Africa Markets Watch - October 2008

Standard Bank

Africa markets watch

Africa ● October 2008

Recent developments Botswana

DRC

Ghana

Kenya

Malawi

Mauritius

Mozambique

Namibia

Nigeria

Tanzania

Uganda

Zambia

Implications of the collapse in commodity prices – Reuters/Jefferies Commodity Price Index 500 Since the Reuters/Jefferies commodity price index peaked 450 at the end of June 2008 at 462.72, it has dropped (by 42% to 268.32 at the end of October) to levels last seen in 400 2005. Most notably, the international oil price has dropped 350 by almost US$100 per barrel to date, since it peaked at 300 US$147 earlier this year. This has significant implications 250 for oil-driven economies like those of Angola and Nigeria 200 that depend heavily on oil revenues to build up their 150 international reserves, finance their fiscal spending, and 2002 2003 2004 2005 2006 2007 2008 invest in their oft-neglected non-oil sectors. Given the continent‟s dependence on commodities, the effects of lower commodity prices have been swift and pervasive. Other than oil, metals prices are also on a downward slide. The price of copper, which is often used as a bellwether for the health of the global economy, has more than halved since it peaked at US$8 900 per tonne in July. Zambia, and to a lesser extent the Democratic Republic of Congo, has been significantly affected by the lower price. For the first time in ten quarters, Zambia‟s trade balance went into negative territory in the third quarter of 2008 because of the poor copper price. As such, Zambia‟s current account deficit is expected to deteriorate, its international reserves are on a downward path, fiscal revenue is being squeezed, and mining-related foreign direct investment is likely to slow. The prices of agricultural raw materials, and food and beverage commodities have not been left unscathed: their price indices decreased by 25% and 18% respectively between July and October 2008. For major agricultural raw material producers, such as the West African countries that depend on cotton for foreign exchange earnings, this is significant. Similarly, exporters of beverage commodities, including cocoa in Ghana, tea in Kenya and coffee in Uganda, have also had their export earnings shaved as a result of the fall in price of their main export commodities. On the upside, lower food prices are favourable for major food-importing countries and the cut in the fuel price will significantly lower the region‟s transaction costs, particularly those of landlocked countries. Nevertheless, these gains are modest relative to the massive drop in earnings that several countries in the region have experienced. The year 2009 will be one of weaker external sectors, contracting fiscal spaces, and a slowdown in the remarkable growth momentum that was experienced earlier this decade. DRC – Despite all the peace accords signed (morbid 1999 Lusaka agreement, Pretoria accord in 2002, and 2008 peace deal), peace and stability in the DRC continue to be overshadowed by violence in the North and South Kivu areas. As discussed in our January 2008 report (Blueprint: Finally, a peace deal but major challenges ahead), the current administration‟s ability to face and deal with the ghost of its past is instrumental in the overall stability in the country. Two major issues all the peace agreements have not been able to address are: first, the future of the Banyamulenge (Congolese ethnic Tutsis), who, apart from tracing their origins to Rwanda, have had domicile in the DRC since before independence, and, second, the presence of the rebel forces, which are remnants of army forces from neighbouring states. The current government‟s failure to address the issue of the decentralisation of the political system has aggravated the problem. There is still a dire need to offer provincial administrations more responsibility for local decision making. Overall, even the presence of a 17 000 strong UN peacekeeping force will not be enough to oversee any DRC peace agreement that does not include the neighbouring states (Rwanda, Burundi, Uganda and Angola).

Jan Duvenage, Anita Last, Yvonne Mhango & Victor Munyama

Standard Bank Group Economics Standard Bank Group Economics

Botswana Inflation continues to climb, but may have peaked. Botswana‟s consumer price index averaged 7.1% in 2007. This year inflation has continued its upward trend, from single digits to 15.1% y/y in August. In September inflation eased to 14% y/y. Overall inflation continues to breach the central bank‟s upper limit of the medium-term target of 3-6%. Food and non-alcoholic beverages have been the main drivers of the inflation rate, rising by over 18% y/y every month since January and by 20.4% y/y in September, the highest for many years. Transport inflation peaked at 37.4% y/y in July but eased to 27.8% y/y in September. Inflation is largely imported from South Africa, where inflation as started to ease. We expect inflation to have peaked and to average about 12.5% this year.

Policy rate left unchanged at 15.5% in October. The Bank of Botswana‟s (BoB) Monetary Policy Committee (MPC) kept the bank rate, the policy rate, unchanged at its meeting on 21 October. The MPC last raised the bank rate by 50 bps to 15.5% in June. The committee noted that inflation is likely to ease into 2009. Monetary policy, however, remains restrictive to contain second round effects and pressures from consumption taxes and administered prices. The real policy rate was low at 1.5% in September. Monetary policy is more influenced by the BoB‟s medium-term inflation forecast and less by credit growth. Rates are expected to remain at these levels, but a global slowdown could imply a more accommodative policy stance.

Inflation - % y/y

Interest rates - %

18

18 17 16 15 14 13 12 11 10

15 12 9 6 3

2002

0 2002

2003

2004

2005

2006

2007

2003

2004

2005

Prime rate 3m BoBC

2008

2006

2007

2008

2009

Bank rate Bank rate f'cast Source: Bank of Botswana

Source: Bank of Botswana

High inflation rate drives weaker pula. Botswana has a crawling band exchange rate system, which was introduced in 2005. The central bank set the trading band at ±0.5% around central parity. The band rules out a large and unexpected adjustment in the exchange rate. Botswana‟s relatively high inflation rate implies that the pula should weaken proportionately in line with expected inflation differentials with its main trading partners. Despite the crawling band system, the pula weakened sharply in October against the US dollar and traded at an average of BWP7.71/USD compared to BWP6.82/USD in September. We expect the pula to trade at an average of BWP6.81/USD this year and BWP8.21/USD in 2009.

Diamond production still robust. The diamond sector continues to dominate the economy, despite efforts to diversify the country‟s export and production base. The weaker pula in recent weeks will help push export earnings higher. However, although diamond resources could be depleted by 2029, production volume is expected to increase until 2015 and then decline, according to research. Unless the economy is more diversified, livings standards could drop as export earnings decline. Botswana produced 31.8 million carats in 2005, up from 20 million in 2000. Export earnings were USD3 359.2 million in 2007. In the third quarter 2008 exports were USD1 055.6 million compared to USD1 073.1 million in the same quarter last year.

Exchange rates

Diamond exports - USD million per quarter

BWP/USD

BWP/ZAR

1.0

1,200

7.0

0.9

1,000

6.0

0.8

800

5.0

0.7

600

4.0

0.6

400

3.0

0.5

200

8.0

2002 2003 2004 2005 2006 2007 2008 2009 BWP/USD (lh)

BWP/ZAR

Source: Bank of Botswana

0

2002

2003

2004

2005

2006

2007

2008

Source: Bank of Botswana

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Standard Bank Bank Group Group Economics Economics Standard

Botswana – picture gallery Real GDP growth - % 10

Sectoral contribution to GDP (2004/05) - %

8

6.4

6.6

Construction 4.6%

Manufacturin g 3.6%

5.3

5.3

4.7

6

Other 14.3%

Agriculture 2.1%

8.4

4.6

5.7

4.7

Trade & hotels 10.4%

3.4

4 2 0 00

01

02

03

04

05

06

07

08f

Mining 38.0%

09f

Government 16.5%

Banking, insurance 10.5%

Source: IMF WEO October 2008

Foreign exchange reserves

Source: IMF

Trade balance

US$ mn

months

Pula million

11,000

50

9,000

40

7,000

30

5,000

20

3,000

10

35,000 30,000 25,000 20,000 15,000 10,000

5,000

2004

2005

2006

2007

Forex reserves

0 2002

2008

Exports

Import cover

2003

2004

Imports

2005

Source: Bank of Botswana

Government budget balance - % of GDP

2006

2007p

Merchandise trade balance

Source: Bank of Botswana

Diamond prices (Antwerp) - US$ index, 1982 = 100

10

180

8

170

6 4

160

2

150

0

140

-2

130

-4 -6

120 02/03

03/04r

04/05r

05/06p

06/07b

2001 2002 2003 2004 2005 2006 2007 2008

Source: IMF

Weights of consumer price index (CPI) constituents

19% 8% 11%

Botswana Stock Exchange indicators 40

22%

31%

Source: Band of Botswana

9%

Pula billion

'000 month-end

30

9

20

6

10

3

0

Food Alcohol & tobacco Clothing

Transport Housing Other Source: Bank of Botswana

12

0

2002

2003

2004

2005

Market cap. (lh)

2006

2007

2008

Domestic index (rh)

Source: Bloomberg, Bank of Botswana

Page 3

Standard Bank Group Economics Standard Bank Group Economics

DRC Significant upside risks to inflation. The gains made on keeping inflation under double digits continue to fade. Consumer inflation increased from 18.2% y/y in June to 21.1% y/y in September 2008. The currency stability that has helped subdue imported inflation, especially from high food and energy imports, seems to be waning. This should exert upward pressures on inflation in the medium term. The deteriorating security environment should also impact negatively on the distribution of consumer items from one part of the country to the other. Despite improved agricultural production, the recent resumption of conflicts in the eastern DRC is already contributing significantly to the upward surge in inflation. Government revised its 2008 inflation target from 12% to 23.5%.

