Equity Research in Africa, Like an Electric Train Africa is picking up, a True Emerging Market

2011

Equity Research in Africa, Like an Electric Train Africa is picking up, a True Emerging Market

CLIENT Chinese Government & African Development Bank by Joab Khamala 11/1/2011

Table of Contents 1. Macro Analysis African Trends and Outlook Executive Summary Joab’s Technologies and Research. Capital’s Country Risk Assessment Overview Geo-political Risk: Perception versus Reality Geographic Resources Demographic Changes Africa Risks and Opportunities Political and Investment Risks on the Decline Democracy on the Advance Rapid Economic Growth Emerging Middle Class Ease of Doing Business has Improved Stock Markets are Becoming more Widespread Credit Markets are Developing Urbanization African Economic Integration Investment Outlook Major Countries Doing Business in Africa Snapshots of Top 12 Economies in Africa Political and Economic Overview Political Risk Assessment, Arab Spring Economic Assessment, Key Trends

4 6 8 9 9 10 11 12 12 12 14 14 16 17 19 20 21 22 23 30 42 44 49

2. Micro Analysis Key Sectors Trends and Outlook Overview Banking and Financial Services Communications and Technology Infrastructure Consumer Products Agriculture Hydropower Mineral Resources Oil and Natural Gas Tourism Microfinance Overview

54 54 55 56 57 60 62 63 64 64 65 67

3. Company Analysis African Bank Investments Limited Letshego

73 87

Section 1: Macro Analysis

2012 African Trends and Outlook

November 2011

Africa Macro | Analysis and Strategy

November 2011

Africa 2012: Trends and Outlook HIGHLIGHTS According to the International Monetary Fund, Africa will host seven of the top ten fastest growing economies in the world in the next five years. Africa already had six of the top ten fastest growing economies in the last decade and many African countries have grown at higher rates those of Asia according to the IMF. Angola’s economy outpaced even that of China from 2001 to 2010, expanding at 11.1 per cent. Much of the growth in Africa has been driven by demand for natural resources, such as oil and minerals, for markets in Asia, in particular.

It is no longer just a commodity story. In the last decade, Africa’s economic growth story has diversified beyond resources with significant advances across a number of sectors including financials, communications and technology, consumer goods, and retail. This report includes an overview of trends and the outlook for Africa’s main sectors and key growth drivers.

The overall macro-economic indicators are much improved. Many African countries are now better governed and there has been a substantial reduction in armed conflict. Foreign direct investment is also rising, especially from Asia and South Africa. Much of the continent has received substantial debt relief from the International Monetary Fund, the World Bank and the African Development Bank. Africa has the fastest growing mobile phone penetration rates in the world. In addition, there is a substantial middle class emerging that is spurring sharp rises in personal spending. Private consumption in Africa grew more than in Brazil or India in the last decade. Some observers say that Africa’s economic development is like a combination lock being opened as more favorable global, regional and national factors come into alignment.

Demographic trends are powering Africa’s growth through an emerging middle class. Africa’s population is now over one billion people. It is a fast growing consumer market, expanding at four per cent a year. Half the population of Africa is under 19 years of age. Multinational companies with global brands are increasingly targeting the emerging consumer with products that are packaged in smaller, more affordable quantities to allow for daily purchases.

GDP Growth Rates (%) for Six Largest African Economies Ranked by Size

There are significant improvements in the “ease of doing business” in many African countries. Rwanda was ranked as the “most improved” country in the world by the Wall Street Journal and the Heritage Foundation in 2011. The recently released World Bank report, “Ease of Doing Business Report for 2012”, found that thirty six out of forty six Sub-Saharan countries surveyed had improved their business regulations in the past year.

Financial markets are deepening. The banking sector has been expanding at a very rapid pace.

Total assets of Africa’s largest 200 banks amounted to almost one trillion US dollars in 2010.

The number of IPOs on stock exchanges has risen in response to privatization programs and an easing of listing regulations.

Source: IMF, Joab’s Technologies and Research.

Capital Joab’s Technologies and Research. 2012-

Infrastructure is improving. African countries have been increasing their outlays on roads, bridges, ports and airports to facilitate economic growth. China has been in the forefront of assisting African nations in improving their infrastructure.

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INTRODUCTION Economic conditions in Africa began to radically improve in the early part of the last decade when commodity prices started rising sharply in response to strong demand from emerging market economies, particularly China and India. As a major supplier of oil and gas, as well as precious minerals and metals that are used across a wide variety of industrial applications, Africa has gained an increasing relevance in the global value chain. It is the mining and energy sectors that have become the defacto springboard responsible for Africa’s surging integration into the global economic community.

The recent increases in economic activity throughout the continent are beginning to fuel an emerging middle class that is underpinning strong growth in the banking, retail, food production, and mobile phone sectors. Political conditions have improved to the point where war and conflict have diminished as compared to 20 years ago providing a more stable environment for foreign investment. As Africa continues to become increasingly assimilated into the broader global economy as a key supplier of raw materials for the world’s growing markets, the reduced political risk combined with improved economic conditions and an overall population of over one billion people, make it a compelling growth story for the astute investor. This is especially true at a time when the economies of the U.S., Europe, and Japan are stalling due to the global financial crisis.

While the mining and energy sectors have provided the impetus to growth, African economies are maturing and expanding well beyond the “resource story” and are becoming more diversified as consumer spending becomes a major pillar of growth. Credit is being introduced into many markets through both traditional commercial banking sources as well as through micro-finance which is designed to provide loans to both consumers and businesses where credit has been scarce if it existed at all. Africans are now experiencing an increase in their disposable income that is driving private spending at a rapid rate. As disposable income continues to advance, opportunities will be created in telecommunications and technology, clothing, housing construction, and the consumer products sectors as citizens seek to improve their living standards and mimic the lifestyle of their counterparts in other emerging as well as developed nations.

and deepening. While still needing improvement, the rule of law is being strengthened. The banking sector is becoming more sophisticated as standards and practices are being brought up to the levels of the OECD nations. Many state owned banks have been privatized. Efforts have been made to recapitalize or eliminate weak banks. Interest rates are increasingly being set by market conditions rather than government fiat. Lending practices have improved. As further reforms are implemented and African countries continue to mature and evolve, the broader continent will continue to integrate in the global economy, thereby opening the door to further foreign investment.

Africa is the last frontier. It is the last region of the world ripe for economic development. In this regard, it is following the path of Latin America and the Far East, which forty years ago were viewed as inhospitable environments for foreign investors. They suffered from many of the same ills that recently plagued Africa. Corruption was rife, coups and dictatorships were the norm, freedom of the press was restricted, poverty was widespread, literacy rates were low, foreign investment regulations were opaque, foreign exchange controls were pervasive, inflation rates were high, the manufacturing sector was tiny and consumer spending was weak. The prospects for Africa are similar to Latin America and Asia, whom were able to surmount these challenges and grow at astonishing rates that created huge returns for astute investors who were willing to take what was perceived as a great risk to enter these markets. The case with Africa rests on extremely high potential opportunity for investors who are willing to weigh the risks and conclude that the prevailing political and economic conditions are the most favorable they have ever been.

Throughout the continent, governments are taking steps to encourage foreign investment. While more needs to be done in this regard, the improvements that have been made in recent years are dramatic. Barriers to investment and trade have been reduced. Profits and dividends can now be more easily repatriated, restrictions on foreigners investing in the stock market have been relaxed and credit markets are growing Joab’s Technologies and Research, Natu Court Flat B.

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EXECUTIVE SUMMARY In past years, the common perception of Africa was that of a war torn and poverty stricken continent that was scarred by tribal and religious conflicts, savage civil wars, and which was ruled by brutal dictators that suppressed civil liberties. It was also viewed as being technologically backward, hobbled by an inadequate infrastructure, afflicted by diseases that had been eradicated in the developed world, and a difficult place to do business in light of corrupt bureaucracies and barely functioning banking and judicial systems. Simply stated, Africa was viewed as a lost cause and not a place of high potential that offers profitable business or investment opportunities.

While there are still risk factors, these perceptions are out of date and political risk is abating as a majority of African economies are being fueled by strong foreign direct investment inflow by countries such as China, India, Russia, Brazil and the United States.

Africa Democracy Index (2010)

ANALYSIS AND STRATEGY

India have enjoyed over the last decade. Standard Bank is forecasting an average annual growth rate for the continent of around 6% through 2015.

World’s Top Ten Growing Economies* 2001-2010 2011-2015 Angola 11.1% China 9.5% China 10.5% India 8.2% Myanmar 10.3% Ethiopia 8.1% Nigeria 8.9% Mozambique 7.7% Ethiopia 8.4% Tanzania 7.2% Kazakhstan 8.2% Vietnam 7.2% Chad 7.9% Congo 7.0% Mozambique 7.9% Ghana 7.0% Cambodia 7.7% Zambia 6.9% Rwanda 7.6% Nigeria 6.8% Source: IMF * Annual Average GDP Growth (%) Emerging Middle Class Growth is being fueled by large investments in the mining, oil and natural gas sectors prompted by high commodities prices and strong demand for raw materials from Asia and other emerging markets. Economic activity is also being boosted by an emerging middle class that has witnessed an increase in their discretionary income and are seeking to mimic the life styles of their counterparts in the U.S., Europe and Asia.

Poverty rates are declining at a dramatic pace. In 1980, 40% of the population lived in poverty but by 2008, that ratio had fallen to 30% and by 2020, it is forecasted to drop to 20%. The African Development Bank’s Annual Development Effectiveness Review for 2011 noted that “Africa now has a growing middle class with money to spend, making it an increasingly attractive consumer market. Consumer goods driven sectors such as telecommunications and banking are expanding two to three times faster in African countries than in Organization of Economic Cooperation and Development (OECD) countries.”

Furthermore, an increasing liberalization of the business climate, improving corporate governance, reduced levels of poverty, an expanding middle class and the increasing number of free and fair elections that are being held are all contributing to a very dynamic macroeconomic environment.

Rapid Economic Growth While Europe is being undermined by a sovereign debt crisis, Japan is entering its third “lost” decade and the U.S. is slowly crawling out of the 2008 credit crisis, Africa is undergoing a barely publicized boom and is doing so at a startling pace – with some countries achieving expansion rates that China and Joab’s Technologies and Research, Natu Court Flat B.

Ease of Doing Business has Improved In its annual “Ease of Doing Business Survey” for 2011, the World Bank included a study on changes in the business environment over the last five years in 174 nations. According to the World Bank, of the 15 countries that made the largest gains in making their regulatory environment more favorable to do business, six were African countries; Rwanda (in second place), Burkina Faso (in fourth place), Mali (in sixth place), Ghana (in eighth place), Mozambique (in twelfth place) and Egypt (in thirteenth place).

Stock Markets are becoming more Widespread Stock markets are proliferating throughout Africa and, as a Page 6 of 104

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result, it is becoming easier to invest in shares as well as government and corporate bonds. There are 29 stock exchanges including the newest, in Rwanda, which opened this year. Seychelles plans to open an exchange later this year or in 2012 and Angola has plans to open an exchange in 2012 (although the opening has been postponed several times since an initial 2006 target date). African stock markets outperformed their counterparts from the major OECD nations which have performed poorly from 1999-2010.

look to foreign direct investment (FDI) - as opposed to aid - as a means of improving their economies.

Infrastructure is Improving Africa was notorious for its poor infrastructure which was a deterrent to foreign investment in past years. Roads were unpaved, telecommunications systems did not function reliably, airports were over-crowded, congested and run down, ports were mismanaged and there was either no - or very limited - broadband service.

African Stock Exchange Performances The state of the infrastructure has improved greatly. To a large extent this is the result of Chinese investment in - or financing of – major development projects including road construction, the building of new airports and ports, upgrading the telecommunications systems and building bridges. A great deal has been done to improve the infrastructure in order to encourage investment, reduce the costs of transportation and enable goods to be more easily transported to markets or to be exported.

End 1999-2010 (Ex Dividends) % Change USD % Change LC* West Africa- BRVM Tunisia- Tunis South Africa- Comp.

Nigeria- All Share Namibia- Overall Morocco- CFG-25 Mauritius- SE Kenya- NSE-20 Ghana** - Comp.

Egypt-Egx-30 Botswana- Gabarone

Infrastructure Ranking in Africa

0 Source: Bloomberg

*Local Currency

500

1000 **2001-2010

Democracy is on the Advance Over the last decade an increased degree of political stability has prevailed in Africa. Coups are increasingly rare. Free and fair elections are becoming more commonplace. The recent Presidential elections in Nigeria, Benin, Zambia and Liberia this year attest to this progress.

The advance of democracy in Africa will serve to reinforce the improved economic climate as democratic nations are characterized by lower levels of corruption, higher levels of transparency, a more competent bureaucracy and a functioning judiciary, which are critical for foreign investors.

Political and Investment Risk is Declining With the economies of Africa booming and free elections becoming more prevalent, the political risks are subsiding although some countries are still in transition or high risk - – this report will highlight where the political risk and economic viability are viewed to be stable to positive. The era of the coup d’etat and the “strong man” is fading. Africa’s infatuation with Marxism and revolution has long since passed. Africa can still be a difficult place to do business but the risk of nationalization of property is much diminished. Most African nations are now eager to attract investment from abroad and Joab’s Technologies and Research, Natu Court Flat B.

Source: World Economic Outlook 2011 Investment Outlook There are many encouraging developments that suggest Africa is shrugging off its previous lethargy. There are more democratic nations than there used to be. Growth is robust in many African nations and in some cases it is close to the levels of China and India. A legitimate middle class is beginning to emerge. High oil and metals prices have increased exports and attracted foreign investment. Airports, roads and ports are improving. Cell phones have made communication easier.

Foreign exchange controls have been eased and the aggregate bureaucracy has become less heavy handed.

The benefits of investing in Africa are beginning to outweigh the risks. At a time when growth is stalling in America, Europe and Japan, and some of the major emerging markets are slowing down, Africa presents compelling, yet select, sector investment opportunities.

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Joab’s Technologies and Research. Capital Country Risk Assessment Prevailing Conditions Business Category 1 Botswana Ghana Mauritius Namibia Rwanda Seychelles South Africa Category 2 Cape Verde Mali Morocco Tanzania Zambia Category 3 Benin Burkina Faso Burundi Cameroon Comoros Gabon Gambia Guinea Ivory Coast Liberia Kenya Madagascar Malawi Mauritania Sao Tome and Principe Sierra Leone Senegal Togo

P P P P P P P Business S N P N S Business N S N N N N N N N N S N N N S N N N

Angola Ethiopia Mozambique

N Business N N N

Nigeria Category 5 Algeria Egypt Libya South Sudan Tunisia

N Business N N N N N

Uganda Category 4

Economy

Politics

P P S S P S

P P P P N S

S Economy S S

P Politics P P

S P

S S

P Economy S S S S S S S P N P S S S S S S

S Politics P S S N S N S S S S S S S N P S

S S

S S

S Economy P S P

N Politics N N S

P Economy S N N N/A N

S Politics N N/A N/A N/A S

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Category 6 Central African Republic Chad Dem. Republic of the Congo Djibouti Equatorial Guinea Eritrea Guinea Bissau Lesotho Niger Republic of the Congo Somalia Sudan Swaziland Zimbabwe

Business N N N N N N N N N N N N S N

Economy S S P S S S S S S P N N N

Politics S N N N N N S S S N N N N

S

N

N- Negative S-Stable P-Positive Cat 1: Best business and economic environment Cat 2: Good potential and/or moving in the right direction Cat 3: More work to be done Cat 4: Difficult business environment, yet too big to ignore Cat 5: Caution advised because of political uncertainty Cat 6: High risk

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OVERVIEW Geo-political Risk: Perception versus Reality While many of the “traditional” perceptions of Africa being economically dysfunctional, destitute and ruled by dictators that suppress civil liberties continue to be true for countries such as Chad, the Democratic Republic of the Congo, Eritrea, Somalia, and Northern Sudan, for many other countries they are outdated, wrong and refuted by economic data compiled by organizations like the World Bank.

Many African nations are making progress in reducing poverty, holding free multi-party elections, deregulating their economies, privatizing state holdings and encouraging foreign investment. They are also growing at a pace that is reminiscent of the Asian tigers (Hong Kong, Singapore, Korea and Taiwan) in the 1960s.

Growth rates of 5% are now common while several countries are achieving growth rates that rival China’s rates of expansion.

Ghana, for example, is projected by the World Bank to surge ahead by 20% this year and by 10% in 2012. The IMF meanwhile forecasts growth of 12.5% in Niger, 10.8% in Angola and 8.5% in the Ivory Coast in 2012. It is also predicting that Mozambique will grow at an average annual rate of 7.7% between 2011 and 2016, Liberia will expand by 7.5%, Tanzania will advance at a 6.9% clip, Rwanda will increase by 6.8% and Uganda and Angola will rise by 6.7%.

