East Africa’s unfinished business

Posted On February 25, 2014 , 11:08 PM Contador HarrisonPeriscope

The new economic indicators that paint a picture of slowing regional economic growth in East Africa will likely affect the growth of main stock markets in Nairobi, Kampala and Dar es Salaam later this year as corporate earnings may also be hurt by poor growth. Slower economic growth could translate into lower valuation of companies on the three main stock markets of East Africa if their earnings are falling. East African economies are expected to expand at their slowest pace in nearly five years in the second quarter of this year, dragged down by weak export performance and slowing domestic consumption in Kenya, Tanzania and Uganda amid high interest rates and rising inflation. The ‘coalition of the willing’ governments have set a target in their budget for economic growth of average 5.5 percent this year and 6.5 percent next year. Various studies have forecast an economic growth rate of 5.5 percent and above this year for Rwanda, Burundi, Tanzania and Uganda with Kenya expected to register growth below that figure. According to predictions, the economic growth rate at an average 5 percent would cause average corporate earning growth to slow to 23 percent this year, lower than the average 27 percent for this year. As a result, the valuation of most companies in Nairobi Securities Exchange will be lower since the appreciation of the stock price is a reflection of earnings growth and market perception.

Most of the companies in Uganda and Tanzania just like Kenyan counterparts maintain their capital expenditure guidance for this year but there are signs that suggest potential slowdown especially because of political turmoil in oil rich South Sudan.  Kenyan banks operating across the region are guiding for lower loan growth from an average of 15 percent last year to 12 percent this year. However most banks are expected to be able to grow their non-interest income through their non-bank subsidiaries expected to dampen the effect of slower net interest income growth from its bank businesses. Tanzanian banks are expected to boost their fees based income by 40 percent to balance the narrowing net interest margin amid increasing interest rates. At the same time, domestic oriented stocks such as consumer goods, infrastructure and transportation are also still in the top picks. East African economies are still more than 60 percent supported by domestic consumption and that’s why legislative elections always create high volatility in the stock market although the elections also help domestic consumption.