Monetary policy remains tight. The worsening inflation outlook should necessitate that the central bank tightens monetary policy in the short to medium term. Short-term lending rates remain at 30%, having been increased from 24% in July 2008. We expect the central bank to raise rates in an attempt to curb surging money supply growth. However, interest rates as an instrument of monetary policy are not very effective. Thus, the central bank should continue to, directly, manage monetary policy by controlling base money through the sale of foreign exchange. This also helps the monetary authority to manage excess liquidity generated by large inflows of foreign aid and revenue from commodity exports.

Inflation - % y/y

Interest rates - %

30

55

25

50 45

20

40

15

35

10

30

5

25 20

0 2005

2006

2007

2006

2008

2007 Discount rate

2008 Prime lending rate

Source: Banque Centrale du Congo

Source: IMF, Banque Centrale du Congo

The franc exchange rate to depreciate. The resumption of unrest in the eastern DRC jeopardises any attempt of the country to return to the International Monetary Fund (IMF) Poverty Reduction and Growth Facility (PRGF) programme. This should lead to a significant reduction of the donor inflows into the country. Thus, we expect the exchange rate to depreciate in the medium term. The slowdown in the global demand for commodities should also reduce commodity export earnings that have facilitated a stable exchange rate since 2007. The exchange rate depreciated from an average of CDF554.68 per US dollar in September to an average of CDF561.64 per US dollar in October 2008.

Surging money supply. Owing to limited ability to control liquidity through other monetary policy instruments, such as interest rates, the central bank (Banque Centrale du Congo – BCC) continues to control base money growth in an attempt to curb inflationary pressures from large inflows of foreign funds. In recent months, money supply has surged, thereby suggesting currency depreciation in the medium term. This development has also worsened the inflation outlook. We expect the BCC to continue controlling base money through the sale of foreign exchange to alleviate inflation pressures from the rapid increase in money supply.

Exchange rates – CDF/USD

Money supply – % y/y 70

600

60 550

50 40

500

30 20

450

10 0

400 2005

2006

2007

2008

Source: Bloomberg

2002

2003

2004

2005

2006

2007

2008f Source: IMF

Page 4

Standard Bank Bank Group Group Economics Economics Standard

DRC – picture gallery Real GDP growth - %

Sectoral contribution to GDP - % 1%

6%

12 6.6

8

8.8

7.9

5.8

6% 40%

6.3

22%

5.6

3.0

4

7%

13%

5%

0

Agriculture Construction Wholesale & retail trade Trade & commerce

-2.0 -4 2001 2002 2003 2004 2005 2006 2007 2008f

Mining Manufacturing Transport & Comm. Other Source: IMF

Source:IMF

Foreign exchange reserves

Trade account – US$ million

US$ mn

months

300

8

4000

250

6

2000

200

5

150

0

3

100

2

50 0

0

-2000 -4000 2000 2001 2002 2003 2004 2005 2006 2007e2008f

2000 2001 2002 2003 2004 2005 2006 2007 2008f Gross official reserves

Import cover (RHS)

Imports

Exports

Trade balance

Source: IMF

Government finances - % of GDP

Source: IMF

Copper price – US$/ton

2

10000

0

8000

-2

6000

-4 -6

4000

-8

2000

-10 2003

2004 2005 2006 2007 Overall balance (excl. grant) Overall balance (incl. grant)

2008f

0 2003

2004

Source: IMF

External debt – as % of GDP

2005

2006

2007

2008

Source: Bloomberg

FDI inflows – US$ million

USD millions

800

12,000

300

10,000

250

8,000

200

6,000

150

4,000

100

2,000

50

0

600 400 200

0

0 2003

2004

2005

External public debt

2006

-200

2007e 2008f

2000 2001 2002 2003 2004 2005 2006 2007e

% of GDP (RHS)

Source: IMF

Source: IMF

Page 5

Standard Bank Group Economics Standard Bank Group Economics

Ghana Inflation declines for three consecutive months. The harvest season, which started in August, has provided relief from food inflation, and headline inflation declined to 17.9% y/y in September from 18.1% y/y in August and 18.3% y/y in July. Food, which represents around 45% of the CPI basket of goods, rose from 7.5% y/y in August 2007 to 17.7% in June 2008. This was due to the restriction of local food supply in the north of the country because of drought in the first part of 2007, followed by flooding in September coupled with the upward trend in global food prices at a time of high transport costs. Over the same period, non-food inflation rose from 10.9% y/y to 18.9% y/y, driven by changes in utility prices and transport costs. The moderation in international crude oil prices and the improved domestic food supply on the back of the ongoing harvest season should continue to support a marginal declining trend.

Bank of Ghana keeps the policy rate at 17%. The Monetary Policy Committee (MPC) hiked the policy rate by 100 basis points to 17% in July in response to accelerating inflation. The central bank policy rate (prime rate) was raised from 13.5% to 14.25% in March and again in May by 175 basis points to 16%. Following the MPC‟s rate decision in July, average commercial bank lending rates were similarly revised upwards within a range of 22% to 41%. (The commercial bank rates continue to show high spreads between deposit and lending rates and are also well above the Bank of Ghana‟s prime rate.) Owing to a declining inflation trend we do not expect an interest rate hike but we do expect monetary policy to remain tight in the presence of inflationary pressures stemming from pre-election spending and high utility prices.

Inflation - % y/y

Interest rates - %

25

35 30

20

25 20

15

15 10

10

5 2004 5 2004

2005

2006

2007

2005 Prime

2008

2006

2007

91-day t-bill

2008 Lending

Source: Bank of Ghana

Source: Bank of Ghana

The cedi continues to depreciate. The cedi lost some ground during 2007 and depreciated by 5%, 7% and 17.5% against the US dollar, pound sterling and euro respectively. Demand pressures were exerted mainly from the golden jubilee anniversary celebration, preparations for hosting the AU summit, and the continued energy crisis. In addition to this, lower cocoa production, as a result of extreme rainfall, led to a 33.8% decline in earnings from exports of cocoa beans and products. Despite strong international prices for gold and cocoa, the national currency continued to depreciate in 2008 – a trend that was fuelled by a large and burgeoning current account deficit stemming from capital goods and oil imports. The cedi largely stabilised in August, September and October and traded at between GHc1.1543/US$ and GHc1.1660/US$. We expect marginal depreciation to continue, especially in a pre-election context.

Favourable cocoa harvest expected. Ghana‟s Cocoa Board (Cocobod) expects favourable output for the 2007/08 season as a result of improving weather conditions. Purchases declared by private buyers reached 566 340 tonnes in the first 25 weeks of the 2007/08 season, which represents an increase of 10.2% over the same period in 2007. Consequently, Cocobod increased its initial estimate of 600 000 tonnes at the start of the season to 634 000 tonnes (8% increase). Last year, the country declared total production of 614 469 tonnes, down from a record 740 457 tonnes in 2006. The average price of cocoa bean exports (US$1 942.2 per tonne at the end of 2007) increased by 7.7% to US$2 091.8 per tonne in the first quarter of this year. Cumulative cocoa purchases through the end of September 2008 amounted to 758 908.

