Category Archives: Barclays

Barclays launches the Africa Financial Markets Index 

Barclays launched their first edition of the African Financial Markets Index (AFMI) that ranks and compares the depth of financial markets in seventeen African countries. The countries were score against six broad pillars of (1) Financial markets depth, (2) Access to foreign exchange,  (3) Market transparency & the regulatory environment, (4) Macroeconomic opportunity, (5) Enforceability of agreements and (6) Capacity of local investors.

South Africa came out on top of the AFMI with 92 out of 100. It was classified as a highly developed market but (with a) challenging macroeconomic outlook; It was followed distantly by Mauritius (66), Botswana (65) and Namibia (62).

Kenya was ranked fifth (59), just ahead of Nigeria (53) Ghana (49) and Rwanda (48), and Kenya was found to be the most sophisticated in East Africa due to innovations and reforms by the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA).  Kenya’s scores were quite consistent across the six pillars with recent developments including the de-mutualization and the IPO of the NSE, the launch of a first exchange-traded fund by Barclays Kenya, and the launch of the M-Akiba bond.

Kenya is the seventh largest stock exchange by market capitalization and sixth by bond listings. But George Asante, Managing Director and Head of Markets at Barclays Africa said that Kenya lacked deep-pocketed market-makers who could broker deals, and take price risks and also that Kenya needed to develop a primary dealership network. He added that the participation of local investors in long long-term investing was quite limited and local investors are critical as they buffer volatility caused by foreign investors. Assets were concentrated among buy-and-hold investors, rather than pension funds and insurers. Kenya’s domestic institutional investors have $12.6 billion of assets but this only works out to  $173 per capita and he suggested that Kenyan markets and regulators needed come up with more securities listings, instruments, and innovations.

Barclays Bank of Kenya Managing Director Jeremy Awori said that “The AFMI will be produced annually to drive conversations, track progress and address gaps in financial markets.” Already countries like Rwanda and Morocco want to use the index data to improve their financial markets.  At the tail end of the AFMI was Egypt, Mozambique, Seychelles and Ethiopia. Ethiopia was scored as “a fast-growing economy but with no financial markets depth or local investor capacity.”  

Guests at the launch included Jeffrey Odundo, CEO of the NSE, and Paul Muthaura, CEO of Kenya’s CMA. Muthaura said the CMA had a master plan to make Kenya a choice destination for capital flows by 2023, while Odundo said the NSE has broadened its  revenue and product base (by introducing REIT’s, ETF’s, M-Akiba and next derivatives, and a new law to govern securities lending), and was working to make Kenya more visible. They are active members of the Africa Securities Exchange Association and will host a “Building African Financial Markets” seminar in Nairobi in April 2018. They also plan to join the World Federation of Exchanges.

The AFMI report can be downloaded here from the Official Monetary and Financial Institutions Forum website; OMFIF produced the report with Barclays Africa

Barclays Africa Macro Economic Report

Africa is poised for third wave of growth that could return it to the Africa rising heights that preceded the global financial crisis. These are some of the highlights from a report released by Barclays Africa in Nairobi on their macro economic outlook for 2017-2018.

Barclays Africa Chief Economist Jeff Gable said that global growth was 3.7% and is at its strongest in 5 years with the growth synchronised in all regions – US, Europe (strongest in a decade), Asia (recovering from 2017), and Latin America (coming out of recession). Global concerns include the politics of rage and nationalism waves, US political uncertainty (with President Trump),  China’s economic adjustments and fluctuations in commodity demand.

Africa has shown itself to be resilient and is receiving foreign direct investments (FDI) flows at levels not seen in a decade. South Africa gets the top share of FDI (followed by Morocco, Egypt,  Nigeria, Kenya), with most deals coming from the USA – 91 investments (followed by France, China, UK, Dubai) but with the largest source of funding, by far, from China ($36 billion).

Gable sees African countries as better able to address macro economic conditions this time around, such as through making infrastructure pay off by focusing on smaller affordable achievable projects (such as Uganda oil and Tanzania gas), diversifying commodity-driven economies, and managing foreign exchange and debt with the lessons learnt from the earlier dip. He expects that a majority of African countries will continue to grow at a faster pace than in recent years and that average growth will be 4% across the continent.