ANALYSIS AND STRATEGY

are attracting more business travelers and tourists. Both Delta and Air France recently announced they will now fly to Monrovia, the capital of Liberia.

Much of the strong growth is being driven by the resource sector, which has benefited from high prices and strong demand from Asia, and, as a result, has been the recipient of the bulk of foreign investment. Private consumption, however, is growing at a buoyant pace and is rapidly becoming an engine of economic growth. Over the last decade Africa has risen at a faster clip than in India and Brazil.

It is true that most African countries are growing rapidly from a very low base and therefore skepticism remains about the sustainability of the rate of improvement in economic conditions. The same skepticism, however, existed in the sixties when the Asian tigers began their incredible economic ascent and in the seventies when China took its first tentative steps to end its economic isolation.

While the developed world’s economies contracted during the recent global financial crisis, most African economies continued to expand. According to the International Monetary Fund (IMF), six of the top ten fastest growing economies from 20012010 were located in Africa; Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda. The likelihood that these growth rates can be maintained is high, given the continued strong demand for raw materials from emerging market economies and expectations that consumer spending will surge in response to a growing middle class.

Accordingly, perceptions towards Africa will continue to evolve as they did with China and Brazil as they underwent their respective economic transformations to high growth economies that are a magnet for foreign investment.

Source: The Economist Over the next five years (2011-2015), the IMF is forecasting that Ethiopia, Mozambique, Tanzania, the Democratic Republic of the Congo, Ghana, Zambia and Nigeria will be among the ten fastest growing economies. Africa is now expanding on average at a faster pace than Asia. Riding on the increasing rates of economic growth, airlines are adding routes to many countries not previously served as they seek to serve African cities that Joab’s Technologies and Research, Natu Court Flat B.

Throughout the region there is a realization of the necessity of becoming part of the global economy and emerging from economic isolation. The continent’s relationship with China has accelerated this process. Steps are being taken on a countryby-country basis to encourage foreign investment, spur growth, boost employment and exports, and improve infrastructure.

The ease of doing business has greatly improved in many nations as regulations have been streamlined, foreign exchange controls eased and transparency improved. There are eight African countries (Mauritius, South Africa, Botswana, Tunisia, Rwanda, Ghana, Namibia and Zambia) that are rated higher than Italy in the 2012 World Bank Ease of Doing Business Survey. Morocco, Ethiopia, Kenya, Seychelles and Egypt are ranked higher than Argentina; Swaziland, Uganda and Cape Verde are ahead of Brazil, and Tanzania is two places in front of Indonesia. According to the United Nations Conference on Trade and Development (UNCTAD), returns on foreign direct Page 9 of 104

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investment in Africa have, in recent years, been amongst the highest in the world.

While corruption remains a problem in some countries, many nations have taken strong measures to curb this scourge.

Botswana, Mauritius, Seychelles, South Africa, Namibia, Ghana and Rwanda are all ranked higher than Italy and Brazil in the 2010 Corruption Perception Index which is compiled by Transparency International. Malawi is rated less corrupt than India and Egypt, Burkina Faso, Swaziland, Gambia, Djibouti and Liberia are ranked ahead of Mexico.

Africa Corruption Index

(measured by book value) surged 259.1% to $553.972 billion between 2000 and 2010. This was equivalent to 33.4% of Africa’s GDP. In 1995, FDI was equal to just 16.8% of GDP. It is not the traditional major economic or former colonial powers who are leading the way in direct investment in Africa.

In fact, they are lagging behind. Instead, China and India have been increasingly dominant as they seek to gain access to the raw materials and oil they need to support their growing economies. These countries are making loans and investments to upgrade the infrastructure, explore for oil and increase the electricity supply all across the continent Brazil is making inroads into Africa, particularly in the Portuguese speaking countries of Angola and Mozambique, and Turkey is increasing its presence, particularly in North Africa and South Africa.

Korean companies are beginning to recognize the importance of Africa. For example Posco, HSG Industries, and LG Electronics have announced plans to build manufacturing plants in South Africa.

Samsung Electronics has operations in South Africa and Nigeria and will be entering the Kenyan market by the end of 2011.

Bilateral trade between Korea and Africa meanwhile jumped from $6.4 billion in 2000 to $13.9 billion in 2009.

Irrespective of the increasing interest and activity from these countries, Africa would welcome more U.S. and European investment to dilute the current economic concentration of capital coming from Asia.

Source: Transparency International th

th

In the late 19 and early 20 century, there was a scramble on the part of the major powers to carve up Africa into colonies.

The British and the French came to dominate the continent.

Now there is a new scramble on the part of foreign investors to gain access to Africa’s abundant riches of minerals, oil and natural gas and its growing consumer market. The strong growth in Africa and the reduction of barriers to trade and investment have led to an explosion of Foreign Direct Investment (FDI) particularly into the oil, natural gas, hydropower and telecommunications sectors. There has also been active foreign interest in the agriculture, banking and retail sectors. According to the data from the UNCTAD, FDI Joab’s Technologies and Research, Natu Court Flat B.

Geography Africa is the second largest and second most populous continent after Asia. Including adjacent islands, it covers a territory of 11.7 million sq miles. This is equivalent to 6.0% of the world’s surface and 20.4% of the total land area. Africa comprises 54 countries, 2 unrecognized states; Somaliland and Sahrawi Arab Democratic Republic and ten colonies and Page 10 of 104

AFRICA MACRO territories; Saint Helena (UK), Ascension (UK), Tristan da Cunha (UK), Melilla (Spain), Plazas de Soberana (Spain), Canary Islands (Spain), Ceuta (Spain), Madeira (Portugal), Mayotte (France) and Reunion (France). Sudan was previously the largest country until South Sudan voted to secede and become the newest independent state on July 9, 2011. The largest country now is Algeria, which is modestly larger than the Democratic Republic of the Congo. Both are slightly less than one-fourth the size of the United States. The smallest country is Seychelles. It is two and a half times the size of Washington DC. Africa is resource rich and is one of the world’s major sources of industrial and other minerals such as gold, diamonds, uranium, iron ore, manganese, palladium, phosphates, timber, titanium, chromium, platinum, coal, chromium, copper, nickel, cobalt and coltan.

The African continent contains 16.8% of the world’s forests.

The Congo basin is the second largest tropical rainforest after the Amazon. About 21.1% of the land area is suitable for cultivation, while deserts cover 42.7% of the land area. The Sahara desert, which accounts for 30.4% of the continent, is the largest desert in the world. Only 2.3% of the land area is devoted to permanent crops. Among the crops grown are apples, bananas, beans, cassava, cocoa (70% of the world’s cocoa supply comes from West Africa), coconuts, coffee, corn, cotton, dates, egg plant, figs, groundnuts, lentils, millet, okra, palm nuts, onions, oranges, pineapples, potatoes, rice, sorghum, sweet potatoes, sugar cane, tamarind, tea and yams.

Source: FAOSTAT

Demographics The population of Africa is 1.052 billion and it now accounts for 15.1% of the world’s population. The most populous country is Nigeria with a population of 165.8 million. This represents 15.8% of the population of the continent and 2.4% of the world’s population. Ethiopia is second with a population of 90.9 million and Egypt is third with a population of 82.1 million.

Seychelles is the smallest country by population with just 89,188 inhabitants. The population density for Africa is 35.5 people per square km and 40% of the population lives in urban areas. The three largest cities are Kinshasa with a population of Joab’s Technologies and Research, Natu Court Flat B.

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9.070 mm, Lagos with 7.938mm and Cairo with 6.759mm.

Africa is a young and rapidly growing continent. The median age is 19.3 years, which is the lowest of any world region. Half of the population in Uganda is under 15. By comparison, industrial countries are aging. The median age in the U.S. is 37.0 years, with 20.0% of the population under 15. In Japan, the median age is 45.0 years and 13.6% of the population is under 15. The aging population in the rich countries of the Organization for Economic Cooperation and Development (OECD) raises issues about health care, pensions and dependency ratios, in contrast to Africa.

Most Populous Nations in Africa Country Population Nigeria 165,822,569 Ethiopia 90,873,739 Egypt 82,079,636 DR of Congo 71.712,867 South Africa 49,004,031 North/South Sudan 45,047,502 Tanzania 42,746,620 Kenya 41,943,504 Algeria 34,994,937 Uganda 34,612,250 The 2008 Census indicated that the population of South Sudan was 8,260,490. The government of South Sudan disputes this tally believing it is an undercount.

SOURCE: US Census Bureau – 2011 data Much of Africa has not yet completed what demographers call a “demographic transition” to low birth and death rates. The population growth rate is the highest in the world at 2.34%.

This translates to a birth rate of 34.9 per 1,000 people and a death rate of 10.8 per 1,000 people. Niger has the highest birth rate at 50.5 per 1,000 people, followed by Uganda at 47.0 per 1,000 people. This compares to 13.7 per 1,000 people in the U.S. and 8.5 per 1,000 people in Japan. The population pyramid indicates that 51.4% of the population is 19 and under, 24.9% is 25-44, 2.9% is 65-79 and just 0.4% is 80 and over.

There are a multitude of languages spoken in Africa. The official languages however tend to be those of the former colonial powers. Arabic is widely spoken in North Africa. French dominates in West and Central Africa, except for Gambia, Ghana, Liberia, Nigeria and Sierra Leone where English is spoken. French is also widely used in Algeria, Tunisia, and Morocco. English dominates in Eastern and Southern Africa and Portuguese is spoken in Angola, Cape Verde, Mozambique and Sao Tome and Principe. Equatorial Guinea is the only country in Africa where Spanish is an official language.

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AFRICA RISKS AND OPPORTUNITIES Political and Investment Risks are On the Decline With the economies of Africa booming and free elections becoming more common, the political risks in Africa are subsiding. The era of the coup d’etat and the “strong man” is fading. Africa’s infatuation with Marxism and revolution has long since passed. Benin for instance, which was a Marxist Leninist state between 1972 and 1990, is now classified as being “Free” by Freedom House. The ruling MPLA in Angola adopted Marxist-Leninist principles in 1977. In 1990 though, they discarded that ideology. In Ghana, the Socialist Convention People’s Party dominated the political scene following independence. In the 1965 elections, it was the only political party. In the 2008 elections however it captured just 1 seat in parliament.

Africa can still be a difficult place to do business but the risk of nationalization of property is much diminished. Instead of driving foreign investors away, most African nations seek to attract them. Almost all African countries are members of the World Trade Organization, the World Intellectual Property Organization and the Multi-Investment Guarantee Agency, a World Bank body that “promotes foreign direct investment by providing political risk insurance to investors and lenders against losses caused by noncommercial risks.” They also adhere to the stipulations of the International Center for Settlements of Investment Disputes, an institution of the World Bank that “provides facilities for the conciliation and arbitration of investment disputes between member countries and individual investors” and have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which facilitates registration and enforcement of foreign arbitral awards between contracting states.

There have been many encouraging political developments in Africa recently. As an example, in 2008, former Vice President John Atta Mills won the Presidential election by a margin of just 40,000 votes (0.46%). Yet, he assumed office without any civil strife occurring. Most encouraging was the peaceful transition South Africa made from apartheid to a functioning democracy with an independent judiciary and a free press. In the last presidential election, Nigeria put aside its reputation for a dysfunctional and corrupt voting process. Liberia and Sierra Leone, with the help of the international community, are rebuilding after savage civil wars and holding free and fair elections. Mali proves that even very poor countries can be democratic.

The internet, social media, cell phones, satellite television, increased trade and rising foreign investment offers the prospect of Africa becoming increasingly part of the global community.

Joab’s Technologies and Research, Natu Court Flat B.

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Democracy on the Advance Post-independence Africa has often had a troubled political history which still shapes much of the world’s perception toward the continent. Historically, several countries and regions have been politically unstable, and sometimes ravaged by brutal civil conflicts some of which killed hundreds of thousands of people such as the 1994 genocide in Rwanda in which 800,000 people were slaughtered; the Civil War in Angola from 1975-2003, which resulted in the death of a half million people and the Algerian Civil War that killed 150,000200,000 between 1991 and 2003. The most brutal of these conflicts was the Second Congo War that lasted from 19982003. It plunged much of the country into near anarchy and chaos and undermined the economy. By 2008 the war and its aftermath was responsible, by some estimates, for the death of up to 5.4 million people, mostly from disease and starvation.

The economic damage caused by this conflict is illustrated by the fact that the Democratic Republic of the Congo has 71% more people than Kenya but its economy is just 42.4% the size of Kenya’s.

Africa was also notorious for being ruled by brutal dictators that suppressed civil liberties, looted the treasury, enriched their friends and family, rigged elections and believed it was their right to rule for life. Among the most nefarious of these was Idi Amin of Uganda, Charles Taylor of Liberia, Siad Barre of Somalia, Hissen Habre of Chad, Jean Bedel Bokassa of the Central African Republic, Sekou Toure of Guinea and Mobutu Sese Seko of Zaire (since renamed the Democratic Republic of the Congo). Each of these leaders pauperized their countries, amassed huge fortunes and was responsible for the death of countless thousands of people. About 300,000 people for example were killed under Idi Amin’s eight year rule that ended in 1979. Very often the only means to change the government was via a coup d’etat by the military, which often replaced one dictator by another. Between 1952 and 2000, there were 85 coups in 32 countries. Mauritania, Nigeria, Sierra Leone, Uganda each had six coups and Burkina Faso, Burundi, Comoros and Ghana had five.

There were few exceptions during this period where military coup leaders handed power to civilian leaders. Mali was a notable example of this. It is now a functioning multi-party democracy.

Over the last decade, however, a degree of political stability has prevailed in much of Africa, partly as a result of higher economic growth in many countries across the continent.

Coups for instance are now increasingly rare. Since 2000, there have only been six coups; Central African Republic in 2003, Mauritania in 2005 and 2008, Guinea in 2008, Madagascar in 2009 and Niger in 2010. Civil conflicts have also substantially diminished.

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AFRICA MACRO Some of the longest lasting conflicts have now ended. There are U.N. peace keeping forces in Abyei, Sudan, the Democratic Republic of the Congo, Darfur, Sudan, the Ivory Coast, Liberia and the Western Sahara to monitor the peace. Sierra Leone and Liberia are rebuilding after brutal civil wars and now hold free and fair elections. Long time dictators such as Mummar al Qaddafi (killed by rebel forces after being captured near his home town of Sirte on October 20, 2011), who ruled Libya with an iron fist for 42 years, Hosni Mubarak, who ruled Egypt for 30 years and Zine El Abidine Ben Ali, who ruled Tunisia for 23 years, have been deposed in the “Arab Spring”.

Despite the persistence of several notorious dictators such as Robert Mugabe who has ruled Zimbabwe for 31 years and in the process decimated an economy that had great potential, Teodor Obiang Nguema Mbas of Equatorial Guinea who has amassed a fortune and kept an iron grip on power and Meles Zenawi who has been in power in Ethiopia for twenty years, the trend in Africa is towards greater freedom, respect for human rights and free and fair elections. It is no longer rare for there to be a peaceful transition of power rather than rigged elections, one general replacing another or perpetual dictatorships.

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witnessed any leader or ruling party being peacefully voted out of office, with the notable exception of Mauritius in 1982… Since 1991, however, no less than 30 ruling parties or leaders have been ousted by voters…The one party state is no longer the African norm (our emphasis).”

Freedom House, which analyzes political trends throughout the world, rates Benin, Botswana, Cape Verde, Ghana, Mali, Mauritius, Namibia, Sao Tome and Principe and South Africa as being “Free.” Between its 1999/2000 survey and its 2011 survey (covering political events in 2010), Burundi, Gambia, Guinea, Kenya, Niger and Togo saw their ratings change from “Not Free” to “Partly Free” while Ghana moved up to “Free” from “Partly Free.” In its 2011 review of press freedom (covering developments in 2010), Freedom House characterized the press in Ghana, Mali, Mauritius, Cape Verde, Sao Tome and Principe and South Africa as “Free”.

In March 2011, Benin held Presidential elections that were judged to be free and fair. Nigeria, which is notorious for its “flawed” elections held a Presidential vote in April that according to international observers was “clean.” Following the vote, Festus Mogae, the former president of Botswana and the head of the Commonwealth Observer Group, called the balloting “a sea change, not only for Nigeria but for the rest of the continent… In recent decades, Nigeria had come to be known for elections that were ‘influenced’ by numerous political interest groups. People outside of Nigeria and the Nigerians themselves had come to believe that elections could not reflect the will of the people. But the past two election cycles there have showed that the call for truly open and democratic elections was heeded. Clearly, one of the most important economies in Africa is reforming itself and putting its house in order.”