Exchange rates

Cocoa prices – US$/metric tonne

1.18

1.60

3500

1.50

3000

1.40

2500

1.30

2000

1.14 1.10 1.06 1.02 0.98 0.94 0.90

1.20 2007

2008 USD (rhs)

1500 1000 2004

EUR (lhs) Source: Bloomberg

2005

2006

2007

2008 Source: IMF

Page 6

Standard Bank Bank Group Group Economics Economics Standard

Ghana – picture gallery Real GDP growth - %

Sectoral contribution to GDP - %

7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Trade, hotel & restaurant Agriculture Mining & quarrying Construction

Services Cocoa production & marketing Manufacturing Other

Source: Bank of Ghana

Foreign exchange reserves - US$ million

Source: Bank of Ghana

Trade account - US$ million

3000

10000 8000 6000 4000 2000 0 -2000 -4000 -6000

2500 2000 1500 1000 500

2001

2002

2003

2004

2005

2006

2007

0 2004

2005

2006

2007

2008

Imports

Exports

Source: Bank of Ghana

Government budget balance - % of GDP

Trade Balance Source: Bank of Ghana

Gold Price - US$/oz

0

1000

-2

900 800

-4

700 -6

600 500

-8

400

-10

2004

2005

2006

2007

2008

2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IMF

Weights of consumer price index (CPI) constituents

Ghana Stock Exchange index 12000

7% 10%

9%

Source: Reuters

6% 5%

10000 8000

52%

4% 4% 3%

Food & Bev. Utilities Trans. & Comm. Health Misc.

Clothing & Footwear Furnishings Enter. Alcohol & Tobacco Source: Bank of Ghana

6000 4000 2000 2004

2005

2006

2007

2008 Source: Bloomberg

Page 7

Standard Bank Group Economics Standard Bank Group Economics

Kenya Stubbornly high food prices keep inflation persistently high. Inflation edged up to 28.4% y/y in October, from 28.2% y/y in September, on the back of high food prices and an increase in the price of household goods and services. Conversely, non-food inflation eased to 13.0% y/y, from 13.3% y/y. This softening in non-food inflation was largely due to a 1.4% m/m fall in the price of fuel and power, which is likely a consequence of the sharp drop in the international oil price. Although the current „long rains‟ season maize harvest has improved grain supply, it has had limited effect on prices because of food insecurity, particularly in the north-east region of Kenya. This explains the downwardly sticky food prices. However, the markedly lower international oil price is favourable for the inflation outlook, which we expect to improve in 2009. Inflation is projected to slip to below 20% by mid-2009.

Inflation - % y/y

Sell-off of short-term government securities pushes up yields. The yield on the 91-day Treasury bill rate rose to 8.52% in mid-November, from 8.12% at the end of October and 7.7% at end-September. This increase is on the back of a decline in appetite for government securities from foreign portfolio investors due to the heightened risk environment related to the global financial crisis. The policy rate, the central bank rate, remained unchanged at 9%, as the monetary authority maintained its firm policy stance in light of soaring inflation. The decrease in the average lending rate in August to 13.66%, from 13.91% in July, is partly attributed to increasing competition among banks. Only once international financial markets begin to stabilise will short-term rates cease climbing.

Interest rates - % 15

35 30 25 20 15 10 5 0

13 11 9 7 2004

5

2005 2006 2007 2008 Overall Underlying (excl. food) Underlying (excl. food, energy & transport)

2005 2006 91-day TB rate Central Bank Rate

2007

2008 Average lending rate Weighted average repo

Sources: National Bureau of Statistics, Central Bank of Kenya

Source: Central Bank of Kenya

The Kenyan shilling continues to flounder. The shilling depreciated by a whopping 7% against the US dollar in October, compared to the previous month, to average KES76.64/USD. The loss in value of the shilling against the greenback was largely due to a 7.6% appreciation of the US dollar. Acute risk aversion implied that investors sought safe haven assets, including US Treasury securities. Also in October, the shilling strengthened by a massive 12.1% against the rand to KES7.81/ZAR, as capital flight weighed heavily on the South African economy. Conversely, the shilling depreciated by a modest 1.2% against the euro, to KES/EUR101.93. In the short term the shilling will be volatile and undervalued, however, once the cumulative effects of the various rescue packages kick in, the shilling should stabilise.

Liquidity position stabilises. The global credit crunch has subdued foreign portfolio inflows, thus contributing to the deceleration of growth in net foreign assets, which in turn has placed a damper on money supply growth. Latest figures reveal that net foreign assets‟ growth slowed to 6.9% y/y in July, from 10.5% y/y in June, and, as such, broad money (M3) growth eased to to an estimated 17.1% y/y in August, from this year‟s high of 28.5% y/y in April, at the height of the Safaricom initial public offering. The refunds made to foreign over-subscribers of the IPO added to the deceleration of net foreign assets‟ growth. In line with M3, reserve money growth also moderated to 19.0% y/y in July, from 19.3% y/y in June. Monetary expansion is expected to be subdued in early 2009.

Exchange rates

Money supply growth - % y/y 30

110

16

100

14

90

12

80

10

70

8

6

6

0

24 18

60

2004

2005 KES/USD

2006

2007

KES/EUR

2008 KES/ZAR (rhs)

Sources: Bloomberg, Standard Bank Group est.

12

2004

2005

2006

Broad money (M3)

2007

2008

Reserve money Source: Central Bank of Kenya

Page 8

Standard Bank Bank Group Group Economics Economics Standard

Kenya – picture gallery Real GDP growth - %

Sectoral contribution to GDP (%)

8 Real estate, renting & bus. serv. 6% Government 14%

7 6 5 4 3

6.4

5.8

5.3

Transport, storage & commun. 12%

4.2 2.3

1 0 2005

2006

Manufacturin g 11%

7

2

2004

2007

2008p

Construction 3%

2009f

Financial services 4%

Foreign exchange reserves – import cover months

4.5

3000 4.0 2400 1800

3.5

1200 3.0 600 0

2.5 2005

2006

Gross foreign reserves

Wholesale & retail trade 11%

Trade account – US$ million

US$ millions

2004

Hotels & restaurants 2%

Source: National Bureau of Statistics

Source: Kenya National Bureau of Statistics, Standard Bank est

3600

Community, social & Agriculture, personal forestry & services fishing 4% 30%

Electricity & water 3%

2007

2700 2400 2100 1800 1500 1200 900 600 300 0

0 -300 -600 -900 -1200 -1500 2004

2008

2005

Exports

Import cover

2006

Imports

Source: Central Bank of Kenya

Government deficit - % of GDP

2007

2008 Trade deficit

Source: Central Bank of Kenya

Tea, Mombasa, Kenya, Auction Price, US cents per kilogram

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 -4.0

350 300 250 200 150 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

2004

2005

2006

2007

2008

Source: Central Bank of Kenya

Weights of consumer price index (CPI) constituents 6%

4%

2% 2% 3%

Stock market indicators Kshs billions

6000

1000

50% 12%

6%

5000

800

4500

600 400

4000

Food and drink Recreation and education Clothing and footwear Fuel and power Personal goods and services

Housing Household goods and services Transport and communication Medical goods and services Alcohol and tobacco

Source: Kenya National Bureau of Statistics

1400 1200

5500

9%

6%

Source: IMF

200

3500

0 2006

2007 2008 Market Capitalisation (rhs) NSE 20 Share Index (1966=100) Source: Central Bank of Kenya

Page 9

Standard Bank Group Economics Standard Bank Group Economics

Malawi Inflation accelerated to 9.3% y/y in September. Inflation followed global trends, accelerating from 8.7% y/y in July, mainly due to fuel and maize price increases. In spite of high oil prices, inflation recorded the lowest rates in decades in 2007 and averaged just below 8%. However, oil prices that kept reaching new highs as well as a marginal seasonal increase in food inflation towards the end of last year saw overall inflation starting to increase moderately from a historical low of 7.1% y/y in September 2007 to 8.2% y/y in March 2008. Although inflation eased in April and May due to the seasonal decline in food costs, the upward trend continued in June. High oil prices and increased government spending ahead of the 2009 election as well as money supply growth pose further upside risks to overall inflation.

Monetary Policy Committee keeps the policy rate flat. In view of the current inflationary pressures stemming from high international oil prices as well as accelerating money supply growth, the Monetary Policy Committee maintained its monetary stance at its meeting, and kept the bank rate at 15% and the liquidity reserve requirement at 15.5%. Despite the government‟s intention to encourage private-sector-led development of the economy, we expect monetary policy to remain tight in order to contain inflation expectations. However, should inflation drop to the estimated levels of below 7% presented in the 2008/09 budget, we expect interest rates to be brought down to around 12%, as projected in the 2008/09 budget, in the second quarter of 2009.