Some risk concerns are that not many African countries can afford to pay for what they are spending and they are exposed to continued outside borrowing at a time that Sub-Saharan Africa credit ratings are declining and there are discussions about uncertain macro economic policies from Angola, Mozambique, Nigeria, Tanzania South Africa, and Zambia as well as other discussions on political strains in Ethiopia, Kenya Tanzania, Uganda, Zambia, and Zimbabwe.  Another concern is that climate change will disproportionately affect Africa. 

Earlier in the day, Barclays Bank of Kenya Managing Director, Jeremy Awori cautioned on the year-old interest rate cap law in Kenya that had constrained private sector growth, and bank earnings He said banking industry earnings had shrunk 8% as at the third quartet of 2017,  compared to average growth of 15% in previous years and that private sector credit may have shrunk during the year.

Barclays Africa Macro Economic Report launch.

Other highlights of the Macro Economic Report:

  • Kenya’s credit rating has been stable since 2010, but Moody’s are now reviewing it for downgrade (due to to large deficits, high borrowing costs, and policy uncertainty). What concerns Moody’s is not Kenya’s debt size, but its replacement of long-term concessionary debt with short-term commercial debt.
  • Barclays Africa forward exchange rate forecast for the Kenya shilling to the US dollar is 106 at the end of 2018, 108.5 in 2019, and 110.8 in 2020.
  • Interest rate caps have been tried in many countries besides Kenya. The intent is the same, but Kenya’s Central Bank won’t be able to do anything about interest rate caps until next year.
  • For Kenya, tourism and agriculture (after the drought) are moving up, but manufacturing is lagging, and the Purchasing Managers Index (PMI) showed dramatic improvement in December 2017 after plunging to lows in October 2017 during the election season.

The annual Macro economic report was produced by the Barclays Africa research desk. It will be followed by another release by Barclays – of their Africa Financial Markets Index which is a survey of 17 African stock markets.

Economic Forecasts from Citi, Barclays, World Bank, Brookings, Oxford

A roundup of recently published economic forecasts, reports, and surveys.   

AfDBThe African Development Bank’s interactive platform, #MapAfrica, maps the locations of the bank’s investments in every country across Africa.   

Also the AfDB launched their 2018 African Economic Outlook report. 

Barclays: In Nairobi this week, Barclays Africa launches the 2017/18 macro-economic report as well as the Africa Financial Markets Index,  which is a survey of 17 African stock markets.

Citi: Citi Research has just published two reports on frontier markets and one on food inflation in AfricaCiti found that frontier markets did better than developed markets and that Kenya did well (36% return on equities) despite the banking interest cap law and the prolonged election season which has now ended.

Citi’s forecasts of top picks for frontier markets in 2018 are Sri Lanka, Romania, and Kenya and they see weaknesses for Argentina, Morocco, and Egypt. The Citi rankings consider six factors: macro growth, macro imbalances, monetary factors, valuations, earnings momentum and price momentum for their forecasts. Citi also ranked five top stock for frontier markets BGEO Group (Georgia), Humansoft (Kuwait), IDH (Egypt), KCB (Kenya) and MHP (Ukraine). For KCB they like the growth profile of corporate and salaried customers from which the bank will grow market its share even if the banking law remains the same.

The Citi forecasts also looked at the Kenyan currency (shilling) which has remained stable relative to other African currencies and how it will continue to do so even with the country’s balance of payments deficits and heightened politics. But they found that one problem with making Kenya predictions is that a significant portion of inflows that offset the current account deficit is classified as other flows, and their timing is not predictable. They assume that the inflows are from the East and Central Africa region that sees Kenya as a safe haven, despite the politics of the second half of 2017. Another finding was that devaluation of currencies have a bigger impact on food inflation in sub-Saharan Africa but Kenya which had drought and food security issues in 2017 is able to draw on food production from its neighbors (Ethiopia, Tanzania, Uganda) that keeps food inflation in check even though the food trade data is not captured in official statistics.