In September, Zambia had a peaceful transition of power when President Rupiah Banda of the Movement for Multiparty Democracy, which led the country for twenty years, stepped down after being defeated by Michael Sata of the Patriotic Front. On October 11, Liberia held the first round of its second Presidential election following the end of a brutal civil war. The balloting went ahead peacefully and there were no allegations of fraud.

According to an October 1, 2011 article in the Economist, “From around 1960, when African colonies first became independent, until 1991, not one of Africa’s 53 countries Joab’s Technologies and Research, Natu Court Flat B.

Although there are some countries, such as Ethiopia, Eritrea and Zimbabwe that restrict, monitor and block what are considered to be objectionable web sites, use of the internet is generally unrestricted in much of Africa. Internet use however is limited by the inability of most of the population to afford a personal computer, the low electrification rate, a poor telecommunications infrastructure, low literacy rates and high connection charges. There are, however, smart phones that cost less than $100 and are selling strongly in Africa. They Page 13 of 104

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allow users to bypass the poor telecommunications infrastructure and connect directly to the web.

The advance of democracy in Africa will help to reinforce the improved economic climate, as democratic countries are characterized by lower levels of corruption, higher levels of transparency, a more competent bureaucracy and functioning judiciaries, which are both critical and essential for foreign investors.

Rapid Economic Growth While Europe is being undermined by a sovereign debt crisis, Japan is entering its third “lost” decade and the US economy is growing very slowly, much of Africa is booming, with some countries are achieving Chinese and Indian like rates of expansion. Standard Bank of South Africa has forecast average annual growth rates for the continent of around 6% through 2015 and Joab’s Technologies and Research. Capital Joab’s Technologies and Research. believes that many African economies will outpace those of Asia into the future.

The African Development Bank (AfDB) Annual Development Effectiveness Review for 2011 expressed a note of optimism about Africa’s prospects, saying “Africa has bounced back from the global financial crisis and resumed its growth path. With its better business environment and its new potential as a consumer market, there is reason to believe that Africa stands on the cusp of a new era of self-sustaining development…This past decade has been particularly dynamic for Africa. The continent has enjoyed unprecedented growth and a rapid fall in income poverty. No country has conquered poverty without sustained economic growth, and the past 10 years have multiplied Africans’ opportunities, with governments using new revenues to finance much-needed infrastructure and services.”

Africa: GDP Growth Rates 14.0 12.0 10.0 8.0 6.0 4.0 2.0

1992-2001

2002-2011

2012

Uganda

Zambia

Tanzania

Senegal

South Africa

Nigeria

Rwanda

Niger

Namibia

Mozambique

Mali

Morocco

Malawi

Ghana

Kenya

Chad

Ethiopia

Botswana

Angola

0.0

There has been a sharp acceleration in economic growth in Africa over the last ten years, particularly when compared to the previous ten years when economic activity was tempered by low commodity prices, high inflation in many countries, modest foreign direct investment inflows and civil conflicts in a number of countries such as Algeria, Angola, the Democratic Republic of the Congo, the Republic of the Congo, Ethiopia (which fought a war with Eritrea between 1998 and 2000), Rwanda and Sierra Leone.

The rates of economic expansion for Africa over the last ten years (2002-2011) compare favorably with that of other major emerging market economies, with the exception of China, which expanded at a 10.6% average annual rate. This was only bested by Equatorial Guinea and Angola. Chad, Ethiopia, Nigeria and Sierra Leone had growth rates that exceeded India’s over the last ten years and Mozambique’s, Rwanda’s and Uganda’s growth rates were similar to India’s. Even some of the “laggards”, such as Botswana, Egypt, Senegal and Kenya compare favorably with such major emerging markets as Chile, Indonesia, Malaysia, Thailand and Turkey. These rates of increase for the “laggards” would be the envy of the major economies which are trapped in slow growth as a result of the debt crisis.

The pace of economic activity has quickened throughout Africa in recent years in response to higher commodity prices, large foreign direct investment inflows, particularly from China, substantial debt relief, relative political stability in many countries and the introduction of measures to improve the business environment.

Emerging Middle Class Growth in Africa is being fueled by large scale investments in the natural resource, oil and natural gas sectors prompted by high commodities prices and strong demand for raw materials from Asia. Economic activity is also being boosted by substantial infrastructural investment, much of which is financed by China. In addition, an emerging middle class that has witnessed an increase in their discretionary income and is seeking to mimic the lifestyles of their counterparts in the US, Europe and Asia is a major contributing factor for Africa’s stellar growth rates. In South Africa, this group is referred to as the “black diamond” market.

A report by Accenture entitled “The Dynamic African Consumer Market: Exploring Growth Opportunities in Sub-Saharan Africa”, which was released on September 7, 2011, noted that “For companies looking for growth via emerging markets, Sub-Saharan Africa (SSA) looms large. Since 2000, SSA has experienced rapid growth in consumer spending of four percent annual growth, reaching nearly $600 billion in 2010.

Consumer spending is expected to rise to nearly $1 trillion by

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MACRO 2020. Accompanying the growth are rapid improvements in income levels, infrastructure and the business environment that promises continued growth as a consumer market…The new African consumer is a force to contend with and represents an opportunity no company can afford to ignore…While mineral resources will undoubtedly continue to be important, the most significant contributors to growth are changing, with less reliance on exports and more reliance on domestic demand. Despite current low per capita incomes in Africa, average income is growing, giving rise to an emerging middle class that will become more demanding as income levels and spending increase.”

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and liberalization of business regulations.

This report also indicated that by 2020, nine countries; Angola, Ethiopia, Ghana, Kenya, Nigeria, Senegal, South Africa, Uganda and Zambia will account for three–quarters of consumer spending in SSA. Consumer spending in these countries is projected to climb by 54.0% between 2010 and 2020 to $679 billion.

The AfDB’s Annual Development Effectiveness Review for 2011 noted that “Africa now has a growing middle class with money to spend, making it an increasingly attractive consumer market. The sectors of consumer goods, telecoms and banking are expanding two to three times faster in African countries than in Source: Canback Global Income Distribution Database (C-GIDD); McKinsey Global Institute

This report cited several factors that suggest the rapid growth in consumer spending will continue. First is a sharp increase in the economically active population which will rise from 56% of the population in 2010 to 66% in 2050. This will spur demand for consumer goods and services. Second is the decline in poverty. In 1980, 40% of the population lived in poverty but by 2008, that ratio had fallen to 30% and, by 2020, it is forecasted to drop to 20%. Third is rapid urbanization which will make it easier for companies to market their products to consumers. As of 2010, 40% of the population lived in urban areas and by 2050, about two-thirds of the population is expected to live in cities. Fourth is increased mobile phone use. By 2012, almost 50% of the population will have a cell phone, up from 30% in 2008. There will be more than 500 million cell phone users in 2012 and many companies are using mobile phones as a means to market and promote their products. Finally, the business environment has improved in response to fewer civil conflicts Joab’s Technologies and Research, Natu Court Flat B.

OECD countries.”

An African Development Bank (AfDB) study that was released in October 2011 noted that the number of middle class in Africa had tripled over the last 30 years to 313 million people.

There were 120 million people who were classified middle class as defined by daily spending patterns. However, when remittances were taken into account, the AfDB estimated the number of middle class people swelled to 313 million. The countries with the largest middle class are Tunisia (45.6%), Gabon (37.8%), Egypt (31.6%), Botswana (29.3%) and Algeria (27.3%).

Remittances are a very important source of income in Africa that boosts consumer spending and housing construction and in many countries partially offset large trade deficits. The World Bank estimates that remittance inflows to Africa quadrupled in the 20 years ending in 2010 to almost $40bn (2.6% of GDP) and were the largest source of net foreign inflows after foreign direct investment, having recently Page 15 of 104

AFRICA MACRO surpassed official development assistance inflows (in the form of aid). It should be noted that this estimate understates the true amount of remittances as it is compiled from official banking sources and does not reflect unofficial methods of sending money. According to World Banks estimates, the amount of informal remittances could be as high as the amount of formal remittances. The World Bank estimates that 30 million Africans have migrated to other African countries or to countries outside of Africa with 9.0% of these going to France, 8.0% to the Ivory Coast, 6.0% to South Africa, 5.0% to Saudi Arabia and around 4.0% each to the US and the UK.

South Africa and Botswana both have per capita incomes that are roughly similar to Malaysia’s, while Gabon’s is higher than Mexico’s. Fueled by high oil prices and increased oil production, Angola’s per capita income is now on par with China’s. The pace of economic catch up has been remarkable.

In 2000, it was 38.1% below China’s. Even some countries that are widely perceived to be dysfunctional, such as The Republic of the Congo, actually have a higher per capita income than Indonesia and Peru.

Ease of Doing Business has improved In its annual Ease of Doing Business Survey for 2011, the World Bank included a study on changes in the business environment over the last five years in 174 nations. Of the 15 countries that made the largest gains in making their regulatory environment more favorable, six were African countries: Rwanda (in second place), Burkina Faso (in fourth place), Mali (in sixth place), Ghana (in eighth place), Mozambique (in twelfth place) and Egypt (in thirteenth place). According to the Wall Street Journal , and the Heritage Foundation 2011 Index of Economic Freedom, Rwanda was the “most improved country” in the world for reductions in barriers to doing business. In its annual Ease of Doing Business Survey for 2012 the World Bank Joab’s Technologies and Research, Natu Court Flat B.

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indicated that of the top 10 spots for countries that made the largest gains in the past year in making their regulatory environment more favorable five were African countries: Morocco (in first place), Sāo Tomé and Principe (in fourth place), Cape Verde (in joint fifth place), Sierra Leone (sixth place) and Burundi (seventh).

World Bank Index: Ease of Doing Business

Source: World Bank The AfDB 2011 Development Effectiveness Review, indicated that, “For the last quarter of the 20th century, Africa’s economic growth barely kept pace with its population increase.

Then, from the late 1990s, Africa suddenly surged ahead, with growth accelerating to 6% and more in the mid- to late-2000s, exceeding the world average. This was due in no small part to the rise of China and other emerging economies, whose strong demand for raw materials was a boon for the resource-rich African continent. But the acceleration in growth was more than a resource boom. African governments made serious efforts to restore macroeconomic stability, tightening their belts, trimming their foreign debt and taming inflation. They introduced microeconomic reforms to stimulate the market by reducing trade barriers, cutting corporate taxes and strengthening regulatory systems. All of a sudden, Africa became an attractive destination for foreign investment, with telecoms, banking, retail and construction all developing rapidly.”

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AFRICA MACRO In an indication of the improved business environment st prevailing in Africa, South Africa is rated 1 of 183 countries in the ease of getting credit category in the 2012 World Bank Ease of Doing Business Survey, Rwanda, Zambia and Kenya are th th tied for 8 place, Namibia is 24 and in the category of investor th th protection, South Africa is ranked 10 , Mauritius is 13 , th Rwanda and Sierra Leone are tied for 29 and Botswana and th Ghana are tied for 46 place.

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accounts for 80% of the total market capitalization in Africa.

There are about 1,500 companies listed on African exchanges and South Africa accounts for about 27% of this total.

Many African countries have established “one stop shop” investment agencies and virtually all of the major African Investment Agencies have web sites that direct investors to potential opportunities, outline the rules and regulations regarding foreign investment including any foreign exchange controls or sectors not open to foreign investment and in many cases provide a link to download forms. There are also web sites for the Central Banks, the stock exchanges and the statistical offices, thus making it easy to follow economic and financial trends and developments. It has never been easier to find out the basic facts about investing in Africa.

Stock Markets are becoming more Widespread Stock markets are proliferating throughout Africa and as a result, it is becoming easier to invest in shares as well as government and corporate bonds. There are 29 stock exchanges including one in Rwanda which opened this year.

Seychelles plans to open an exchange either later this year or in 2012 and Angola has plans to open an exchange in 2012 (the opening though has been postponed several times since a 2006 target date). Most of the markets are shallow, lack liquidity, have few share listings and are highly concentrated with just a few issues accounting for the bulk of trading activity and market capitalization. But the same could have been said of many emerging markets such as Peru, Malaysia, Chile, India, Thailand and Indonesia twenty or thirty years ago. South Africa, Morocco, Egypt, Nigeria and Ghana have the largest stock market capitalization.

A composite index of African stocks would have easily outperformed a similar index of stocks from the major OECD nations which have performed poorly since the end of 1999.

The major indices of France, Germany, Japan, Spain, Switzerland and the US closed 2010 at lower levels than at the end of 1999. None of the major African indices however faltered and some of the indices produced returns that compare favorably with those of the major emerging markets of Latin America and Asia. Three markets; Mauritius, Tunisia and South Africa saw gains of 250% or more in US dollar terms, while for Botswana the figure was very close to 250%.

South Africa has the deepest and most liquid stock market in Africa. In terms of market capitalization, the Johannesburg th stock exchange, which is the 16 largest in the world, Joab’s Technologies and Research, Natu Court Flat B.

In the FT Global 500 for 2011, which ranks companies by market capitalization as of the end of March, 2011, there were six South African companies. No other African nation had any listings.

There have been several notable IPOs on African stock exchanges this year, which have helped to deepen and broaden trading activity. On October 7, the IPO for Tanzania Precision Air Service was begun with shares expected to be listed on the Dar es Salaam exchange on December 8. The offer price was Tsh475 (US$0.28) and the number of shares offered was 58,841,750 shares. The minimum application was 200 shares. Most of the proceeds from the IPO will go towards capital spending. Shares can be purchased through registered stock brokers and in any CRDB Bank or Stanbic Bank branches.

Before the IPO, Kenya Airways owned 49% of the airline and Michael Shirima, the founder and chairman, owned 51%. After the IPO however, their holdings will be diluted to 34.2% and 34.6% respectively. The airline is the largest in Tanzania and is based in Dar es Salaam. It flies to Moroni, Comoros, Mombassa and Nairobi, Kenya, Johannesburg and Entebbe, Uganda. There are plans to extend the route structure to include the Democratic Republic of Congo and Angola.

To further develop the stock market and to facilitate the economic and financial integration of East African, Gabriel Kitua, the CEO of the Dar es Saalam exchange, indicated on August 24 that steps will be taken to ease controls on the amount of shares foreigners can buy. Presently, 40% of the Page 17 of 104

AFRICA MACRO shares of listed companies are reserved for nationals.

Foreigners are also prohibited from investing in government bonds. When Precision Air Service is listed, there will be 17 companies trading on the exchange of which four are cross listings of Kenyan companies; National Media Group, Kenyan Airways, Kenya Commercial Bank, and East African Breweries.

The most actively traded stocks on the exchange are CRDB Bank, National Microfinance Bank, Tanzania Cigarette Company and Tanzania Portland Cement Company. African Barrick Gold is expected to be cross listed by the end of the year or in early 2012. The company is 73.9% owned by Barrick Gold (Canada).

An IPO of African Barrick Gold on the London Stock Exchange in March of 2010 raised $884 million.

The largest IPO in Africa this year, and the largest in the stock market history of Ghana, was the June 2011 offering of Tullow Oil, the Anglo-Irish oil company that discovered Ghana’s offshore oil fields. It has also found oil in Uganda. The company, which is listed on the London stock exchange, offered 3.531 billion shares and raised $72.3 million in proceeds. The stock began trading in July. Ekwow Afedzie, the Deputy Managing Director of the Ghana Stock Exchange said the listing of Tullow Oil Ghana “would make the Ghanaian stock market more visible and attractive to both the domestic and international business world.”

The newest stock exchange in Africa is the Rwanda Stock Exchange in Kigali, which began operations at the end of January, 2011. The first public offering was BRALIRWA, a brewer. The government sold a 20% stake in the company for RwFr 22.1 billion ($37.3 million). It sold a further 5% to Heineken, which brought its holdings to 75% of the company.

BRALIRWA sells beers such as Amstel, Guinness, Mutzig and local brand Primus and has an estimated 95% market share in the country. The company also bottles Coca Cola drinks. Annual revenues for 2010 were about $93 million.

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bond issued by the Commercial Bank of Rwanda and several government bonds.

In August, British-American Investments, a Kenyan financial services holding company, which owns 2 insurance companies and an asset manager, raised KSh 3.5 billion ($37.7 million) by selling 390.6 million shares.

Telnet Holdings, a technology company was listed on the Tunis Exchange on May 23. The IPO of 2,070,000 shares at TND5.80 ($4.19) per share was 3.2 times oversubscribed. Trading of the shares began on August 24. This was the first listing in 2011.