Inflation - % y/y

Interest rates - %

20

45

16 35 12 8

25

4

15

0 2004

2005

2006

2007

Overall Inflation Food inflation

5

2008

Non-food inflation

2004

2005

2006

Prime-avg

2007 Bank rate

2008 91-day t-bill

Source: National Statistics Office

Source: Reserve Bank of Malawi

Kwacha stability ensured through RBM intervention. The authorities attach importance to exchange rate stability as an intermediate measure in maintaining macroeconomic stability. The kwacha remained relatively stable against the US dollar in the first three quarters of 2008 and averaged MWK140.35/US$, MWK140.63/US$ and MWK140.69/US$ respectively. In October, the kwacha was slightly weaker at MWK140.82/US$. The economy is into the seasonal lean period following the end of the tobacco auctions. The pressure on foreign reserves from fertilisers and oil imports will remain a concern for some time, although the kwacha is expected to receive some support from donor funds and the authorities. The RBM is expected to continue intervening in the foreign exchange market and we therefore expect the kwacha to trade within a narrow band of MWK140/US$ and MWK142/US$.

Tobacco auction floors more than doubled sales. The tobacco auction floors had processed about 143 million kilograms valued at US$348 million as at the end of July 2008. In value terms, the quantity is almost double that posted for the whole season last year (US$185 million). As at 22 August, 168.7 kilograms of the green gold had been sold, earning US$412.3 million – an average price of 244 US cents per kilogram. Out of the total sold, burley contributed 145.9 million kilograms (86.5%) whereas flue-cured contributed 20.9 million kilograms (12.3%). All foreign currency payments for tobacco sold in Malawi are now made through the central bank and not through commercial banks as in the past. The onset of uranium exports next year will be an additional source of support for the local currency.

Exchange rates

Tobacco export price – UScts/kg

260

24

220

22

180

20

140

18

100

16

60

14 2004

2005 USD

2006

2007 EUR

2008 ZAR (rhs) Source: Bloomberg

350 300 250 200 150 2004

2005

2006

2007

Source: Tobacco Control Commission

Page 10

Standard Bank Bank Group Group Economics Economics Standard

Malawi – picture gallery Real GDP Growth - %

Sectoral contribution to GDP - %

10 8 6 4 2 0 -2

Agriculture Manufacturing Construction Transport and Comm Private social services

-4 -6 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mining and quarrying Utilities Distribution Finance & Insurance Government services Source: OECD 2007

Source: IMF

Foreign exchange reserves – import cover

Trade Balance - US$ million

US$ million

Months

1500

250

3.5

200

3.0

500

150

2.5

0

100

2.0

50

1.5

1000

-500 -1000

2004

2005

2006

2007

Foreign reserves

2001 2002 2003 2004 2005 2006 2007 2008

2008 Imports

Import cover

Exports

Source: Central Statistics Office

Source: Reserve Bank of Malawi

Government finance - %

Tobacco exports – million Kg

0 -2 -4 -6 -8 -10 -12 -14 -16 02/03

03/04

04/05

Including grants

05/06

06/07 07/08e 08/09f

140 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 2006 2007

Excluding grants Source: IMF

Weights of consumer price index (CPI) constituents 6%

Trade Balance

5%

4%

Source: Reserve Bank of Malawi

Malawi Stock Exchange index 6000

6%

5000

9% 58% 12%

4000 3000 2000 1000

Food Clothing & footwear Beverage & tobacco Household operation

Housing Misc. Transport Source: Central Statistics Office

0

2006

2007

2008 Source: MSE

Page 11

Standard Bank Group Economics Standard Bank Group Economics

Mauritius Continued pressure on inflation from high food and oil prices. Headline inflation has been on a declining trend since July last year but remained relatively high at around 9%, largely as a result of the pass-through effects of high food and energy prices. The appreciation of the rupee in the first four months of this year dampened the impact of mounting import prices, and inflation came marginally down to 8.8% y/y in May. After remaining level during June, inflation accelerated to 9.1% y/y in July and to 9.5% y/y in August and 9.8% y/y in September. Once again the main pressure came from food and fuel. With oil prices showing a softening bias and food prices expected to plateau, external pressures are easing, although domestic pressures such as strong demand are expected to remain. Our expectation is that overall inflation will slightly exceed the 8.6% average projected in the 2008/09 budget.

Bank of Mauritius cuts the repo rate to 7.75%. Against the backdrop of a reduction in policy interest rates by the US Federal Reserve and the Bank of England as well as potential downside risk to economic growth stemming from decelerating growth in major trading partners, the BoM cut the repo rate by 25 basis points to 9% in February, lowered it further to 8.5% in March and in May by 50 basis points to 8%. In view of growing demand-side pressures on inflation and no slowdown in food and fuel prices, the BoM increased the repo rate on 21 July to 8.25%. On 31 October the BoM considered the resilience of the domestic economy in the light of the exceptional circumstances characterising the domestic and global economic and financial situation and decided by consensus to reduce the repo rate by 50 basis points to 7.75%.

Inflation - % y/y

Interest rates - %

14

14

12

12 10

10

8

8

6

6

4

4

2 2004

2005

2006

2007

2008

2 2004

2005

2006

2007

Prime rate Lombard Rate

2008

Bank rate Repo Rate

Source: Central Statistics Office

Source: Bank of Mauritius

Rupee depreciated further in October to MUR30.04/US$. Supported by FDI inflows, record tourism earnings and the depreciation of the US dollar on currency markets, the rupee appreciated by 9% in the first quarter of this year to a fouryear high of MUR25.5/US$. In April this trend was reversed when the rupee averaged MUR26/US$, MUR26.5/US$ in May and MUR27.2/US$ in June. This was mainly on account of continued deterioration of the current account as import prices, particularly food and fuel, pushed up the import balance. The extent and duration of the global downturn will play a large part in export demand as Mauritius is closely linked to international financial markets and the majority of its export demand (more than 50%) comes from Europe and the US. The current account will therefore remain under pressure. FDI and tourism receipts should lend some support to the rupee.

Tourist arrivals increased by 5.5% in the first half of 2008. Tourist arrivals increased to 455 758 compared to 432 113 for the same period in 2007. Gross tourism receipts for the first six months amounted to Rs22 170 million, an increase of 12.2% compared to Rs19 752 million for the same period in 2007. The sector continues to play a large role in terms of attracting FDI and is one of the main drivers of the country‟s economic recovery. Given the construction timeframe of current hotel projects, the sector should receive a substantial increase in capacity through 2008 and 2009. Despite this, the sector may experience even negative growth in revenues through 2008, because of the dismal performance through the second half of the year, as the effects of the global financial crisis start hitting consumer‟s disposable income.

Exchange rates

Tourism receipts – Rs million

45

5.5

60000

40

5.0

50000

35

4.5

40000

30

4.0

30000

25

3.5

20000

3.0

10000

20 2004

2005 MUR/USD

2006

2007 MUR/Euro

2008 MUR/ZAR (rhs)

Source: Bloomberg

0 2001 2002 2003 2004 2005 2006 2007 2008 Source: Central Statistics Office

Page 12

Standard Bank Bank Group Group Economics Economics Standard

Mauritius – picture gallery Real GDP Growth - %

Sectoral contribution to GDP - %

12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sugar Export-oriented industry Wholesale & Retail trade Transport, storage & communication Others (incl. gov)

Non-sugar agriculture Construction Hotels & Restau-rants Financial Inter-mediation

Source: IMF (2006)

Source: Central Statistics Office

Foreign exchange reserves – import cover

Trade Balance – US$ million

2500

50

2000

40

1500

30

1000

20

500

10

0

0 2004

2005

2006

2007

Foreign Reserves

2008

3000 2500 2000 1500 1000 500 0 -500 -1000 2000 2001 2002 2003 2004 2005 2006 2007

Weeks of import cover

Imports

Exports

Source: Central Statistical Office

Government finance - % of GDP

Trade balance

Source: Central Statistical Office

Tourist arrivals - number

0

1200

-1

1000

-2

800

-3 600

-4 -5

400

-6

200

-7

0 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: IMF

Weights of consumer price index (CPI) constituents 4%

8%

Source: Central Statistics Office

Stock Exchange of Mauritius index 2200

9% 10% 16%

2000

9%

1800 13% 5%

22%

4%

1600 1400 1200

Clothing, footwear

Housing, water, electricity

Health

Transport

800

Communication

Furnishings, household

600

Recreation, culture

Education

Restaurants, hotels

Miscellaneous goods, services Source: Central Statistical Office

1000

2005

2006

2007

2008 Source: Bloomberg

Page 13

Standard Bank Group Economics Standard Bank Group Economics

Mozambique Inflation slowed to 10.3% y/y in October, from 10.7% in September. This deceleration was due to a slowdown in food inflation to 15.2% y/y, from 16.1%. However, this softening of food inflation was not due to falling prices, but rather a low base effect. Hereafter, food inflation is expected to accelerate in the short term as the lean season has begun. Price pressures from fuel prices have moderated, on account of the sharp drop in the international oil price. As such, the rent, fuel and utilities‟ price index remained unchanged in October, and that of transport increased by a modest 0.1% m/m. In the short term, price pressures will stem from food prices; however, a high base effect in the tail end of 2008 is likely to subdue annualised food inflation. Thus, a modest decrease in inflation is projected over the short term and a return to single-digit inflation in the first quarter of 2009.