World Bank: Meanwhile the World Bank is taking heat after one of their economists admitted that the WB “Doing Business” rankings for Chile had been manipulated for political reasons. The Doing Business reports are cited by leaders of several countries such as Kenya, Rwanda, India as indicators of their good performance in office, But this one admission of political interference could trigger fall out as to the credibility of other reports, country economic forecasts, growth statistics, inflation measures and discussions with governments that the World Bank does.

The Oxford Business Group: The Oxford forecasts reviewed the year Kenya in 2017 in which growth was expected to be about 5% (down from an initial forecast of 5.8% for 2017), but still above the sub-Saharan Africa average of 2.7%. It noted the mixed agriculture performance was due to the drought that affected maize, sugar, tea. Also that Kenya’s Supreme Court decision to nullify the presidential election set a good path for the country in 2018 despite the added cost of staging two elections in 2017 affecting the government’s ability to meet budgetary targets and which later resulted in Moody’s considering a downgrade of Kenya’s debt rating.

Brookings: The Brookings forecasts are contained in Foresight Africa, an Africa-focused report  that celebrates Africa’s growth and highlights priorities for the continent. For Kenya, it contains a sum up of the ability of the country to leverage technology and innovation for things like revenue collection and uptake of products and mobile bonds (M-Akiba), M-Tiba, and IFMIS. It mentions that Kenya can balance the impact of special economic zones and infrastructure from China against politics and that the successful launch of the SGR in May 2017 could one day serve Uganda Rwanda, Burundi and even Tanzania South Sudan and Ethiopia. It has special sections on the 2017 Kenya election and the M-Akiba bond (“The KSh 150.04 million (approximately $1.5 million) uptake of the M-Akiba bond was mainly dominated by small investors who invested less than KSh 10,000 (approximately $100)”)

Barclays Kenya Previews IFRS9

Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.

Some of the highlights of the day:

Compliance Impact

  • Even as banks are still digesting the impact of interest rate caps, along comes IFRS9.
  • All institutions will adopt the impairment standard in 2018.
  • One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
  • IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
  • Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
  • Banks will use predictive analytics, and big data to manage risk in customer lending.  

Customers

  • IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
  • Expect a change from the current practice of using credit reference more from the negative  perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
  • Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
  • Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculator that the bankers association rolled out earlier.
  • IFRS9 seems to give an incentive for banks to lend shorter duration loans. 

    IFRS9 gives incentive to shorter loans

Profits

  • With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
  • Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
  • Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.

Financial Statement Changes

  • From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
  • Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
  • Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
  • Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations

Way Forward

  • On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
  • Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
  • ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
  • ICPAK will have other forums to further explain IFRS9 as will the Central Bank. 
  • CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..

NewGold ETF Debuts at the Nairobi Securities Exchange

March 27 saw the listing of 400,000 gold bullion debentures, via NewGold, an exchanged traded fund (ETF)  at the Nairobi Securities Exchange. NewGold is represented by Barclays Financial in Kenya. It is incorporated in South Africa and is also listed on stock exchanges in Botswana, Nigeria, Mauritius, Namibia and Ghana. The listing will be equal to these previously issues ones.The NewGold ETF tracks the value of gold bullion and will be the Kenya shilling equivalent of the international market price of gold. Selling of NewGold will not attract capital gains in Kenya. Also in March 2008 NewGold got approval in South Africa for being shariah compliant with Islamic principle of ethical investing “NewGold and NewPlat ETFs open the way for Muslim investors to gain exposure to precious metals – gold and platinum – through investing in a listed ETF.”

NewGold listed at the Johannesburg Stock Exchange in 2004 and “since launch NewGold has grown rapidly, attracting over R21 billion investment, due to its healthy returns. It is the largest ETF listed on the JSE

Notes from NewGold

  • JSE Code GLD: GLD are designed to track the spot gold price less management fees
  • ISIN ZAE000060067
  • Gold Entitlement Approximately 1/100th one fine troy ounce of gold.
  • The Underlying Assets: Allocated Gold – all gold is kept in the form of 400 oz London Good Delivery Bars. The gold is kept in an allocated form, and as such does not carry third party credit risk
  • Absa is the originator, Barclays is the sponsoring broker, and Mboya Wangongu advocates are the legal advisors.