During 2010, there were 5 listings. To encourage companies to list on the exchange, the previous government of deposed President Zine El Abidine Ben Ali introduced tax incentives, including a five year reduction in the corporate tax rate from 30%-35% (depending on the sector) to 20% if a company listed more than 30% of its capital before 2014. To further develop the stock market, Mohamed Fadhel Abdelkefi, President of the Bourse des Valeurs Mobilières de Tunis management committee announced a five point development strategy that includes developing a “financial market culture” and “market awareness” through media and education outreach programs, making it easier for companies to list, enhance the development of the bond market, including establishing a secondary mortgage market, improve the IT of the exchange and conduct additional training programs for the staff. There are presently 58 listed companies. Foreign investors account for about 20% of the market capitalization.

Bank of Kigali raised $35.4 million through an IPO. The government sold its 20% stake in the bank. The issue was oversubscribed by 274%. Rwandan nationals bought 75% of the issue. The bank will use the proceeds to expand its branch network and increase its loan portfolio. In its first day of trading on September 1, the stock price surged by 52%.

In early 2011, Alliance Assurances became the first private company and the seventh listed on the Algiers stock market.

The share offering was open to the public from November 2, 2010 to December 1, 2010. A total of 1,804,511 shares were subscribed at a price of 830 Algerian dinars ($11.17) each. A third of the shares were allocated to Algerian citizens, 28.5% went to institutional investors, 28.5% went to Algerian companies, 2.4% of the shares went to insurance brokers and another 2.4% was allocated to employees of the company. The company will benefit from a 5-year tax holiday on profits that is designed to encourage share listing. The Algiers market is nearly catatonic. Trading takes place just twice a week, on Monday and Wednesday mornings for two hours.

The only other shares that are traded on the exchange are cross listings of the Kenya Commercial Bank and the National Media Group of Kenya. The government has been contemplating selling its 10% holding of MTN Rwanda, which is 55% owned by MTN of South Africa on the exchange. Cementmanufacturer Ciments du Rwanda Ltd., Rwanda Commercial Bank and insurance company SONARWA are companies that are partly owned by the government which are likely to be listed in the near future. The exchange also lists one corporate

With the notable exception of South Africa, stock market capitalization as a percentage of GDP is very low when compared to the major developed and emerging markets. In Ghana, Namibia, Nigeria, Tanzania and Tunisia, it is less than a third of GDP. This suggests there is enormous potential for future growth. As the middle class develops in Africa, they will use the stock market as an investment vehicle to increase their wealth and to save for retirement, thus supporting the likelihood of additional gains.

Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MACRO Credit Markets are Developing Alongside the proliferation of stock markets, there has also been the embryonic development of money markets and government bond markets, which are likely to deepen as governments seek to utilize domestic savings and external capital to finance budget deficits, fund capital projects and reduce dependency on foreign assistance. Local companies will also be tapping into domestic savings to finance investments by issuing corporate bonds. As is the case with the stock market, South Africa has the deepest and most sophisticated credit markets. About half of all the government and corporate bonds on the continent are issued by South Africa.

Several African countries issue medium and long-term government bonds. Kenya for instance has a 30-year bond, South Africa and Namibia have twenty-year government bonds, Botswana and Zambia have fifteen-year bonds, Algeria and Tunisia issue seven, ten and fifteen year bonds, Nigeria issues seven, ten and twenty year bonds, Morocco has a ten year bond, Mauritius, Ghana and Uganda issue five year bonds and Malawi has a three year bond. In addition, there are active interbank money markets in many African nations such as Nigeria, Kenya and South Africa as well as weekly Treasury bill auctions.

With the exception of South Africa, the corporate bond market is still very small but it has been growing. In order to encourage its growth, the Kenyan government has exempted corporate bonds from the withholding tax on interest. Electric utility, KenGen, and mobile phone company Safaricom, are among the Kenyan companies that have issued corporate bonds. The banks, however, remain the largest issuer of corporate bonds. There is a small investor class for bonds in Kenya which consists mostly of commercial banks and fund managers who hold 90% of the outstanding bonds. In Uganda, Joab’s Technologies and Research, Natu Court Flat B.

ANALYSIS AND STRATEGY

bonds for the Eastern and Southern African Trade and Development Bank are quoted on the stock exchange.

Nigeria’s central bank governor, Lamido Sanusi, has indicated that he intends to “give renewed priority to developing a corporate bond market, to encourage companies to shift their funding sources away from bank loans, particularly in raising medium- to long-term finance. It is hoped this will encourage the banking sector to lend more to small and medium-sized enterprises which continue to face difficulties in accessing bank credit.”

There is a very limited state and municipal bond market in Africa. The most active issuers are the Nigerian states. Nine of the 36 states have issued bonds. The total debt outstanding of $2.3 billion exceeds that issued by South African states and municipalities by $400 million. Nigerian states rely more heavily on bonds than their South African counterparts because it is more difficult for them to get bank loans than is the case in South Africa. Johannesburg was the first local authority to tap the bond markets in 2004. Cape Town has also issued debt.

Nigerian state bonds account for seven percent of all outstanding issues while in South Africa, municipal debt is just one percent of total outstanding issues. Nigerian state bonds are tax-exempt. There is no secondary market for South African municipal debt, while in Nigeria the debt market for state obligations is very illiquid. Nairobi and Kigali have both expressed an interest in issuing debt but they have yet to do so. Douala, Cameroon issued a five-year bond in 2005, but that is the only instance outside of South Africa and Nigeria that municipal debt has been issued by an African local authority.

Population Growth Although Africa’s population growth rate is slowing, it still remains well above that of other continents where economic development and greater opportunities for women have resulted in a marked decline in the fertility rate. According to the US Census Bureau, Africa’s population has increased from 806.960 million in 2000 to 1.052 billion in 2011. Its share of the world population during this period rose from 13.2% to 15.2%.

By 2050, the Census Bureau projects Africa’s total population will surge to 2.270 billion and will account for 24% of the world’s population. There are presently six African countries; Nigeria, Ethiopia, Egypt, Democratic Republic of the Congo, South Africa and Sudan that are among the 30 largest countries in terms of population. By 2050, the Census Bureau projects there will be nine African countries among the top 30; Nigeria (which will rise to the fourth most populous country from the seventh), Ethiopia, the Democratic Republic of the Congo, Egypt, Uganda, Sudan, Kenya, Tanzania and Mozambique. The combined population of Nigeria, Ethiopia, the Democratic Republic of the Congo and Egypt will be close to one billion.

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% of Total World Population 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Africa

Brazil

China 2050

Europe

India Indonesia Pakistan

US

2011

Rest of the world

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Given the expected sharp increase in population and the rapid growth of the economy, Africa’s continued emergence from poverty could have as profound an impact on the global economy as the rapid pace of China’s and India’s expansion in terms of increasing demand for raw materials, providing a market for consumer goods, fueling growth of the financial sector and boosting demand for energy. Africa’s population is presently 78.7% of China’s. By 2050, when India is projected to have more people than China, Africa’s population is projected to be 74.2% larger than China’s and 37.1% above that of India’s. This is clearly an enormous potential market to be tapped.

Urbanization Most Africans still reside in rural areas but that is rapidly changing. In 2000, 36% of the population lived in urban areas but by 2010 that ratio had increased to 40.0% and by 2050 the UN expects 58.7% of the population will live in cities. As of 2010, there were 50 cities in Africa that had a population of one million or more. By 2025, the UN predicts there will be 81 cities that will have a population of one million or more.

Unlike in many developed countries, Africa’s demographics are skewed towards a burgeoning population of young people.

Using Nigeria, the most populous African country, as an example, the US Census Bureau estimates that 54.3% of the population is under nineteen and just three percent is 65 and over. By contrast, in the US, 26.9 percent of the population is 19 and under and 13.2 percent is 65 and over. According to the Population Reference Bureau, “Africa has the fastest-growing and most youthful population in the world…over 40 percent of Africa's population is under 15 years of age.”

This young population will create a tidal wave of consumers in the near future who like their Asian and Latin American counterparts will want to spend their disposal income on goods and services that improves their living standards. This will clearly benefit many sectors of the economy such as retail, restaurants, travel, automobiles, electrical appliances, furniture and clothing.

Joab’s Technologies and Research, Natu Court Flat B.

The urbanization of Africa will present many challenges.

Housing will be one of the most important. It is already inadequate in Sub-Saharan Africa as 71.9% of the urban Page 20 of 104

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population lives in slums. A growing urban population suggests there will be a great need for urban amenities such as parks, hospital, schools, parking lots, sewage systems, play grounds, cultural institutions, shopping centers and garbage and waste disposal facilities. There will also be a need for new roadways as cars proliferate. In addition, mass transit systems will have to be developed. At present, mass transit in Africa is woefully inadequate. Cairo is the only city in Africa with a subway system. Algiers is building one. Buses are often overcrowded and dangerous, while commuter rail lines are slow if they exist at all. There are also substantial opportunities which will arise from the urbanization of the continent with recycling businesses springing up in many cities. For example, “the Abay” is being assembled in Ethiopia which runs on gas derived from municipal waste. The “green economy” will be a substantial growth sector on the continent in coming years.

then shared among the member states according to a revenuesharing formula. South Africa is the custodian of the pool of funds. SACU is negotiating an Economic Partnership Agreement with the European Union (EU).

African Economic Integration Africa is embracing free trade and is moving to lift tariffs and trade barriers and encourage economic integration and intraAfrican trade. Several African trading blocs have arisen. The largest of these is the Common Market for Eastern and Southern Africa (COMESA), a preferential trading area whose members consist of Burundi, Comoros, the Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. In 2008, COMESA expanded its free trade zone area to include members of two other African trading blocs, the East African Community (EAC) and the Southern African Development Community (SADC). There are also plans for members of COMESA to issue potentially a single currency by 2018.

The Economic Community of West African States (ECOWAS) is a regional group of fifteen West African countries that was established on May 28, 1975 to promote economic integration by creating a trading bloc through an economic union. Its member are Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.

The East African Community (EAC) consists of Burundi, Kenya, Rwanda, Tanzania and Uganda. It was founded in 1967, collapsed in 1977, and was resurrected in July 2000. The EAC is potentially a precursor to the establishment of an East African Federation in which the five countries will unite in a political and economic union. Newly independent South Sudan is expected to apply for membership. In 2010, the EAC initiated a common market for goods, labor and capital. It has set a goal of having a single currency in 2012 and a full political federation by 2015. The target date for a single currency, however, is clearly ambitious particularly as the member states have inflation rates that are currently above the 4.0% level mandated for monetary union.

Botswana, Lesotho, Namibia, South Africa and Swaziland are members of the Southern African Customs Union (SACU), the oldest customs union in the world. Within SACU, no tariffs exist on goods exported among the member states. All customs duties are paid into South Africa’s National Revenue Fund and

Joab’s Technologies and Research, Natu Court Flat B.

The members of the Southern African Development Community (SADC) are Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. According to its website, the mission of the group is “to promote sustainable and equitable economic growth and socio-economic development through efficient productive systems, deeper co-operation and integration, good governance, and durable peace and security, so that the region emerges as a competitive and effective player in international relations and the world.”

The West African Monetary Union was founded on January 10, 1994 by Benin, Burkina Faso, the Ivory Coast, Mali, Niger, Senegal and Togo. Guinea Bissau joined on May 2, 1997. It is a customs and a currency union whose objectives are “greater economic competitiveness, through open markets, rationalization and harmonization of the legal environment, convergence of macro-economic policies and indicators, the creation of a common market, the coordination of sectoral policies and the harmonization of fiscal policies.” The member states share a common central bank, Banque Centrale des États de l'Afrique de l'Ouest (BCEAO), which is located in Dakar, Senegal. They also share a common currency, the CFA Franc. It was originally fixed to the French franc but is now fixed to the Euro at a rate of 655.957 francs per Euro. It is fully convertible into the euro, with the convertibility guaranteed by the French Treasury through a special operations account at the Central Bank of France. This arrangement offers an unlimited overdraft facility that allows the CFA nations to avoid short-run balance of payments problems. In return, the BCEAO is required to deposit 65% of its foreign exchange reserves at the Bank of France. Payments and transfers of capital within the CFA Franc zone and with France are unrestricted. Outflow of capital to countries outside of France and the CFA zone are subject to verification and the submission of supporting documentation for approval. Members of the CFA franc zone have a regional stock market, the West African Regional Stock Exchange (BRVM), which is headquartered in Abidjan and has offices in each of the member countries. There are 39 companies listed Page 21 of 104

AFRICA MACRO on the exchange; 33 from the Ivory Coast, two from Burkina Faso and one each from Benin, Niger, Senegal and Togo. There are no listings from Guinea Bissau and Mali. The largest capitalized issue is the Pan-African bank Ecobank, headquartered in Togo with a market value of around $855mm.

ANALYSIS AND STRATEGY

genocide plagued Rwanda and Burundi, the Democratic Republic of the Congo appeared to be disintegrating, Somalia descended into chaos and anarchy, many economies were dominated by inefficient loss making public companies, infrastructure was dismal and foreign investment was hindered by lack of an independent judiciary, red tape, a heavy handed bureaucracy, high inflation, an inadequate banking system and foreign exchange controls. The cost of investing clearly outweighed the possible benefits and few investors outside of the oil and mining sectors, where high returns were achieved, were willing to take a chance on investing in Africa.

Some of these ills unfortunately persist. There are still too many dictators and heavy handed leaders in Africa, poverty is still widespread, the infrastructure is still poor and unemployment is high.

The Central African Economic and Monetary Union (CEMAC) consists of Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of the Congo. It shares a common central bank, Banque des Etats de l’Afrique Centrale (Bank of Central African States), which is located in Yaounde, Cameroon. Members of the CEMAC use a joint currency, the Central African CFA Franc. It is fixed to the Euro at an exchange rate of 655.957 per Euro and is fully convertible into the euro; again with convertibility guaranteed by the French Treasury. As with the West African CFA Franc, the countries using the currency have an unlimited overdraft facility with the Bank of France that allows them to avoid shortrun balance of payments difficulties. Rules and regulations regarding payments and the transfer of capital are similar to those of the West African Monetary Union.

Although the Central African and the Western African CFA francs are pegged at the same level to the Euro, they are not interchangeable and are not legal tender in the other CFA zone.

There is a fledgling stock exchange commission for the Central African zone, but there is no regional stock market. There are exchanges in Douala, Cameroon and Libreville, Gabon, but they are small and relatively illiquid with few listings.

Investment Outlook For many years, international investors wrote off Africa as unviable for investment. It was often seen as a continent that was politically unstable and ruled by cruel dictators who butchered their citizens and severely restricted political discourse and human rights. Corruption and nepotism was pervasive and foreign aid was not productively channeled to lift the meager standard of living. Poverty was widespread, AIDS was eliminating large segments of the population, brutal civil wars decimated the social fabric of Liberia and Sierra Leone, Joab’s Technologies and Research, Natu Court Flat B.

Despite these drawbacks, however, there are, as noted earlier, many indicators that suggest Africa is on the move and is shrugging off its previous lethargy. While some countries remain mired in political problems, such as Zimbabwe, others have some of the fastest rates of economic growth in the world.

Today, there are more democratic nations than there used to be, and, as recent events in North Africa suggest the Arab countries of Africa are moving towards more open political systems. Growth is robust in many African nations and in some cases is close to the levels of China and India. A middle class is beginning to emerge which is seeking to mimic the lifestyles of their counterparts in Europe, America and Asia. Many who left the continent for education and to find work are returning with their skills and money to open new businesses and to help build a stronger economy. High oil and metal prices have increased exports and attracted foreign investment. Airports and ports are improving. Cell phones have made communication easier. Foreign exchange controls have been eased and the bureaucracy has become less heavy handed.

Africa is beginning to take off and many investors are noticing as the benefits of investing in Africa are beginning to outweigh the risks. At a time when growth is stalling in America, Europe, and some of the major emerging markets are slowing down; it is time to take a serious look at Africa. It is no longer a place to be dismissed by potential investors. To ignore Africa is to ignore one of the fastest growing and most dynamic parts of the world.

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AFRICA MACRO Major Countries Doing Business in Africa China Among the most active investors in Africa have been the Chinese who are eager to secure rights to natural resources such as copper, iron ore and oil that are critical to their continued rapid economic expansion. Standard Bank Group of South Africa has forecast that China’s gross investment in Africa will rise by 70% from its 2009 level to $50 billion by 2015 and bilateral trade with Africa will double from its 2010 level to $300 billion by 2015. In 2009, China was the largest source of imports for Sub-Saharan Africa, accounting for 14.6% of the total and was also the second largest export market with a 12.6% share. The largest export market was the US which commanded a 20.2% share. Of the major African countries, China is the largest source of imports for Ethiopia, Ghana, Nigeria, South Africa and Sudan and the second largest source for Algeria, Egypt, Madagascar and Mauritius. China is the continent’s largest trading partner.