Inflation - % y/y

Higher short-term interest rates signal tightening in policy to curb monetary expansion. The yield on the 91day Treasury bill rose again in September to 13.95%, from 13.89% in August. This increase reflected the tightening of monetary policy, to ensure base money met its end-quarter ceiling targets. The lending rate, which increased to 18.61% in August, fell to 18.36% in September, thus resuming its long-term downward trend. Conversely, the policy rate, the standing lending facility, remained unchanged at 14.5%, mostly likely because the real policy rate has not been compromised by a concomitant surge in inflation. Monetary policy is expected to remain firm in the short term, on account of the approaching festive season, and thereafter to ease as inflation decelerates in 2009.

Interest rates - %

25

30

20

25

15

20

10

15

5

10

0

5 2004

2005

2006

Overall

2007

Food

2008

2004

Non-food

2005

Prime

2006

2007

2008

Standing lending facility

91 day t-bill

Source: Instituto de Nacional Estatistica

Source: Banco de Mocambique

Metical holds firms against hard currencies. The metical depreciated by a modest 0.6% against the US dollar in October, compared to September, to MZN24.20/USD. Evidently, the central bank is managing the value of the local currency against the US dollar to ensure that it does not veer off the central bank‟s seemingly preferred exchange rate for 2008 of MZN24.00/USD. As fundamentals and external events in recent months suggest a weaker metical, the fact that the local currency has not depreciated against most hard currencies implies that the central bank is using foreign reserves to prop up the metical. The metical‟s appreciation of 17.3% and 7% against the rand and euro respectively, to MZN2.47/ZAR and MZN32.14/EUR, was amplified by the depreciation of the rand and euro in October. As global financial markets stabilise, the metical is projected to recover against the euro and rand.

Base money stock breaches target ceiling in September. Although base money contracted by 0.8% y/y in August, its subsequent 2% m/m expansion in September to MZN17 495 million led it to exceed the target, for the end of the third quarter of 2008, of MZN17 347 million. On an annualised basis, base money growth continued to slow, as it has done since June, to 13.1% y/y in September, from 15.2% y/y in August. Money supply (M2) growth also softened in September to 23% y/y, from 2008‟s high of 26.2% y/y in July. The approaching festive season is expected to spur an acceleration in money supply growth in the last quarter of 2008, and, thereafter, monetary expansion is expected to moderate. As fuel price pressures have eased, other than food prices, excess money supply will be elevated as an inflation risk in 2009.

Exchange rates

Money supply - % y/y

40

4.8

36

4.4

30

32

4.0

25

28

3.6

20

24

3.2

15

20

2.8

10

16

2.4

5

2004

2005 MZN/USD

2006

2007

MZN/EUR

2008 MZN/ZAR (rhs) Source: Bloomberg

35

2004

2005

2006 M2

2007

2008

Base money Source: Banco de Mocambique

Page 14

Standard Bank Bank Group Group Economics Economics Standard

Mozambique – picture gallery Real GDP growth - %

Sectoral contribution to GDP (%) Real estate activities & business services, 9% Financial activities, 6%

10 8 6 4

8.4

7.5

8.7 7.0

7.7

7.0

2006

2007

2008p

2009f

Manufacturi ng, 15%

2000

Trade account – US$ million

US$ millions

months

10

1600

8

1200 6 800 4

400 0

2 2004

2005

2006

Electricity and water, 6%

Source: Instituto de Nacional Estatistica

Source:IMF, Instituto de Nacional Estatistica,Standard Bank est.

Gross foreign reserves & import cover

Fishing, 2% Extractive industries, 1%

Commerce, 11% Constructio Hotels and n, 4% restaurants , 2%

0 2005

Community services, 7%

Transports, storage & communica tions, 10%

2

2004

Agriculture, animal production, hunting & forestry, 24%

Education, 4%

2007

Foreign reserves

2008

900 750 600 450 300 150 0 -150 -300 2004

Import cover

2005

2006

Exports

2008

Imports Deficit Source: Banco de Mocambique

Source: Instituto de Nacional Estatistica

Government deficit - % of GDP

2007

Aluminium price – US dollars per metric tonne

0

3500

-1 3100

-2 -3

2700

-4

2300

-5 1900 -6 1500

-7 2003

2004

2005

2006

2007

2004

2008p

2005

2006

2007

2008 Source: IMF

Source: IMF CR. No.08/220

Weights of consumer price index (CPI) constituents 13%

10%

Capital account – US$ millions

5% 5%

52% 3%

1%

3% 2% 2% 2%

Food & non-alcoholic drinks Transport Clothes & footwear Leisure, recreation & culture Alcohol & tobacco Miscellaneous

2%

Dwellings,water,elec., gas & fuels Mobile dwellings, hhold equip. & main. Health Communications Restaurants & hotels Education

Source: Instituto de Nacional Estatistica

1500 1000 500 0 -500 -1000 -1500 -2000 -2500 2006 Foreign borrowing

2007

2008p

Amortisation

2009p

2010p

Direct investment Source: IMF

Page 15

Standard Bank Group Economics Standard Bank Group Economics

Namibia Inflation levelling off. Namibia‟s inflation is largely imported from South Africa through close trade links. Inflation has risen steeply since a low of 0.9% y/y in May 2005 to 12% y/y in August and September this year. Inflation is mainly driven by high food prices and transport prices. Food inflation reached a high of 18.8% y/y in July and September, the highest for several years; in 2004 and 2005 there were short bouts of food deflation. Transport prices rose by 18.1% y/y in August, but fell to 15.4% y/y in September. Food and transport inflation may have peaked as prices are trending lower in South Africa and elsewhere on the back of the much lower crude oil price. We expect inflation to average 10.2% this year.

Monetary policy rate remains unchanged. Namibia‟s monetary policy focuses mainly on securing the 1:1 peg to the rand by holding sufficient foreign exchange reserves under the Common Monetary Area (CMA) agreement. The CMA also limits Namibia‟s policy independence as there are no restrictions on capital flows within the area. Namibia‟s policy rate, the bank rate, is 10.5%, which implies a negative real policy rate of 1.5%. The last MPC meeting was on 16 October, but no statement was released. The next meeting will be on 18 December. We expect interest rates to remain unchanged this year, but lower rates may start to materialise from the second quarter of next year onwards as inflation is expected to start falling.

Inflation (% y/y)

Interest rates - %

20

20

16

16

12

12

8

8

4 0

4

-4

2002

2004

2005

2006 CPI

2007

2003

2008 Food

2004

Prime rate

2005

2006

2007

Bank rate

2008 91-day TB

Source: Bank of Namibia

Source: Bank of Namibia

The Namibian dollar relatively stable, but vulnerable. The Namibia dollar (NAD) is pegged at par to the South African rand (ZAR) under the CMA agreement. The rand is legal tender in Namibia, but not vice versa. The sudden appreciation of the US dollar against most developed and emerging market currencies has driven the rand/Namibian dollar substantially weaker. The NAD/ZAR is expected to trade at an average of NAD9.80/USD in the fourth quarter of 2008; and NAD8.22/USD for the whole of 2008. Next year the forecasts are: NAD8.80/USD in the first quarter; NAD8.50/USD in the second quarter and NAD8.25/USD in the third quarter. The average for 2009 is NAD8.4/USD. The expected 12-month trading range is NAD8.00-12.00/USD.