Chinese oil companies are very active in Africa. The Chinese National Offshore Oil Corporation (CNOOC) has operations in Nigeria, Kenya, Equatorial Guinea, the Republic of the Congo and Algeria. Sinopec has interests in Sudan, Angola and the Republic of the Congo and through its purchase of Addax Petroleum in 2009 gained holdings in Nigeria, Gabon and Cameroon. The Chinese National Petroleum Corporation (CNPC) has holdings in Algeria, Chad, Equatorial Guinea, Libya, Mauritania, Niger, Nigeria, Sudan and Tunisia. In 2010, China accounted for 45% of Angola’s oil exports (by volume), 11% of Libya’s, 67% of Sudan’s and 12% of Equatorial Guinea’s (in 2009).

South Africa is Africa’s biggest economy and China has been particularly active in building its trade and investment ties to it. China is now South Africa’s largest trading partner.

In late September 2011, during a visit to China by South African Vice President Kgalema Motlanthe, the China Development Joab’s Technologies and Research, Natu Court Flat B.

ANALYSIS AND STRATEGY

Bank and the Development Bank of South Africa signed a $2.5 billion agreement. In addition, the two nations signed a Memorandum of Understanding on geological exploration and mineral resources. Motlanthe indicated “China is an important trading partner of South Africa…The South African government is willing to remove any unnecessary obstacles to improve the investment environment, so as to offer good conditions for Chinese investors in South Africa.” China’s Prime Minister Wen Jiabao meanwhile said China expects to increase its imports of high value-added products, such as food, chemicals, steel, aluminum products and automobiles from South Africa.

In 2010, China accounted for 14.1% of South Africa’s imports and 14.6% of its exports. As of the end of July 2011, China had invested $4.2 billion in South Africa and had extended a $20 billion credit line. South Africa is the destination for the largest share of China’s FDI in Africa, accounting for 49.1% of the total invested between 2004 and 2010. Nigeria was a distant second with 9.1%. There are also many South Africa based companies that have operations in China such as SABMiller which entered the Chinese market in 1994 through a joint venture, Sasol is involved in two coal-to-liquids projects, South African boat builder Robertson and Crane has a joint venture with Chinese company Flying Eagle to produce sail and power catamarans in China, MIH, a division of Naspers has investments in a number of newspapers and Hollard Insurance, Old Mutual, FirstRand and Standard Bank have operations in China.

China has large investments in Nigeria, mostly in the oil and natural gas sectors. There is also significant investment in agriculture and construction. In May, 2010, China signed a $23 billion agreement with Nigeria to build 3 gasoline refineries that will add 750,000 barrels a day to its refining capability.

China has also been involved in repairing the Kaduna oil refinery, building power generating plants, providing concessionary grants to support the development of infrastructure and rehabilitating the railroad system. In an indication of the increasing importance of economic and business ties between the two countries, the Central Bank of Nigeria announced in September that it will hold 5-10% of its foreign exchange reserves in yuan.

The Lusaka branch of the Bank of China will provide services such as deposit-taking, lending and repatriating remittances in yuan in order to cater to Chinese companies operating in Zambia. Bilateral trade between China and Zambia was $2.8 billion in 2010. In the first quarter of 2011, China was Zambia’s second largest export market behind Switzerland with a 16.2% share. As for imports, it was in third place behind South Africa and the Democratic Republic of the Congo with 8.8% of the total. There are over 300 Chinese companies operating in Zambia, mainly in the mining, agriculture, telecommunications and construction sectors.

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AFRICA MACRO China has also been very active in the Democratic Republic of the Congo (DRC). In fact, one of its biggest projects in Africa involves a $6 billion commitment to the country. In return for the rights to extract more than 11 million tons of copper and 620,000 tons of cobalt over the next 25 years, China has agreed to build 2,000 miles of roads and 1,800 miles of railway tracks, hundreds of schools, 145 health clinics, a 450 bed modern hospital in Kinshasa, 31 150 bed hospitals in 26 provinces, 2 hydro-electric dams, power lines, 2 vocational training centers for construction and public works and 2 universities. In addition, China has agreed to transfer technology to the Congo and train local workers. The original terms of the agreement were for $9 billion but it was scaled back after the IMF raised concerns about the ability of the DRC to take on that much debt. Most of the construction work will be done by Chinese companies. The Chinese Export-Import Bank will provide $5 billion of the $6 billion in financing. Under the agreement, a joint Congo-China copper mining venture in Katanga was established that is 68% owned by a Chinese consortium consisting of China Railway Construction Corp and Sino hydro and 32% by Gécamines, the Congolese state owned mining company. The mining project will be funded by a $1 billion injection of equity from the Chinese investors and a $2 billion loan that carries an interest rate of 6.1%. The mine is expected to be operational in 2014. In the first year of operations, it is projected to produce 50,000 tons of copper and two years later, production is forecasted to climb to 200,000 tons a year.

ANALYSIS AND STRATEGY

Throughout the continent, China is involved in improving the infrastructure. It has been active in road building and maintenance and airport construction. China has also built sport stadiums, schools, hospitals, theatres, sports facilities, hydropower plants, and repaired and built rail lines.

India India has followed China’s lead into Africa and now has $33 billion of investments there. The largest investment is the $9 billion acquisition in March 2010 of the African mobile phone holdings of Zain (headquartered in Kuwait) by Bharti Airtel Limited, which gave it operations in 15 African countries; Burkina Faso, Chad, Democratic Republic of the Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia.

Bharti Airtel Limited also purchased Telecom Seychelles in August 2010 for $62 million. Essar, the Indian Steel group, has formed a joint venture with the government of Zimbabwe to revive the morbid Zimbabwe Iron and Steel Company by splitting it into separate mining and steel companies.

The Indian Oil and Natural Gas Company has interests in Libya, Sudan, Nigeria and Egypt. Tata, the Indian conglomerate is especially active on the continent. It has operations in Ghana, Kenya, Malawi, Mozambique, Namibia, Nigeria, Senegal, South Africa, Zambia and Zimbabwe.

At an Indian-African summit in Addis Ababa in May, Indian Prime Minister Manmohan Singh pledged $5 billion in aid over the next three years to help African countries met their Millennium goal targets. In addition to the $5 billion in aid, India indicated it will spend $700 million on training programs, $300 million to reconstruct the decrepit Ethio-Djibouti Railway line, offer 22,000 African students scholarships to study in India and contribute $2 million to the cost of the African Union mission in Somalia.

India’s bilateral trade with Africa soared from around $1 billion in 2001 to about $50 billion in 2010. It is expected to be at least $70 billion by 2015. In 2009, Africa (both North Africa and subSaharan Africa) accounted for 7.9% of India’s total imports and 7.6% of its exports. By comparison, Africa is responsible for 4.3% of China’s imports and 4.0% of its exports while for the US, those ratios are 4.0% and 2.3% respectively. Diamonds are a key component of India’s trading relations with Africa, especially as it is the world’s largest cutter and polisher of rough diamonds, the world’s largest importer of rough diamonds and the world’s largest exporter of cut and polished diamonds. The government has indicated that it wants to enhance its trading relationships with diamond producing Africa nations in order to increase imports of rough diamonds from Africa instead of Antwerp. Namibia, Angola, Botswana

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AFRICA MACRO and South Africa account for 53% of the world’s diamond output. On September 1, 2011, the government gave approval for the import of over $153 million of rough diamonds from Zimbabwe following the decision by the Kimberley Process to lift an embargo on importing diamonds from the Marange fields in Zimbabwe. The Kimberley Process Certification Scheme was established to certify the specific origin of rough diamonds to ensure they were not derived from areas of conflict (blood diamonds).

Brazil Brazil is making a major push into Africa. Vale, the Brazilian mining giant, Odebrecht, a construction company, Açúcar Guarani, a sugar producer, Marcopolo, a bus manufacturer and Petrobras, the state controlled oil company, are all active on the continent. Under former Brazilian President Lula da Silva, expanding trade ties with Africa, particularly with the countries that speak Portuguese, was a major priority. In his eight years in office, he visited 25 African nations. Also during that period, the Brazilian Foreign Ministry opened 16 new embassies in Africa. Miguel Jorge, the former minister of development, industry and foreign trade in the Lula Administration said, “The continent is going through a process that is similar to what Brazil experienced decades ago. There are major opportunities to participate in the growth of African countries, through the transfer of technology and expertise.”

There are over 100 Brazilian companies in Angola and an estimated 25,000 Brazilians live there. Angola is the largest recipient of Brazilian investment on the continent. In 2010, Odebrecht, became the single largest private sector employer in Angola where it has interests in food and ethanol production, construction and supermarkets. In Mozambique, Brazilian firms are active in the coal, construction, agriculture, bio-diesel and pharmaceutical industries.

ANALYSIS AND STRATEGY

South Africa South Africa has been very active in other African nations. It already had a dominant economic position in southern Africa, courtesy of the South African Development Community and the Southern Africa Customs Union. Not only do the countries of the SADC have close commercial ties to South Africa but they also have close financial and monetary ties. South African banks dominate the financial sector of Namibia, Lesotho and Swaziland and have a substantial presence in Botswana. The rand serves as a parallel currency in Lesotho and Swaziland.

The currencies of Namibia and Lesotho are pegged at par to the rand and as a result, monetary policy is effectively made by the Reserve Bank of South Africa (the Central Bank of South Africa).

Many South African companies are cross listed on the Namibian stock exchange. Other southern African nations are also very economically dependent on South Africa. In 2009, for example, it was the dominant source of imports for Malawi at 34.1%, for Mozambique at 35.4% and Zambia with a 40% share.

It is the second largest export market for Malawi (after Belgium), the second for Mozambique after the Netherlands and the third for Zambia (after Switzerland and China).

This year, Vale bought Metrorex, a small Johannesburg based mining company that has a copper mine in the Democratic Republic of the Congo for $1.1 billion. Vale has indicated it will invest $12 billion in Africa over the next five years. Brazil has signed agreements to assist with the development of a bio-fuel industry with Angola, Ghana, the Republic of the Congo and Nigeria.

South Africa has literally been Zimbabwe’s life line. It accounted for 60.5% of the country’s imports in 2009 and took 52.5% of its exports. Controversially, the bulk of foreign investment in Zimbabwe originates in South Africa and millions of Zimbabweans have fled to South Africa to escape the disintegration of the economy and the political tyranny of Robert Mugabe. These migrants send valuable remittances back to Zimbabwe which helps to bolster consumer spending there.

As of 2009, Brazil’s investments in Africa were about $10 billion, which represented 6.4% of the country’s total outward investments. Bilateral trade between Brazil and Africa surged from just $5 billion in 2002 to $20 billion in 2010. About half of Brazil’s exports to Africa consist of food, beverages and tobacco while around 80% of its imports are minerals, oil and natural gas. Nigeria is the largest trading partner on the continent, accounting for 32% of total bilateral trade with Africa while Angola has a 16% share.

South African retail companies have been aggressive in expanding their presence throughout the continent. Shoprite, a grocer and fast food company, is in Madagascar, Mauritius, Namibia, Nigeria, Tanzania and Zambia. Pick N Pay, the second largest supermarket chain in South Africa, has stores in Botswana, Mozambique, Zambia, Zimbabwe and Namibia.

Woolworths, the clothing and general merchandise store company, has 46 stores in ten African countries; Botswana,

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AFRICA MACRO Namibia, Lesotho, Swaziland, Ghana, Kenya, Tanzania, Uganda, Zambia and Mozambique. It has plans to open a store in Angola and 3 stores in Nigeria via a joint venture. Retailer Pepkor is in Namibia, Botswana, Lesotho and Swaziland and has plans to expand into Nigeria. Meanwhile, Eskom, the South Africa electric company provides electricity to Namibia, Zimbabwe, Botswana, Swaziland, Lesotho, Mozambique and Zambia.

United Kingdom Most of East and Southern Africa were once British colonies as were Ghana, Sierra Leone and Nigeria in West Africa. British colonies in Africa once stretched from “Cairo to the Cape” of Good Hope in South Africa. However, British dominance in Africa has long since passed and it is now a relatively modest power in the region, although there are major British investments in South Africa and Nigeria. The British military also maintains a small presence in Kenya, largely for training purposes. Its military intervention was critical in ending Sierra Leone’s brutal civil war in the early 2000s and it is involved in training the Sierra Leone army. In 2009, just 2.8% of the UK’s imports came from Africa and 2.6% of its exports went to Africa (including North Africa). Partly as a result of extensive investments there, South Africa is Britain’s largest trading partner in Africa. As of the end of 2009, UK investments in Africa were £29.4 billion, which represented just 2.9% of total overseas investments. Of the total invested in Africa, 48.5% was in South Africa and 7.4% was in Nigeria.

Most of the major UK companies have operations in Africa.

Cable and Wireless owns Affinis Communications which has a presence in Algeria, Benin, Burkina Faso, Cameroon, Guinea, Morocco, Niger and Senegal. BP (formerly British Petroleum) operates in 20 countries including Algeria, Angola, Egypt, Mozambique, South Africa, Tanzania and Zambia.

GlaxoSmithKline is in Kenya, Morocco, Nigeria and South Africa.

Intercontinental Hotels has properties in Johannesburg, Mauritius, Lagos and Lusaka. British American Tobacco has operations in Nigeria and South Africa and Pearson has offices in Ghana, Kenya, Lesotho, Namibia, Nigeria, Uganda, Malawi, Mozambique, South Africa, Uganda, Tanzania, Zambia and, Zimbabwe. Tate & Lyle has subsidiaries in Morocco and South Africa.

United States The United States is being surpassed as a major trading partner in Africa by China. Its presence and influence on the continent is under threat as Congress slashes the foreign aid budget to reduce the budget deficit. At a time when Africa is becoming more important in the world, more democratic and a key trading partner with many emerging market powerhouses, the US cannot afford to be left behind in the race to secure a piece of the growing African economy. In an indication of US concern Joab’s Technologies and Research, Natu Court Flat B.

ANALYSIS AND STRATEGY

of the increasing dominance of China in Africa, US Secretary of State Clinton on a visit this year to Zambia warned about “new colonialism” on the continent.

While US aid to Africa is under pressure, China has an almost unlimited amount of money to invest and loan to Africa to gain access to its oil, natural gas, mineral resources and consumer market. This is facilitated by the fact that China has the world’s largest foreign exchange reserves at over three trillion dollars.

At a time when the US is struggling with a large trade deficit and is experiencing sluggish economic conditions, it is of great importance that US companies take advantage of the strong economic conditions in Africa, which could, in time, become a major export market. Presently however, Africa is hardly on the radar screen for US companies and exporters. General Electric for instance derives just 1.0% of its total revenues from Africa.

The largest export market in Africa for US merchandise goods th is South Africa. It ranked 35 among export markets for the US in the first eight months of 2011, accounting for only 0.52% th of all exports. Egypt was the 38 largest export market and th accounted for 0.32% of total exports and Nigeria occupied 44 place and represented 0.32% of all exports. These three countries have the largest economies in Africa and a combined population of 296.9 million people, which represents 4.3% of the world’s population, yet exports to these nations accounted for just 1.3% of all US exports. Fast growing Angola meanwhile accounted for a paltry .11% of US exports and equally fast growing Ghana had a .08% share.

The US exports more to Guatemala than it does to Nigeria and it exports almost as much to Singapore, a country of 5.25 million people, as it does to all of Africa which has 1.052 billion people. Exports to Africa are highly concentrated with South Africa, Egypt, Nigeria and Morocco accounting for 61.3% of all exports to the continent in the first eight months.

Africa is strategically important to the US as a source of imports largely because of oil shipments. Nigeria for instance is the fifth largest source of oil imports (measured in volume terms) and the thirteenth largest overall source of imports.

Angola is the eighth largest source of oil imports and Algeria is the tenth largest. The US also imports small amounts of oil from Chad, the Democratic Republic of the Congo, Equatorial Guinea, Gabon, Libya and the Republic of the Congo.

In the first 8 months of 2011, the US derived 18.1% of all its oil imports from Africa. By 2015, the US may get as much as 25% of its imported oil from West Africa given the recent oil discoveries off the coast of Ghana, Sierra Leone and the Ivory Coast. In addition, with the ousting of Colonel Qaddafi in Libya, the US might become a bigger market for its oil. In the Page 26 of 104

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first 8 months, Libya accounted for only 0.1% of all US oil imports.