Money supply. Broad money supply (M2) rose by an average of 20.8% in 2006 and 19.6% in 2007. This year M2 rose from N$27 030 million in the first quarter to N$28 004 million in the second quarter on 2008, an increase of 3.5% q/q. Net foreign assets rose by 4.5% q/q; and domestic claims fell by 1.5% q/q; whereas other items declined by 6.4% q/q. Domestic claims to the private sector (consisting of individual households and private non-financial businesses), other financial corporations and parastatals rose by 1.9% q/q. Credit growth to businesses was marginally lower. However, credit growth to individuals was higher as personal loans rose driven by individuals facing the rising cost of living.

Exchange rate: NAD/USD

Money supply (M2) – y/y % change 40

12

35

30

10

25 20

8

15 10

6

5 0

4 00

01

02

03

04

05

06

07

08

Source: Bloomberg

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Source: Bank of Namibia

Page 16

Standard Bank Bank Group Group Economics Economics Standard

Namibia – picture gallery Real GDP growth - % 8

Sectoral contribution to GDP - % 6.7

Mining & quarrying 8.3%

6.6

6

Manufacturin g 12.6%

Other 15.1%

4.7 3.5

3.9 3.6

3.5

4

4.2

3.9

2.4

Fishing 4.2% Agriculture & forestry 5.7%

2 0 00

01

02

03

04

05

06

07

08f

09f

Other services 35.5% Government services 18.6%

Source: Bank of Namibia

Source: IMF WEO April 2008

Foreign exchange reserves

Trade balance – N$ billion

US$ mn

Months

1,600

8

1,200

6

800

4

400

2

25 20 15 10 5

0

0 -5

0 2004

2005

2006

Reserves (lh)

2007

2002

2008

2003

2004 Central 2005 Bureau 2006p of 2007p Source: Statistics

Exports

Import cover (rh)

Imports

Source: Bank of Namibia, Bloomberg

Government budget balance (incl. grants) - % of GDP

Trade balance Source: Bank of Namibia

Fishing industry output N$ billion

%

4

2.5

5.5%

2

2.0

5.0%

0

1.5

4.5%

-2

1.0

4.0%

-4

0.5

3.5%

-6

0.0

3.0%

-8

00 03/04

04/05

05/06e

06/07

07/08p

08/09p

01

02

03

04

Source: IMF

Weights of consumer price index (CPI) constituents 21% 29%

7%

7% 15%

Food & non-alc. bev. Transport Misc. goods & services

21%

Housing, w ater, electricity Education Other

Source: Bank of Namibia

05

Fishing on board (lh)

06

07

% of GDP (rh) Source: Bank of Namibia

Namibia Stock Exchange index (monthly, overall) 1,100 1,000 900 800 700 600 500 400 300 200 2002

2003

2004

2005

2006

2007

2008

Source: Bloomberg

Page 17

Standard Bank Group Economics Standard Bank Group Economics

Nigeria Inflation remains elevated. Headline inflation remained in double digits, increasing from 12.4% y/y in August to 13% y/y in September 2008, driven by surging energy prices. Energy prices (which constitute about 18.1% of the consumer price index – CPI – basket) increased from 4.1% y/y in August to 7.5% y/y in September 2008. Increased agricultural production continues to ease food supply problems, thereby reducing food prices. Food prices (accounting for about 64% of the CPI basket) declined from an average of 18.8% in August to 17.2% y/y in September 2008. However, core inflation (headline inflation, excluding food) increased from an average of 3.9% y/y in August to 6.9% y/y in September 2008. We forecast inflation to average 10.7% in 2008.

Monetary policy to loosen into 2009. The central bank continues to focus its efforts on liquidity management to avert the long-term inflationary pressures from fiscal expansion and high inflows of oil revenue rather than fight the short-term inflationary impact of rising food prices. From the lowering of the monetary policy rate (MPR) to 9.75% in September, the 91-day Treasury bill (T-bill) rate declined marginally to average 9.08% in September from an average of 9.13% in August 2008. In the short term, the fiscal contraction following the reduction in the 2009 budget oil price to USD45/bbl from USD59/bbl in 2008 might lead to a significant spending cut, thereby reducing inflation. However, decreased fiscal revenue might force government to issue bonds, thereby driving yields up.

Inflation - % y/y

Interest rates - %

50

20

40

16

30

12

20

8

10

4

0 0

-10

2005

2005

2006 CPI inflation

2007 Food

2008 Non-food

2006

2007

Policy rate

2008

Prime

91-day TB

Source: National Bureau of Statistics

Source: Central Bank of Nigeria

Naira exchange rate to weaken. A stable and strong naira/USD remains the central policy of the central bank as is evident from the narrow range within which the currency continues to fluctuate. However, with the significant decline in oil prices, which should lead to fiscal contraction going into 2009, we expect some depreciation of the naira exchange rate to maintain the current revenue stream at the USD45 per barrel oil price set in the 2009 budget. That is, about 80% of government revenue is dollar denominated. However, a too weak budget exchange rate might make it impossible to fight the double-digit inflation, as the country relies heavily on imports. Thus, going into 2009, a naira exchange rate of around NGN126/USD should support a relatively healthy fiscal space while enabling the monetary authority to fight inflation.

Declining money supply. Following the banking sector reforms and positive business environment experienced throughout 2006/2007, broad money supply surged as a result of increased credit lending. Private sector credit extension (PSCE) declined from 103.7% y/y in April to 77.4% y/y in September 2008. This led to a slowdown in broad money growth from 97.1% y/y to 57.9% y/y over the same period. We expect the downward trend to continue owing to the envisaged fiscal contraction that might squeeze the government fiscal space, in this way leading to a reduction in oil savings in the Excess Crude Account. We also expect a significant reduction in net foreign assets of the banking system. This should help slow down the growth in broad money supply.

Exchange rates

Broad money supply (M2) – % y/y

135

120 100

130

80 60

125

40

120

20

115

-20

0

2006 Naira/US$

2007 2008 Budget exchange rate (Naira/US$)

Source: Bloomberg & Federal Ministry of Finance

2003

2004

2005

2006

2007

2008

Source: Central Bank of Nigeria

Page 18

Standard Bank Bank Group Group Economics Economics Standard

Nigeria – picture gallery Real GDP growth - % 12

10.3

Sectoral contribution to GDP (%)

10.6

9.4

10 8 5.4

6

6.2

Manufacturi Wholesale ng, 4.0 & retail trade, 16.2

8.6

Telecommu nication, 2.3

Agriculture, 42.2

6.4

4 2 Finance & insurance, 3.9

0 2003

2004

2005

2006

2007

2008f 2009f

Building & construction , 1.7

Oil & gas, 19.4

Source: NBS

Source: NBS

Foreign exchange reserves – US$ million

Trade account – US$ million 100 80 60 40 20 0 -20 -40 -60

70000 60000 50000 40000 30000 20000 10000 0

2004 2003

2004

2005

2006

2007

2008

2005 Exports

2006 Imports

2007

2008f

Trade surplus Source: IMF

Source: Bloomberg

Government surplus - % of GDP

Oil production and prices million bpd

30

US$/barrel

3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

20 10 0 -10 2003

2004

2005

Overall balance (cash basis)

2006 Revenue

2007

2008f

160 140 120 100 80 60 40 20 2005

Source: IMF

Weights of consumer price index (CPI) constituents 18%

64%

2006

2007

2008

Total production Bonny Light spot price (RHS) Source: International Energy Agency

Expenditure

Nigerian stock exchange – All share index 70000

4% 4%

60000

3%

50000

2%

40000

5%

30000 Food & non-alcoholic bev. Transport Clothing & footwear Other

Hse water, elec, gas & other fuel Furn & hshld equip maint Alcohol, tobacco & kola

20000 10000 2003

Source: NBS

2004

2005

2006

2007

2008

Source: Bloomberg

Page 19

Standard Bank Group Economics Standard Bank Group Economics

Tanzania Inflation in double digits. Headline inflation increased from 9.8% y/y in August to 11.6% y/y in September 2008, mostly driven by high energy and food prices. The food component (which constitutes about 55.9% of the consumer price index –CPI – basket) increased from 11.1% y/y in August to 13.4% y/y in September 2008. We expect food price increases to slow down during this harvest period. Energy prices (which constitute about 8.5% of the CPI basket) increased from 12.7% y/y in August to 15% y/y in September as the country continues to import its full quota of oil. Second-round effects of high energy prices are still evident, as transport costs remained elevated at 9.7% y/y in September 2008. Thus, we expect softer oil prices and increased food supply to bring some relief in the medium term. We forecast inflation to average 9.5% in 2008.

Upside risk to interest rates. The developments in Treasury bill (T-bill) yields continue to provide an anchor for market-determined interest rates. The increasing trend in the yields for all maturities continues and is expected to remain elevated in the short term. The 91-day T-bill rate increased from 8.62% in August to 10.36% in September 2008. The overall weighted average T-bill rate also increased, from 9.47% in August to 10.17% in September 2008. As inflation ventures into double-digit territory, we expect nominal lending rates to increase in the short term. This should, however, help maintain stable real interest rates. Overall, the risks to interest rates are on the upside. Our revised endyear T-bill forecast is 11.4%.

Inflation - % y/y

Interest rates - % 25

15

20

12

15

9

10 6

5

3

0 2005

0 2005

2006 Overall

2007 Non-food

2008 Food

Source: National Bureau of Statistics

2006 2007 2008 Central Bank Rate Comm.Bank Lending Rate Treasury Bills Source: Bank of Tanzania

The shilling exchange rate remains relatively stable. Export performance continues to determine fluctuations in the exchange rate as the economy is heavily dependent on the agriculture and commodity sectors. Increased demand for tourism services and continued inflow of donor aid should continue to support a strong currency. The slowdown in the world commodity demand might dampen mining exports, thereby leading to slight depreciation of the currency. However, strong performance in tourism and tourism services has provided an anchor for currency stability, and is expected to continue in the medium term. Having appreciated from an average of TZS1 160.33 per US dollar in August to an average of TZS1 159.16 per US dollar in September, the shilling depreciated to TZS1 230.13 in October 2008 following the bleak inflation outlook.

Slowdown in money supply growth. Tight monetary policy and a strong currency have facilitated a slowdown in money supply growth. In fulfilling its primary mission of “price stability”, the Bank of Tanzania (BOT) aims to control inflation by influencing the growth of broad money through targeting reserve money. Announcing the June 2008 monetary policy statement (MPS), the BOT specified a target of reducing money supply growth (both M2 and M3) to 18% each by end June 2009. Extended broad money (M3) declined from 27.1% y/y in March to 20% y/y in July, while M2 declined from 33.6% y/y to 25.3% y/y over the same period. We expect monetary policy to remain tight to contain inflationary pressures from large donor inflows.

Exchange rates

Extended broad money supply (M3) - % y/y

1350

TZS per USD

Millions of US$

240

1300

200

1250

160

1200

120

1150

80

1100

40

1050

0

2005

2006

2007

2008

Volume of transactions (US$ millions) RHS Exchange rate (TZS per USD)

Source: Bank of Tanzania

40 35 30

25 20 15

2005

2006

2007

2008

Source: Bank of Tanzania

Page 20

Standard Bank Bank Group Group Economics Economics Standard

Tanzania – picture gallery Real GDP growth - %

Sectoral contribution to GDP (%)

7.2

8

7.8

6.9

7.4

6.7

17.5%

8.1

7.8

7.1

6.9%

5.4% 9.2%

10

5.4% 5.8%

6

1.5%

44.7%

3.8%

4

4.1%

2 0 2002

2003

2004

2005

2006

2007

2008f 2009f

Agriculture Financial & Business Services Public Admin. Construction Mining and quarrying

Source: National Bureau of Statistics

Source: National Bureau of Statistics

Foreign exchange reserves, import cover

Trade account – US$ million 4000

months

US$ millions 3000

8

2500

7

2000

6

1500

5

-2000

1000

4

-4000

500

3

0

2

2000 0

-6000 2000 2001 2002 2003 2004 2005 2006 2007e

2000 2001 2002 2003 2004 2005 2006 2007e Gross reserves

Trade, Hotels & Restaurants Manufacturing Transport & Comm. Electricity and water supply Owner occupied dwellings

Exports

Import cover (rhs)

Imports

Source: Bank of Tanzania

Government deficit – % of GDP

Trade deficit Source: Bank of Tanzania

Services receipts – year ending July (US$ millions)

0

1200

-1

1000

-2

800

-3

600

-4

400

-5

200

-6

0

-7

Transportation

2000 2001 2002 2003 2004 2005 2006 2007 2008f

2004

Source: Bank of Tanzania & IMF

Travel (Tourism)

2005

2006

Other Services 2007

2008

Source: Bank of Tanzania

Weights in consumer price index (CPI) constituents 6.4%

6.9% 55.9%

Capital account - US$ million 6000

1.4%

8.5% 9.7% 2.6%

5000 4000

2.1% 2.1% 2.1% 0.8%

Food Clothing and Footwear Fuel, Power and Water Household Operations&Maintenance Recreation & Entertainment Education

3000 2000

1.5%

Drinks and Tobacco Rents Furniture & Household Equipment Personal Care & Health Transportation Miscellaneous Goods and Services

Source: National Bureau of Statistics

1000 0 2000 2001 2002 2003 2004 2005 2006 2007e Source: Bank of Tanzania

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Standard Bank Group Economics Standard Bank Group Economics

Uganda Inflation consolidated its slowdown in October. Inflation slowed to 14.5% y/y in October, from 15.2% y/y in September and 15.8% y/y in August. In the short term, overall inflation is projected to ease on the back of softening non-food inflation. Lower fuel and transport prices are expected to subdue nonfood inflation. The sharp drop in the international oil price to a fraction of its peak in 2008 has dampened inflationary pressures. However, food insecurity in the region is expected to put upward pressure on food prices. As the weighty item in the consumer price index (food) has a price that is downwardly sticky, the softening of inflation is expected to be moderate. As such, single-digit inflation is only projected to return in the second quarter of 2009.

Global financial crisis curbs foreign appetite for Treasury bills. The yield on the 91-day Treasury bill jumped to 10.4% at the end of October, from 8.6% at the end of September, on the back of a surge in investors‟ risk aversion for emerging markets, as global financial conditions deteriorated. The policy rate, the rediscount rate, is also likely to have climbed in October, from 15.2% in September. In recent days, there have been tentative signs that the cumulative interventions by developed world Treasuries and central banks are beginning to take effect, thus easing risk aversion, which may explain the moderation of the 91-day Treasury bill rate to 9.2% in early November. As conditions stabilise short-term interest rates are projected to moderate.

Inflation - % y/y

Interest rates - %

18

25

15

20

12

15

9

10

6

5

3

0

0

2004

2005

2006

Overall

2007

2005

2008

Core (excl. food, fuel, electricity and utilities)

2006 2007 2008 91 Day TB (yield) Weighted average lending Rediscount Source: Bank of Uganda

Source: Uganda Bureau of Statistics

The shilling weakens significantly. Uganda was not untouched by the massive sell-off of emerging market assets during the volatile month of October for global financial markets. Investors sought safe haven assets, including US Treasury securities, which boosted the value of the US dollar in October, and thus explains the Uganda shilling‟s 9.7% depreciation against it to a monthly average rate of UGX1 805.3/USD. The shilling depreciated by a relatively modest 1.3% against the euro, to UGX2 394.7/EUR. However, the Ugandan currency appreciated by 9.9% against the rand to UGX184.03/ZAR, largely on account of the latter currency‟s excessive weakness due to massive capital flight. As conditions improve in international financial markets, the shilling is projected to recover modestly before stabilising.

The rate of monetary expansion slows. The global financial crisis has heightened risk aversion, particularly of emerging market assets, and has as a result slowed capital inflows into Uganda. Liquidity has thus moderated as is evident from the slowdown of base money growth to 17.3% y/y in September, from 21.7% y/y in August. Similarly, broad money growth decelerated in August to 25.4% y/y, from 28.3% y/y in July. The softening of monetary expansion reduces the challenges of sterilising large foreign exchange inflows and as a result improves the authority‟s chances of containing base money below the ceiling target. Slower monetary expansion will also reduce the upside inflationary risk that stems from too much money chasing too few goods.

Exchange rates

Money supply growth – y/y %

2700

360

2500

300

2300

240

2100

180

1900

120

1700

60

1500

0

2004

2005

UGX/USD

2006

2007

UGX/EUR

2008 UGX/ZAR (rhs)

Sources: Bloomberg, Standard Bank Group est.