US Imports of Oil by Vol 2011 Jan- Aug

that have interests in Africa are Exxon/Mobil, Chevron/Texaco, Conoco Philips, Hess Oil, Anadarko Petroleum, Marathon Oil, Noble Energy, Occidental Petroleum and Apache Oil. France France maintains close political relationships with its former colonies in West, North and Central Africa. In fact, its military assistance was critical in helping to capture Laurent Gbagbo on April 11, 2011 after he refused to give up power following his defeat in the 2010 Ivory Coast Presidential elections. Every year, a Franco-African summit is held in France to discuss relations. France also has military bases in Djibouti and Libreville, Gabon and troops in the French territory of Reunion in the Indian Ocean.

Russia Ecuador Algeria Brazil Angola Colombia Nigeria Others Venezuela Mexico Saudi Arabia Canada 0%

5%

10% 15% 20% 25%

Source: US Census Bureau

In 2010, motor vehicles accounted for 10.8% of US exports to Sub-Saharan Africa, petroleum and coal products were second with a 7.7% share and oil seeds and grains had a 7.5% share.

With respect to imports, 80.9% was oil, 3.2% consisted of platinum and motor vehicle and parts were 2.5%.

In May 2000, the US Congress approved the African Growth and Opportunity Act (AGOA) which was designed to bolster the economic development of Sub-Saharan Africa by offering trade preferences for duty free entry into the US for certain goods, notably textiles and apparel but also cut flowers, horticultural products, automobiles and steel and oil. Largely because of oil Nigeria and Angola are the largest exporters under AGOA. In 2008, AGOA was set to expire but was extended by Congress to 2015. Most Sub-Saharan African countries are eligible for AGOA privileges with the notable exception of Zimbabwe. Preferential rights for Guinea, Niger and Madagascar were suspended in 2010 because of concerns over political developments. Despite the existence of AGOA, US imports of textiles and garments from Africa have not risen sharply because African producers have been undercut by China and more recently Bangladeshi producers.

US Foreign Direct Investment in Sub-Saharan Africa is very small, particularly outside of the natural resources sector. In 2009, it accounted for less than 1% of total FDI (book value). It is also heavily concentrated with South Africa ($5.9 billion), Nigeria ($5.4 billion), Mauritius ($3.6 billion), Equatorial Guinea ($3.5 billion), Angola ($2.6 billion) and Liberia ($862 million) accounting for 96.4% of the total. Much of the FDI is in the oil and natural gas sectors. Among the major US oil companies Joab’s Technologies and Research, Natu Court Flat B.

France’s importance as a trading partner and a source of investment has diminished as Chinese influence has increased.

It was, however, still the fourth largest export market for SubSaharan Africa in 2009, with a 4.9% share, and the third largest source of imports, with a 5.4% share. It is the major trading partner of Algeria, Morocco and Tunisia. France accounts for 15% of Libya’s oil exports (by volume), 5% of those of Equatorial Guinea, 4% of Angola’s, 3% of Nigeria’s, 13% of Egypt’s liquefied natural gas exports and 12.6% of Algeria’s natural gas exports. As noted earlier the French Central Bank has very close relations with the central banks of the West and Central African CFA zones.

Most of the major French companies have a presence in Africa.

Total has exploration, production or refinery operations in Algeria, Angola, Cameroon, Egypt, Gabon, Ivory Coast, Libya, Madagascar, Mauritania, Nigeria, the Republic of the Congo, Sudan, South Africa and Tunisia. Areva is active in uranium mining in Niger. It operates 2 mines and is developing the Imouraen uranium mine in the north of the country. When completed, it will be the largest mine of its kind in Africa with an eventual production of 5,000 tons of uranium over an expected lifespan of 35 years.

The main water and electricity company in Gabon, SEEG (Société d'énergie et d'eau du Gabon), has been 51% owned by the French company Veolia since 1997. Accor has hotels throughout Africa and Bouygues has worked on major construction projects in Algeria, Benin, Botswana, Egypt, Equatorial Guinea, Gabon, Ivory Coast, Kenya, Mali, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Republic of the Congo, South Africa, Tanzania and Togo. GDF Suez has oil or natural gas exploration and or production operations in Algeria, Ivory Coast, Libya and Mauritania. Private French water companies, such as Suez, have also been active in Africa.

Japan Bilateral trade between Japan and Africa has been growing at a Page 27 of 104

AFRICA MACRO blistering pace, climbing at a 27% compound annual rate between 2002 and 2010. In 2010, total trade amounted to $24 billion with a rough balance between imports and exports.

Japan’s trading relations with Africa are heavily concentrated in just a few countries. In 2010 for instance, South Africa accounted for 62% of all imports from Africa while Sudan had a 10% share and Nigeria was at 5%. With respect to exports, South Africa was once again on top at 32%, Liberia was second with a 16% share and Algeria accounted for 8%. Trade was also heavily concentrated with regards to the goods that were imported and exported. Precious stones and metals were 32% of imports, mineral fuels and oil had a 26% share and ores and slag accounted for 10%. As for exports, 39% were vehicles, 19% machinery and ships and boats had a 16% share.

Despite the recent rapid growth in trade with Africa, it still represents a miniscule portion of total Japanese trade. In the first eight months of the year, Africa accounted for just 1.6% of total exports and 1.9% of imports. By comparison, Malaysia, which has a population of 28.7 million, represented 2.3% of exports and 3.5% of imports. Africa is also not a major destination for foreign direct investment. In 2010, the stock of FDI (measured in book value) in Africa was just 0.7% of total worldwide FDI. South Africa accounted for 37.3% of all investments in Africa.

Most of Africa’s FDI from Japan is in the infrastructure and the mining sectors. One of the largest such investments is Sumitomo Corporation’s 27.5% interest in the Ambatovy nickel mining project in Madagascar. Sherritt Metals of Canada is the major shareholder in the venture with a 45% stake. The project is being jointly financed by the AfDB and the Japanese Bank for International Cooperation (JBIC). Other projects that are being financed by the JBIC include a refinery in Egypt, the reJoab’s Technologies and Research.tion of a National Textile Company plant in Angola and a metro construction project in Egypt. In 2009, JBIC signed a $150 million loan agreement with Standard Bank to boost trade finance in Africa. It has also provided $470 million in financing to ESKOM, the South African power company, which will be used to buy generation equipment and transformers and install power transmission lines.

In 2010, NTT bought Dimension Data of South Africa for $3.2 billion. Through its ownership of Firestone, Bridgestone has large holdings in the Liberian rubber sector. KDDI has interests in the South African telecommunications sector via its ownership of Telehouse of the UK. Nissan has indicated it will sell the Leaf, its battered powered electric car, in South Africa in 2013. Toyota has announced that it will increase the local content of the vehicles it makes in South Africa from 45% to 70%. It has also made a R363 million investment to build a new parts distribution warehouse. Mitsui and Toshiba are building locomotives in partnership with Transnet Freight Rail.

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Japanese conglomerate, African Economy and Development, announced plans in September to build a N7 billion manganese plant in Nigeria. It will produce about 5,000 tons of manganese annually. In August, the state owned Nigerian National Petroleum Corp. indicated it will accept a $2 billion loan from a Japanese group led by the JBIC to help fund a $5 billion liquefied natural-gas project.

South Korea South Korea’s biggest trading partner in Africa is South Africa which accounted for a mere 0.3% of its exports and imports in 2010. Imports from Africa are dominated by oil while exports are dominated by machinery and transportation equipment and manufactured goods. Foreign Direct Investment in Africa has been paltry, accounting for just 1.5% of total FDI from 2005-2009. One of the largest such investments is Korea Resources’ (a consortium consisting of Daewoo International, Keangnam and STX) 27.5% interest in the Ambatovy nickel project in Madagascar.

In June, Byung-Sam Kim, the African regional director of the Korea Trade-Investment Promotion Agency indicated that South Korea aimed to increase bilateral trade with South Africa from about $4 billion a year at present to $10 billion a year within five years. Only one Korean company, optic fiber manufacturer M-Tec, presently has manufacturing facilities in South Africa. Samsung and LG have regional office headquarters in Johannesburg. Korean companies however are gearing up for a major push into the South African market which is likely to serve as a springboard for the rest of southern Africa. Posco, LG, Hankook Tire and Korean Trade Insurance have said they will set up operations. In another sign of active interest in South Africa on the part of Korean companies, KT Corporation has indicated its intent to purchase 20% of Telkom of South Africa which is 11.1% owned by Public Investment Corp., the South African state-owned money manager, and 39.8% by the government.

South Korean firms have been active in other African countries. STX has a $10 billion agreement to construct 200,000 housing units in Ghana. Hyundai-KIA has opened up a dealership in Nairobi. On a two day visit in July by President Lee of South Korea to the Democratic Republic of the Congo, several agreements were signed between the government of the DRC and Korean companies, including Samsung, Pohang Iron and Steel Co. and Korea National Oil Corp. The agreements included projects to build copper and cobalt mines, explore for oil, improve the water infrastructure and build solar energy capacity. South Korea companies have also reached agreements to participate in a natural gas project in Mauritania, buy land in Tanzania for agricultural production and develop a uranium project in Niger.

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Turkey Turkey has set its eyes on expanding trading ties with Africa. It already is a major presence in North Africa, which accounted for 7.3% of its exports in 2009 and 2.5% of its imports, but it also wants to have a presence in the rest of the continent. In March, President Abdullah Gül indicated that Turkey has established a target of bilateral trading volume with Africa of $30 billion within the next few years. This would be almost double the $16 billion figure of 2010, which was 220% above the level of 2003. Turkey has embassies in 22 African countries and will increase that number to 32 by 2013.

Turkey’s % of Total Exports 2003 2004 2005 2006 2007 2008 2009 Source: UNCTAD

North Africa 3.3% 3.5% 3.5% 3.6% 3.8% 4.4% 7.3%

Sub Saharan Africa 1.2% 1.2% 1.5% 1.7% 1.8% 2.4% 2.7%

In October, on a visit to South Africa, Prime Minister Recep Tayyip Erdogan called for the implementation of a free trade area agreement and the waiving of visa requirements between the two countries to increase trade. There are 50 Turkish companies doing business in South Africa including two Turkish-owned coal mines. In July, Turkish consumer electric company Arcelik bought South African white goods manufacturer Degy for $230 million.

Turkish Airlines now flies to Algeria, Egypt, Ghana, Kenya, Libya, Morocco, Nigeria, Senegal, South Africa, Sudan, Tanzania, Tunisia and Uganda. The Turkish textile industry has outsourced work to Ethiopia. Off the coast of Mauritania, Turkish fishing vessels are engaged in industrial fishing. TAV Airports Holdings built the Enfida International Airport on the northeast coast of Tunisia. It has a concession to run the airport for 40 years. The company also operates the Habib Bourguiba International Airport in Monastir under a 40-year concession.

On his trip to North Africa in September, Prime Minister Erdogan took 280 businessmen and women. Over $850 million in new deals were signed during the stopover in Egypt where Turkish investment is about $1.25 billion. Before the outbreak of the rebellion in Libya, 110 Turkish construction firms had projects worth $23.6 billion. Libya was the most important country for Turkish construction companies.

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Snapshots of Top 12 Economies in Africa South Africa

2011 Population: 49,004,031

South Africa is the powerhouse of Africa. It accounts for about 30% of the continent’s GDP, is home to 23.9% of all of Africa’s Foreign Direct Investment, has the largest stock exchange on the continent, which accounts for about 80% of Africa’s total market capitalization and has the most liquid money and bond markets. Its banking system is the most modern and sophisticated on the continent. The four largest banks in Africa by assets are all based in South Africa; Standard Bank, ABSA, which is owned by Barclay’s, Nedbank and First Rand. South Africa also has the largest manufacturing sector in Africa, abundant natural resources including gold, chromium, antimony, coal, iron ore, manganese, nickel, phosphates, tin, uranium, diamonds, platinum, copper, vanadium, natural gas and modest oil reserves and is one of the few African countries that is a net exporter of food. Rule of law prevails, the judiciary is independent as is the central bank, freedom of the press is respected and elections are free and fair. Non-residents can freely transfer capital into and out of South Africa and they can freely purchase local securities without restrictions.

2011 % Change GDP: 3.4 2012 % Change GDP: 3.6 2011 GDP (Billions USD): 422.037 2012 GDP (Billions USD): 443.288 2011 GDP Per Capita (USD): 8,342 2012 GDP Per Capita (USD): 8,658 2011 Inflation: Avg. Consumer Price Change (%): 5.9 2012 Inflation: Avg. Consumer Price Change (%): 5.0

2011 Current Account Balance (% of GDP): -2.8 2012 Current Account Balance (% of GDP): -3.7 Source: IMF, all 2012 data are forecasts

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Nigeria

2011 Population: 165,822,569 2011 % Change GDP: 2.9 2012 % Change GDP: 3.3 2011 GDP (Billions USD): 183.415 2012 GDP (Billions USD): 188.592 2011 GDP Per Capita (USD): 5,001 2012 GDP Per Capita (USD): 5,066

Nigeria is the dysfunctional giant of Africa. It has 165.8 million people, the largest population of any country in Africa and 238.4% more than South Africa. Yet, the South African economy is actually 70.8% larger than Nigeria’s. The country suffers from poor infrastructure, inadequate electricity supply, an uncompetitive manufacturing sector, an agriculture sector that cannot fully feed its bulging population thus necessitating large amounts of food imports and occasional sectarian disputes between Moslems and Christians that prompts large scale violence. Parts of the oil rich Niger Delta is literally out of bounds to the government because of tensions between foreign oil companies and a number of the Delta’s ethnic minorities who feel they are not receiving their fair share of the oil revenue. They are also angered by the ecological damage caused by the oil companies. The bureaucracy is heavy handed, the banking system nearly collapsed in 2009 because of a mountain of bad debt, corruption is rampant and the economy is overly dependent on the oil sector. Yet, Nigeria is a country of enormous potential which makes it difficult to overlook.

Despite all of its problems, the economy expanded by a stunning 8.9% annual average rate between 2002 and 2011.

There is a growing middle class. Three of the top 20 banks in Africa by assets are located in Nigeria. It accounts for 10.9% of all FDI in Africa. The IMF estimates the current account will register a surplus of 13.5% of GDP this year as a result of high oil prices. Most encouraging, the recent elections were conducted without fraud. Nigeria in other words has been able to surmount its problems, and as long as oil prices don’t crash, the economy should continue to expand at a healthy rate.

2011 Inflation: Avg. Consumer Price Change (%): 3.9 2012 Inflation: Avg. Consumer Price Change (%): 4.3

2011 Current Account Balance (% of GDP): 13.7 2012 Current Account Balance (% of GDP): 10.9 Source: IMF, all 2012 data are forecasts

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Egypt

2011 Population: 82,079,636 2011 % Change GDP: 1.2 2012 % Change GDP: 1.8

Egypt is in the midst of political and economic turmoil as it tries to navigate a path to democracy following the overthrow of the 30 year rule of Hosni Mubarak. It has been anything but a smooth transition. The military took over following the ousting of Mubarak and promised to quickly turn power over to the people. They, however, have backtracked on that promise and appear to be settling into power. Protests are being broken up and abuse of detainees is widespread as it was under the Mubarak regime. Elections are likely to see gains for the Moslem Brotherhood, which will upset Egypt’s western allies and the urban secular elite. The economy meanwhile is crumbling. The stock market has faltered badly, investment is drying up, tourism is down, the budget deficit is about 8.6% of GDP, construction activity is declining and foreign exchange reserves are dwindling. Strikes are spreading as workers demand higher wages and the ouster of unpopular bosses. The military shows no signs of implementing needed economic reforms such as cutting food subsidies that bloat the budget deficit. Unemployment has risen to 12.2% from 9.0% in 2010 and is particularly pronounced among the young. It will be a while before the dust settles in Egypt and it becomes apparent what the new political and economic landscape will look like. In the meantime there is likely to be a great deal of political and economic turbulence.

2011 GDP (Billions USD): 231.890 2012 GDP (Billions USD): 252.777 2011 GDP Per Capita (USD): 2,922 2012 GDP Per Capita (USD): 3,123 2011 Inflation: Avg. Consumer Price Change (%): 11.1 2012 Inflation: Avg. Consumer Price Change (%): 11.3 2011 Current Account Balance (% of GDP): -1.9 2012 Current Account Balance (% of GDP): -2.2 Source: IMF, all 2012 data are forecasts

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Algeria

2011 Population: 34,994,937 2011 % Change GDP: 2.9 2012 % Change GDP: 3.3 2011 GDP (Billions USD): 183.415 2012 GDP (Billions USD): 188.592 2011 GDP Per Capita (USD): 5,001 2012 GDP Per Capita (USD): 5,066 2011 Inflation: Avg. Consumer Price Change (%): 3.9 2012 Inflation: Avg. Consumer Price Change (%): 4.3

Algeria is the largest country in Africa with a land area that is about one-fourth of the United States. It is richly endowed with oil and natural gas, which are the mainstays of the economy, accounting for 98% of exports and two-thirds of budget revenues. On the surface, the economy is doing well. The current account for instance has been in surplus since 1996, foreign exchange reserves are equivalent to 38 months of imports, the external debt is just 2.2% of GDP and inflation is relatively low, averaging 4.4% between 2007 and 2011. The veneer of good economic data, however, does not reveal the true nature of the economic situation. The government has been slow and hesitant in implementing economic reforms that are required to spur the economy which expanded at a relatively sluggish pace of 2.8% per annum between 2007 and 2011. Little has been done to diversify the economy away from its great dependence on the hydro-carbon sector. As of June 2010, nonperforming loans accounted for 14.9% of total bank loans. The government has put on hold its privatization program and has supported state-owned companies experiencing financial difficulties by cancelling their debts and providing investment credits and technical assistance. The ruling NLF Party keeps an iron grip on power and suppresses dissent and any signs of Muslim fundamentalism. It has been quick to put down any demonstrations prompted by the Arab Spring. Although the government appears to be securely in power, Algeria suffers the same problems that ignited uprisings in other Arab countries. Corruption is widespread, youth unemployment is very high, the state dominates the economy, the judiciary is not independent, the press is not free and the government wins elections by lopsided majorities, thus suggesting that voting is not free and fair. It remains to be seen how long the government can keep the lid on smoldering discontent and prevent the Arab Spring from fermenting.

2011 Current Account Balance (% of GDP): 13.7 2012 Current Account Balance (% of GDP): 10.9 Source: IMF, all 2012 data are forecasts

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Morocco

2011 Population: 31,968,361 2011 % Change GDP: 4.6 2012 % Change GDP: 4.6 2011 GDP (Billions USD): 101.767 2012 GDP (Billions USD): 109.242 2011 GDP Per Capita (USD): 3,162 2012 GDP Per Capita (USD): 3,359

Morocco has been able to avoid being pulled into the whirlwind of the Arab Spring. King Hassan remains popular and he was able to defang a budding protest movement by proposing reforms that will reduce his powers, grant the judiciary independence and make the prime minister the head of the largest political party in Parliament instead of being chosen by the King. While corruption is not as widespread as in other Arab countries, it still is a problem. Protection of intellectual property rights are weak and as a result counterfeit DVDs and movies are widely sold. There is no discrimination against foreign investors and they are allowed to own 100% of a company in most sectors of the economy. No private investment, whether foreign or domestic, is allowed in sectors the state has a monopoly, including phosphate mining, wholesale fruit and vegetable distribution, and water and electricity supplies. Foreign investors are also prohibited from owning agricultural land. They can, however, purchase shares on the stock market without restriction. The economy was able to side step the 2008/2009 global economic downturn and the recent turbulence caused by the sovereign debt crisis in Europe. Inflation is very modest, rising by 0.8% the year to September. The economy does face some difficult challenges.

Increased food and fuel subsidies have pushed the budget deficit up to 6.8% of GDP. The IMF projects the current account deficit will be 5.2% of GDP this year. Unemployment is high at about 9.0% and is particularly pronounced for young people.

Despite these problems however, the government has been able to successfully navigate the global financial crisis and avoid the turmoil of the Arab Spring. Morocco is likely to continue to be a shelter from the storm of the turbulence that is unstettling the Arab world.

2011 Inflation: Avg. Consumer Price Change (%): 1.5 2012 Inflation: Avg. Consumer Price Change (%): 2.7

2011 Current Account Balance (% of GDP): -5.2 2012 Current Account Balance (% of GDP): -4.0 Source: IMF, all 2012 data are forecasts

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Angola

2011 Population: 17,544,728 2011 % Change GDP: 3.7 2012 % Change GDP: 10.8 2011 GDP (Billions USD): 99.325 2012 GDP (Billions USD): 108.960 2011 GDP Per Capita (USD): 5,061 2012 GDP Per Capita (USD): 5,391

Angola is on its way to becoming an economic power house in Africa. It is riding the wave of an oil boom that is fueling growth at a breakneck speed and has catapulted it to the sixth largest economy in Africa. Between 2000 and 2011, the nominal value of the economy measured in US dollars soared by 879.5%.

Angola has seen its oil production climb from 645,000 barrels per day in 1995 to 1.988 million barrels a day in 2010. It is the third largest oil producer in Africa behind Nigeria and Algeria and the sixteenth largest in the world. China and the US are its major markets for oil exports, accounting for 45% and 23% respectively. The oil sector dominates the economy, accounting for three quarters of government revenue and 95% of merchandise exports. The economic fundamentals are strong, with the IMF expecting the current account to register a surplus of 12.0% of GDP in 2011. The budget is in surplus, the gross external debt is just 19.8% of GDP and gross international reserves are equal to about eight and a half months of merchandise imports. The banking sector is surging ahead at a strong pace. In 2004, outstanding loans from commercial banks were equivalent to just 8.6% of GDP. By 2010, however, that ratio had advanced to 33%. Foreign investment has flooded into the country, mostly in the oil sector, and as a result, Angola now has the fifth largest stock of FDI of any African country. Angola can be a terribly frustrating place to do business. The judiciary is not independent, there are inconsistent and confusing rules and regulations regarding investment, government monopolies still dominate many sectors of the economy and there is rampant corruption. In addition, although great efforts have made to improve the infrastructure, it remains inadequate. Despite these drawbacks, Angola is too big to ignore. It seems on its way to becoming one of the most important countries on the continent.

2011 Inflation: Avg. Consumer Price Change (%): 15.0 2012 Inflation: Avg. Consumer Price Change (%): 13.9 2011 Current Account Balance (% of GDP): 12.0 2012 Current Account Balance (% of GDP): 7.3 Source: IMF, all 2012 data are forecasts

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Libya

2011 Population: 6,597,960

An armed uprising has succeeded in ending the 42 year rule of the mercurial eccentric reign of Colonel Qaddafi. The conflict to remove him from power however has come at a great cost. Oil production has plunged, the infrastructure has been damaged and many thousands have been killed or wounded. Economist Intelligence Unit estimates the economy will decline by 28% this year. There is a great deal of uncertainty about the political outlook with various anti-Qaddafi forces jockeying for position.

There is concern among the urban educated secular elite that Islamist parties could garner the largest share of the vote in any elections. Libya has the largest oil reserves of any country in Africa. It also has the third largest natural gas reserves in Africa.

The interim government is hoping to stabilize the economy by gaining access to Libya’s sovereign wealth fund, which is believed to have $70 billion in assets and reviving oil production. The interim government that has taken power has indicated it will welcome foreign investment to help rebuild the economy. However, no regulatory framework has been put in place. There is a great deal of uncertainty with regard to the economic and political prospects, and, as a result, foreign investors, with the exception of the oil companies who are eager to strike deals with the government, are likely to hold off investing in Libya until the dust settles.

2010% Change GDP: 4.2 2011 % Change GDP: n/a 2012 % Change GDP: n/a 2010 GDP (Billions USD): 71.336 2011 GDP (Billions USD): n/a 2012 GDP Estimate (USD): n/a 2010 GDP Per Capita (USD): 10,873 2011 GDP Per Capita (USD): n/a 2012 GDP Per Capita (USD): n/a 2010 Inflation Avg. Consumer Price Change (%): 2.5 2011 Inflation: Avg. Consumer Price Change (%): n/a 2012 Inflation: Avg. Consumer Price Change (%): n/a 2010 Current Account Balance (% of GDP): 14.4 2011 Current Account Balance (% of GDP): n/a 2012 Current Account Balance (% of GDP): n/a Source: IMF

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Sudan (Sudan and South Sudan) Sudan broke apart on July 9 when South Sudan became the th 54 independent country in Africa. The breakup of the country presents enormous economic challenges to both countries. The most important of these is how to split up the oil revenues.

Sudan rode the wave of an economic boom that was precipitated by rising oil production. Between 1997 and 2010, oil output soared from 4,850 barrels a day to 514,318 barrels a day. China is the largest market for Sudan’s oil, accounting for 67% of all of its oil exports. Most of the oil resources are in areas that are now part of South Sudan. The only oil pipeline, however, terminates at Port Sudan on the Red Sea, which is in North Sudan. The two countries have indicated an interest in devising a method of sharing the oil revenue but no agreement has been concluded. The loss of the oil fields is a severe blow to Sudan as oil accounted for 95.1% of export receipts and about two-thirds of government revenues in 2008. Sudan is a very difficult place to do business. Corruption is rampant, the judiciary is not independent, the banking system is underdeveloped, the bureaucracy is heavy handed and the infrastructure is inadequate.

2011 Population: 45,047,502

On its own, South Sudan ranks as one of the poorest countries in the world. UNICEF has estimated that more than 90% of the population lives on less than a dollar a day, maternal mortality rates are among the highest in the world, 18% of the population suffers from chronic hunger and 76% of adults are illiterate. The infrastructure meanwhile is woefully inadequate and just 34% of the population has access to clean drinking water. The government is hoping that oil revenues will provide the means to develop the economy. But as in many other countries, it may just fuel corruption and wasteful spending. It will be a Herculean task to build the economy, particularly if existing tensions between Sudan and South Sudan once again spark clashes between the two sides as occurred in the prelude to South Sudan’s independence.

2011 % Change GDP: -0.2 2012 % Change GDP: -0.4 2011 GDP (Billions USD): 63.329 2012 GDP (Billions USD): 59.286 2011 GDP Per Capita (USD): 1,939 2012 GDP Per Capita (USD): 1,769 2011 Inflation: Avg. Consumer Price Change (%): 20.0 2012 Inflation: Avg. Consumer Price Change (%): 17.5 2011 Current Account Balance (% of GDP): -7.3 2012 Current Account Balance (% of GDP): -7.6 Source: IMF, all 2012 data are forecasts Joab’s Technologies and Research, Natu Court Flat B.

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Tunisia The Arab Spring began in Tunisia and it was the first Arab country to oust its long-time dictatorial ruler. As is the case in Egypt and Libya, which were also caught up in the whirlwind of the Arab Spring and managed to depose long serving strong men, there is much confusion and uncertainty over the economic and political outlook. Concerns exist among the urban educated secular elite and Tunisia’s western allies that Islamists parties may gain the upper hand in elections. Nahda, the moderate Islamic Party, captured 41.7% of the vote, the largest total of any of the parties running in the October 23 elections for the Constituent Assembly which will be tasked with the responsibility of writing a new constitution. After the elections, it was quick to dispel suspicions that it has an Islamic agenda. It also reassured women that their rights will be protected and indicated that it strongly supports free-market economic principles. A vague target of having an elected parliament and government in place by the end of 2012 has been set.

The revolution has sapped the strength of the economy which is at a standstill. Unemployment is expected to climb to 19% by the end of the year, tourist receipts have fallen sharply, investment activity has dropped and strikes have spread throughout the industrial sector. Tunisia is not a major oil producer. Oil output in 2010 was just 83,724 barrels a day.

Since it could not rely on its petroleum sector to drive the economy, Tunisia has developed a manufacturing base. In 2009 for example, machinery and transportation equipment accounted for 25.1% of exports, apparel and clothing accessories had a 21.6% share and electrical machinery was 15.3%. As a result, Tunisia has an industrial base to build upon to spur its economy once political uncertainty diminishes.

2011 Population: 10,629,186 2011 % Change GDP: 0.01 2012 % Change GDP: 3.9 2011 GDP (Billions USD): 48.932 2012 GDP (Billions USD): 52.239 2011 GDP Per Capita (USD): 4,593 2012 GDP Per Capita (USD): 4,852 2011 Inflation: Avg. Consumer Price Change (%): 3.5 2012 Inflation: Avg. Consumer Price Change (%): 4.0 2011 Current Account Balance (% of GDP): -5.7 2012 Current Account Balance (% of GDP): -5.5 Source: IMF, all 2012 data are forecasts Joab’s Technologies and Research, Natu Court Flat B.

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Ghana Ghana’s economic prospects have been substantially bolstered by the discovery of offshore oil. Oil production is presently 120,000 barrels a day and it is expected to rise to 200,000 by the end of next year. The start of oil production has fueled an enormous economic boom. The World Bank is projecting the economy will surge ahead by 20% in 2011 and by 10% in 2012.

Gold remains the dominant export accounting for 37.3% of the total during the first half of 2011. That, however, may change as oil production continues to rise. Oil accounted for 18.3% of exports in the first six months. In 2010, Ghana did not export any oil. Cocoa is the second largest export with a 26.1% share in the first half. Many of Ghana’s key economic fundamentals are in good shape. The external debt for example was just 18.7% of GDP in June, 2011, inflation dropped from 18.9% in the year ending January 2010 to 8.4% in the year to September 2011 and the IMF is forecasting a decline in the current account deficit to 1.1% of GDP in 2015 from 6.5% of GDP in 2011 as a result of rising oil production.

2011 Population: 24,791,073 2011 % Change GDP: 13.530 2012 % Change GDP: 7.256 2011 GDP (Billions USD): 38.592 2012 GDP (Billions USD): 45.124 2011 GDP Per Capita (USD): 1,588 2012 GDP Per Capita (USD): 1,810 2011 Inflation: Avg. Consumer Price Change (%): 8.7 2012 Inflation: Avg. Consumer Price Change (%): 8.7

2011 Current Account Balance (% of GDP): -6.5 2012 Current Account Balance (% of GDP): -4.9 Source: IMF, all 2012 data are forecasts

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Foreign investors can invest in the stock exchange without limitations or restrictions. They can also freely repatriate dividends, interest, profits, loan service payments, and proceeds from the sale or liquidation of an enterprise. Foreign investors are required to have local partners when investing in the fishing, insurance, and extractive (including oil) industries.

In addition, foreigners cannot own land but they can lease it.

There are some problems and difficulties in doing business in Ghana. The legal system can be slow, copyright protection can be problematic and the process of establishing a business can be lengthy and complex. Nevertheless, Ghana is moving in the right direction as reflected by the fact that foreign direct investment surged by 466.9% between 2000 and 2010. The major problem facing Ghana is to avoid the resource curse that has damaged so many other countries such as its neighbor Nigeria where the oil sector completely dominates the economy to the detriment of the agriculture and industrial sectors. In March 2011, the government passed the Petroleum Revenue Management Act, which formally created two sovereign funds: the Ghana Heritage Fund and the Ghana Stabilization Fund to ensure that the oil revenues are wisely invested.

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Kenya Kenya has great potential, but that potential has yet to be realized. The country has an atrocious reputation concerning corruption, weak protection of property rights, the judiciary is prone to political interference, the customs system is inefficient, regulations can be burdensome, the bureaucracy is inefficient, the port of Mombasa, which is the largest in East Africa, is dysfunctional, copyright protection is often problematic, the infrastructure is inadequate, the shilling is weak and the government owns or holds shares in several financial institutions and, as a result, influences the allocation of credit. An April 2008 survey, conducted by the Kenya Association of Manufacturers (which is the foremost business association), concluded that the business climate is “hostile.”

An analysis of the tax system by the World Bank, International Finance Corporation, and PriceWaterhouseCoopers that was released in early December 2008 indicated that Kenya had the least friendly tax regime in East Africa.

2011 Population: 41,943,504 2011 % Change GDP: 5.3 2012 % Change GDP: 6.1 2011 GDP (Billions USD): 36.102 2012 GDP (Billions USD): 40.638 2011 GDP Per Capita (USD) : 882 2012 GDP Per Capita (USD): 965 2011 Inflation: Avg. Consumer Price Change (%): 12.1 2012 Inflation: Avg. Consumer Price Change (%): 7.4 2011 Current Account Balance (% of GDP): -8.9 2012 Current Account Balance (% of GDP): -8.5

Kenya’s image was severely tarnished by the fraudulent election of December 2007 that sparked a wave of brutal tribal violence which killed about 800 people and displaced 600,000.

A national unity government was formed following the violence and a new constitution was written. It was approved in a referendum in August 2010. The next Presidential election is scheduled for August 14. Kenya’s economic fundamentals are poor. Inflation was 17.3% in the year to September and the IMF is projecting the current account deficit will be 8.9% of GDP in 2011 and the gross government budget shortfall will be 5.9% of GDP. The economic picture, however, is not totally bleak.

Despite all of its problems and the difficulties of doing business, the economy still managed to grow at a 4.2% average annual rate between 2002 and 2011. Kenya has one of the most developed financial sectors in Africa, its stock exchange is the eighth largest in terms of capitalization on the continent, Nairobi is the regional headquarters for many multinational companies and cell phone use is above the African average. th Kenya is the ninth most populous nation in Africa and the 11 largest economy in Africa. It is too big to ignore.