50 40 30 20 10 0 2004

2005

2006

M3 (Broad money)

2007

2008 Base money Source: Bank of Uganda

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Standard Bank Bank Group Group Economics Economics Standard

Uganda – picture gallery Real GDP growth - %

Sectoral contribution to GDP (%)

10

Community services 24%

Transport & communica tion 10%

8

Agriculture 30%

6 9.4

8.6

4

9.2

9.1

8.9

Hotels & Restaurant s 3% Wholesale & Retail Trade 11%

6.6

2 0 2004 2005 2006 2007e 2008p 2009f Source: Uganda Bureau of Statistics, IMF, Standard Bank est.

Foreign exchange reserves – import cover months

7.5

2500

7.0

2000

6.5

1500

6.0

1000

5.5

500

5.0

0

4.5 2004

2005 2006 Forex reserves

Electricity and water 1%

Manufacturi ng 9%

Source: Uganda Bureau of Statistics

Trade account – US$ million

US$ million

3000

Constructio n 11%

Mining and quarrying 1%

400 350 300 250 200 150 100 50 0

-60 -80 -100 -120 -140 -160 -180 -200 2006 Exports

2007 2008 Import cover (rhs)

2007 Imports

2008 Trade balance (rhs)

Sources: Bank of Uganda, Bloomberg

Government budget deficit - % of GDP

Source: Bank of Uganda

Coffee prices – US cents per pound

1 200 0

160 120

-1

80

-2

40 -3

0 2004

-4 2005/06

2006/07

2007/08

2005

2006

Robusta price (rhs)

2008/09p

2007

2008 Arabica price (rhs) Source: Bloomberg

Source: IMF CR No. 08/236

Weights of consumer price index (CPI) constituents 14.7%

7,000

1,050

6,100

900

5,200

750

4,300

4.7%

600

3,400

4.4%

450

2,500

300

1,600

27.2%

14.8%

Food Beverages and tobacco Clothing and footwear Rent, fuel and utilities Household and personal goods Transport and communication Education

Ushs billions

1,200

16.8%

12.8% 4.5%

Stock market indicators

2005

Source: Bank of Uganda

2006 2007 2008 Market Capitalisation (rhs) USE ALSI (Share index) Source: Uganda Stock Exchange

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Standard Bank Group Economics Standard Bank Group Economics

Zambia Inflation continued its ten-month climb in October to 15.2% y/y. Inflation in October was largely driven by food, and transport and communication prices. Food inflation accelerated to 17.6% y/y in October, from 16.2% y/y in September, while transport and communication price inflation surged to 19.2% y/y, from 11.5% y/y over the same period. Food inflationary pressures are expected to persist in the short term, as the lean season has just begun. Expenditure related to the recent presidential elections is also likely to have created short-term price pressures. The sharp fall in the international oil price is expected to substantially dampen price pressures from fuel, utilities and transport. And, as the green harvest begins to enter markets at the end of the first quarter of 2009, inflation is expected to ease.

A higher interest rate environment. Short-term interest rates have increased in recent months largely on account of a decline in appetite for local government debt related to the sharp increase in investors‟ aversion to emerging market risk. The drop in the copper price has also reduced the appeal of Zambian debt. As such, the yield on the 91-day Treasury bill increased to 13% in the first week of October, from 12.5% in September. Accelerating inflation and reservations about the country‟s new leadership also added to the upward pressure on interest rates. Similarly, the average lending rate increased to 26.7%, from 25.7% over this period. This high interest rate environment is expected to persist until the global financial markets stabilise.

Inflation - % y/y

Interest rates - %

25

50

20

40

15

30

10

20

5 10

0

0

-5 2004

2005

2006

Overall

2007

Food

2004

2008

2005

2006

Average lending rate

Non-food

2007 BoZ rate

2008 91-Day TB

Source: National Bureau of Statistics

Source: Bank of Zambia

Kwacha at its weakest value against the US dollar in 18 months. Heightened risk aversion spurred the dramatic sell-off of emerging market assets in October and led to a sharp depreciation of emerging market currencies, including the kwacha. The kwacha lost 15.4% of its value against the US dollar and 6.4% against the euro, to average ZMK4 088.1/USD and ZMK5 415/EUR in October. The reversion of the trade balance to negative territory in the third quarter of 2008, largely because of the halving of the copper price in less than six months, subdued foreign exchange inflows and thus added to the weakening pressure on the kwacha. The slowdown in China‟s growth momentum suggests that the demand for copper has softened and thus Zambia‟s export earnings will moderate, implying a weaker kwacha in the short term.

Broad money (M3) growth drops to a two-year low in August. M3 growth slowed to 19.5% y/y in August, from 29.2% y/y in July, largely on account of a significant decline in foreign currency deposits. The growth rate of foreign currency deposits, which constitute between 26% and 30% of M3, slowed sharply to 0.8% y/y in August, from 9.2% y/y in the previous month. This deceleration reflects acute emerging market risk aversion, in light of the global financial crisis, and uncertainty surrounding policy continuity following the death of President Mwanawasa. Reserve money growth was also subdued in September at 4.3% y/y, compared to 11.1% y/y in August, owing to a decline in growth of statutory reserves on foreign exchange deposits.

Exchange rates

Money supply growth – % y/y

Wwwwwweeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee

6600

900

50

6000

750

40

5400

600

30

4800

450

20

4200

300

3600

150

3000

0

2004

2005

2006

2007

2008

10 0 -10 2004

ZMK/USD

ZMK/EUR

ZMK/ZAR (rhs)

Sources: Bloomberg, Standard Bank Group est.

.

2005

2006

Broad money (M3)

2007

2008

Reserve money Source: Bank of Zambia

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Standard Bank Bank Group Group Economics Economics Standard

Zambia – picture gallery Real GDP growth - %

Sectoral contribution to GDP (%)

7

Financial Institutions & Insurance 7%

6 5

Communit y, Social & Personal Services 8%

Real Estate & Business services 9%

Agriculture , Forestry & Fishing 13% Mining & Quarrying 8%

4 3

6.2

5.4

6.1

5.7

5.2

Transport, Storage & Communic ations 9%

6.2

2 1

Restaurant s, Bars & Hotels 3%

0 2004

2005

2006

2007e 2008f 2009f Source: IMF, Standard Bank est.

Foreign reserves & import cover

Manufactur ing 11%

Wholesale & Retail trade 18%

Constructi on 11%

Electricity, Gas & Water 3%

Source: Central Statistical Office

Trade account – US$ million

1500

4.0

1200

3.5

900

3.0

600

2.5

300

2.0

0

1.5

1600 1200 800 400

2004

2005

2006

2007

2008

0 -400 2005

Forex reserves (US$ millions) months of import cover

2006

Imports

2007

Exports

Sources: Bloomberg, Bank of Zambia

Government budget balance - % of GDP

2008 Trade balance

Source: Central Statistics Office

Copper price – US dollars per tonne

20

9000

16

7500

12

6000

8

4500

4

3000

0

1500

-4

0 2005

2006

2007

2008p

2009f

2004

2005

2006

Sources: IMF CR No.08/187

Weights of consumer price index (CPI) constituents, % 4.9

8.2 57.1

8.5 6.8

Food & beverage Rent, fuel, lighting Medical care Recreation & education

2008 Source: Bloomberg

Stock market indicators ZMK billions

4.1 9.6

0.8

2007

Clothing & footwear Furniture & household goods Transport & communication Other goods & services

Sources: Central Statistical Office, Standard Bank Group est.

4000 3500 3000 2500 2000 1500 1000 500 0

22000 20000 18000 16000 14000 12000 10000 8000 6000 2005

2006

2007

2008

LuSE All Share Index (Jan 1997=100) Market Capitalisation (rhs) Source: Lusaka Stock Exchange

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Standard Bank Group Economics Standard Bank Group Economics

Group Economics Goolam Ballim – Group Economist +27-11-636-2910 [email protected] South Africa Johan Botha +27-11-636-2463 [email protected]

Shireen Darmalingam Jeremy Stevens +27-11-636-2905 +27-11-631-7855 [email protected] [email protected]

Danelee van Dyk +27-11-636-6242 [email protected]

Anita Last +27-11-631-5990 [email protected] Angola Ghana Malawi Mauritius

Victor Munyama +27 11-631-1279 [email protected] DRC Nigeria Tanzania Zimbabwe

Rest of Africa Jan Duvenage +27-11-636-4557 [email protected] Botswana Lesotho Namibia Swaziland

Yvonne Mhango +27-11-631-2190 [email protected] Kenya Mozambique Uganda Zambia

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