Source: IMF, all 2012 data are forecasts

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Ethiopia

2011 Population: 90,873,739 2011 % Change GDP: 7.5 2012 % Change GDP: 5.5 2011 GDP (Billions USD): 30.501 2012 GDP (Billions USD): 36.883 2011 GDP Per Capita (USD): 351 2012 GDP Per Capita (USD): 414 2011 Inflation: Avg. Consumer Price Change (%): 18.1 2012 Inflation: Avg. Consumer Price Change (%): 31.2 2011 Current Account Balance (% of GDP): -6.3 2012 Current Account Balance (% of GDP): -8.6 Source: IMF, all 2012 data are forecasts

The government has recently taken measures to encourage foreign investment. A “one-stop shop” service has been established which has significantly reduced the time and cost of getting the necessary investment and business licenses.

Ethiopia has not participated in the political liberalization that has touched many African nations. President Meles Zenawi has held power since 1991 and shows no signs of stepping down.

Freedom of speech, the press and assembly are restricted and internet use is also limited. Elections are not free and fair and dissent is brutally put down. Ethiopia is one of the poorest and least developed countries in the world. Poverty is widespread and the life expectancy is just 56.2 years. It is a difficult place to do business. Inflation is very high, rising by 40.1% in the year ending September, the birr is not convertible, the manufacturing sector is small, corruption is pervasive, state owned businesses receive preferential treatment in obtaining credit and land leases, the electricity supply is inadequate, enforcement of property rights is weak, the financial system is underdeveloped and the judiciary system is inefficient and prone to government interference. Foreign investors cannot invest in the banking, insurance, broadcasting, air transport services, vehicle maintenance and printing sectors. All land is owned by the state. It can, however, be leased for up to 99 years.

A business license can now be obtained in one day if all the requirements are met. Foreign investors can freely repatriate profits, dividends, principle and interest on foreign loans and proceeds from the sale or liquidation of a business. However such transfers may involve delays because of a shortage foreign exchange. Foreign direct investment has grown strongly in recent years, rising by 335.9% between 2000 and 2010 to $4.102 billion. However, it still remains small by comparison with other African nations. For example, FDI was equal to just 15.4% of GDP in 2010. This compares to an average of 33.4% for all of Africa. Despite the many problems in doing business in Ethiopia, the economy sprinted along at a 9.7% average annual pace between 2007 and 2011. The government has indicated that it intends to encourage industrialization through increased exports and import substitute.

Ethiopia is the second most populous country in Africa after th Nigeria. Yet, it is only the 12 largest economy. There is a great deal of potential but it has to be unlocked by a greater willingness by the government to liberalize the economic environment, tackle corruption, and streamline the bureaucracy. Growth is expected to remain strong but foreign investment may be held back by the lack of political and economic reforms that would substantially boost confidence in the country.

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Africa Macro | Political and Economic Overview

November 2011

Joab Khamala, Senior Analyst, joab@carthageabc.net tel: +254724893678

Africa 2012: Winds of Change HIGHLIGHTS

The Arab Spring began in Tunisia and has toppled the longstanding strongmen in Tunisia, Libya and Egypt. Anti-government demonstrations also occurred in Morocco, Mauritania and Algeria, but they were not sustained nor did they reach a critical mass of protesters that threatened the ruling regimes.

The overthrow of longstanding dictators may prove to be the easiest part of the efforts to establish a free society. New constitutions have to be written, political parties have to be formed and economic and regulatory frameworks have to be put in place.

The revolutions in Tunisia, Egypt and Libya have disrupted their economies and caused a major jump in unemployment. Egypt saw its sovereign debt rating downgraded by S&P in response to the prevailing economic and political uncertainty.

Political uncertainty in the countries impacted by the Arab Spring has caused a sharp drop in tourist receipts and a significant fall-off in foreign direct investment inflows. Growth prospects are poor in the near-term. This is especially the case for Libya which suffered extensive damage to its infrastructure during the conflict to overthrow Colonel Qaddafi.

The Arab Spring has seeped into Sub-Saharan Africa with the outbreak of demonstrations in Senegal, Uganda and Malawi, and close monitoring in these countries is warranted. Protesters have demanded political change, improved economic conditions and a freer press. As in the Arab world, social media and the internet have helped people to organize. There are Presidential elections in 2012 in the Democratic Republic of the Congo, Angola, Senegal and Kenya which are likely to spark unrest if there are any flagrant violations in the voting process.

Africa’s economic fundamentals have improved in recent years, as a result of swelling foreign direct investment, particularly in the mining, oil, natural gas, timber and telecommunications sectors, decelerating inflationary pressures, a reduction in foreign debt levels prompted by debt relief granted under the IMF and the World Bank Heavily Indebted Poor Country Initiative and privatization of state assets.

Privatization will be a mainstay of economic policy. Although many of the largest companies still remain in state hands, governments are privatizing assets in order to encourage the development of the private sector as well as attract foreign investment.

The improved economic performance of many African nations have enabled them to issue securities on the Eurobond market which have been warmly received by investors, thus indicating there is strong demand for frontier market securities. Despite the volatile state of global markets, the stronger African countries have been able to support a growing IPO market.

Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MACRO

POLITICAL INTRODUCTION Political risk has subsided in Africa as the era of strongmen dominating the political scene has begun to fade. Most importantly, many of the brutal civil conflicts that were so prevalent in the recent past have ended allowing peace to prevail in much of the continent. Despite these encouraging developments, political risk remains a concern because democracy has yet to take root throughout the entire continent. Only a handful of countries, such as South Africa, Ghana, Botswana, Mali, Namibia and Mauritius are fully functioning multi-party democracies where freedom of speech and the press are protected, the judiciary is independent and the rule of law prevails.

Sub-Saharan Africa (SSA) may be on the cusp of entering into a period of political turbulence that could increase political risk in the near-term. However, that turmoil could lower the risk in the medium-term if it results in a more liberal political framework that encourages transparency, reduces corruption, eases burdensome regulations and allows for elections that are not subverted by fraud.

The “Arab Spring” has swept away the strongmen who ruled Egypt, Tunisia and Libya for decades. It has also shaken the longstanding regime in Algeria and prompted the King of Morocco to institute reforms that if fully implemented will curb his near absolute authority. The only certainty, however, is that the Islamist parties will garner the largest share of the vote in any election as they are the best organized political force and have the largest political base. This was indeed the case in Tunisia where the moderate Islamic party, Nahda, captured a plurality of the vote for the Constituent Assembly that will write a new constitution. The leader of the party was quick to reassure the public that it did not have an Islamist fundamentalist agenda and would protect civil liberties and not roll back women’s rights. Although there is much skepticism about these pledges, it is hoped that Tunisia will set an example for Egypt and Libya that will result in free and fair elections and coalition governments that will promote economic reforms and respect the rights of women and minorities and not impose fundamentalist Islamic orthodoxy.

POLITICAL AND ECONOMIC OVERVIEW

Senegal and Uganda as people test the limits of their ability to give voice to their discontent.

In terms of political risk in 2012, there will be several elections, including in Senegal, the Democratic Republic of the Congo, Gambia, Burkina Faso, Algeria, Kenya and Angola. Most of these nations are not known for conducting “clean” elections, and, therefore, the political risk in these countries should be monitored. The last Presidential election in Kenya in 2007 for example was so fraudulent that it was the spark that ignited savage tribal violence that resulted in the death of about 800 people and the displacement of 600,000 people. Another fraudulent result in next year’s upcoming elections could set off an even more violent conflagration that would severely tarnish Kenya’s image in the world, weaken its diverse economy and damage the tourist industry, which is a major source of foreign exchange earnings and employment. Hopefully, this will not happen and the Kenyan election will follow the precedent of the recent approval by the public of the new constitution in a referendum that was deemed fair, free and “clean.”

There is much anger over the prevailing poor global economic conditions and the inability of politicians to put a halt to rising unemployment and financial insecurity. The Arab Spring is one manifestation of that discontent. This discontent can be seen in the streets from India Wall Street where it is cause for many to question the established political order.

SSA is likely to be touched by the tsunami of discontent that is swirling around the globe. But if this discontent is positively channeled and results in a more liberal political regime that will usher in the rule of law, an independent judiciary, end the tyranny of long serving regimes and reduce corruption, it will be a positive development that will enable Africa to have a more stable and prosperous future.

The Arab Spring has clearly had an impact on the rest of Africa, which is increasingly plugged into the global information network via cell phones, the internet, satellite television, and social media. The people of SSA have seen how “people power” has displaced regimes that once appeared to be impregnable.

Many African nations suffer from the same ills which afflicted the countries of North Africa. Youth unemployment is high, corruption is rampant, there is a great deal of income and wealth inequality, and political systems are not responsive to the needs of the people. There have been stirrings in Malawi, Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MACRO

MAJOR TRENDS IN AFRICA Political Developments The Arab Spring

The Arab Spring began in Tunisia, a North African country. It was there that the smoldering anger, discontent and frustration that had been building in the Arab world for many years came to a boiling point. A revolution was precipitated by the self-immolation of a 26-year old street vendor who set himself afire on December 17, 2010 to protest the confiscation of his unlicensed vegetable cart and the failure of municipal officials to listen to his complaints. Public outrage swept through the country following his death. Although the government promised reforms it also tried to contain the uprising by arresting protesters and using force to disperse demonstrators. But the people would not be cowed and they continued to protest for a more liberal political order and an end to corruption. On January 4, 2011, President Zine El Abidine Ben Ali agreed to step down after 23 years in power.

He fled to Saudi Arabia with much of his ill gotten fortune derived from running the country as if it was his own personal fiefdom.

The departure of President Ben Ali was the spark that lit a fire throughout the Arab world as people saw they were not completely helpless and could implement change. Protests began to sweep the Arab world with demonstrations occurring in Algeria, Yemen, Jordan, Bahrain, Mauritania, Morocco, Syria, Oman and Egypt where it took just a month to end the thirty year reign of Hosni Mubarak on January 14, 2011. In an astonishing development, he is now standing trial for the premeditated killings of peaceful protestors during the revolution. If convicted, he could face the death penalty.

The long serving eccentric mercurial tyrant Muammar alQaddafi of Libya has also been deposed after almost 42 years of iron fisted dictatorial rule that suppressed civil liberties and killed dissenters. He was killed after being captured by rebel forces on October 20 near his hometown of Sirte. His death brought an end to seven months of bloody fighting which began with an uprising in the eastern part of the country. NATO bombing was crucial to the victory of the rebels. Without its intervention, they would have probably been unable to prevail and a bloody stalemate would have likely ensued.

The toppling of the regimes that monopolized power in Tunisia, Egypt and Libya may prove to be the easiest part of the efforts to establish a free society. A democracy has to be built from scratch in countries that have no tradition of democracy and it has to be accomplished at a time when the economy is very weak. The Economist Intelligence Uni (EIU) has estimated the Libyan economy will decline by 28.2% this year because of the disruption caused by the civil war and the Joab’s Technologies and Research, Natu Court Flat B.

POLITICAL AND ECONOMIC OVERVIEW

deep plunge in oil production. The IMF has predicted Egypt will expand by only 1.2% this year and Tunisia will experience no growth.

For many people who participated in the revolutions in Egypt, Tunisia and Libya, the transition to democracy has been painstakingly slow, hesitant and disappointing. Great expectations that had been built up are now being dashed by the reality of the difficulty of building a civil society, writing a constitution, organizing elections and forming political parties.

In Egypt, the army took command following the ousting of Mubarak and pledged to quickly turn power over to the people. However, they are backtracking on that promise. An October 15 New York Times article noted, “Egypt’s military rulers are moving to assert and extend their own power so broadly that a growing number of lawyers and activists are questioning their willingness to ultimately submit to civilian authority. Two members of the military council that took power after the ouster of former President Hosni Mubarak said for the first time in interviews this week that they planned to retain full control of the Egyptian government even after the election of a new Parliament begins in November. The legislature will remain in a subordinate role similar to Mr. Mubarak’s former Parliament, they said, with the military council appointing the prime minister and cabinet. ‘We will keep the power until we have a president’, Maj. Gen. Mahmoud Hegazy said. The military had pledged in formal communiqués last March to hold the presidential election by September. But the generals now say that will come only after the election of a Parliament, the formation of a constitutional assembly and the ratification of a new constitution — a process that could stretch into 2013 or longer.”

The military’s decision to keep its grip on power and reinstate emergency laws to contain protests has angered the public who see the hard won achievements of the revolution slipping away. Most alarming has been the increased tensions between the minority Coptic Christian community (about 8% of Page 44 of 104

AFRICA MACRO the population) and the majority Muslim population which has spilled over into violence that the military seems to have participated in. Strikes meanwhile are spreading as workers demand higher wages and better working conditions, thus damaging the economy which has been hurt by a decline in tourist receipts and a slowing down in investment activity.

Reflecting the poor business environment, the stock market has suffered a severe drop with the EGX-30 Index slumping by 37.7% (a 39.4% fall in US dollar terms) in the year to date period ending October 31. Unemployment meanwhile has risen to 12%.

POLITICAL AND ECONOMIC OVERVIEW

In response to the poor economic environment, Standard and Poor’s downgraded Egypt’s sovereign debt rating on October 19 to double B minus from double B. The outlook remained at negative. In explaining their decision, S&P stated, “risks to macroeconomic stability have risen during the transition period for Egyptian political reform.” It also warned that the rating could be downgraded once again if political instability further undermines the economy. The ratings agency indicated that it expected Egypt to continue to run high budget deficits because of weak tax revenue and increased spending, particularly on food subsidies, which accounts for more than 20% of public spending. Over the last five years, the budget deficit has averaged 8% of GDP. In Libya there is confusion over how power will be divvied up between the various anti-Qaddafi factions and forces in the prelude to elections. Tensions exist between Benghazi in the east of the country where the revolution broke out and Tripoli, the capital and the largest city. There is an urgent need to bring oil production back up to normal levels so the government can earn the revenues needed to rebuild the economy and the infrastructure. This is especially important as Colonel Qaddafi did nothing to diversify the economy. As a result, oil is the backbone and lifeline of the economy. In 2008, it accounted for 88.6% of government revenue and 97.7% of exports.

An October 10 article in the Financial Times painted a very worrisome picture of the economic and political landscape. It said, “Newly won freedoms have led to an explosion of demands for retribution against former officials and businessmen, further bruising a battered economy, and have generated social expectations that are colliding with the current economic reality… many within Egypt and abroad fear that the inability to deliver the economic dividend is threatening an already fragile political transition… in the short term, however, overcoming the economic impact of change after three decades of Mr. Mubarak’s rule, and in a country in which 40 per cent of the population lives below or near the poverty line, is proving daunting…the country has been held back by bad economic management, excessive bureaucratic control and poor education…Investment has ground to a halt and tourist numbers have plummeted. Foreign direct investment inflows, which peaked at an annual $13 billion before the 2008 global financial crisis, have evaporated. Egypt has, meanwhile, lost one-third of its foreign exchange reserves.

The International Monetary Fund expects a slow recovery and continued balance of payments pressures. Prime Minister’s Sharaf’s administration, which took over in March, has failed to quell strikes that have hit public and private factories and ports as emboldened trade unionists seek to boost their pay and get rid of unpopular managers.”

Joab’s Technologies and Research, Natu Court Flat B.

In early September, Tunisia’s interim Prime Minister Essebsi, announced a broad security crackdown in response to continued protests and a wave of strikes. Among the measures outlined were laws that authorized the Interior Ministry to ban meetings deemed to “threaten stability” and to place individuals under house arrest. With the economy grinding to a halt, unemployment has risen and is expected to surge to 19% by the end of the year. The number out of work has swelled by the jobs that were lost as a result of economic dislocation caused by the revolution, an increase of 150,000 new entrants into the labor force and many thousands of Tunisians returning home from jobs they once held in Libya. Like Egypt, Tunisia has also suffered a major decline in tourist revenues, which is an important source of foreign exchange earnings and jobs. During the summer months, tourist receipts were down more than 40% from the same levels of a year ago.

An encouraging development in Tunisia was the October 23rd elections for the Constituent Assembly that will be tasked with the responsibility of writing a new constitution. This was the first free and fair balloting in the country’s history. There was a multitude of parties running. The largest share of the vote was garnered by Nahda, the moderate Islamic Party which captured 41.7% of the vote and 90 of the 217 seats in the Assembly. Two secular parties followed, with the Congress for the Republic

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AFRICA MACRO Party capturing 13.8% of the vote and 30 seats, and a left-wing Party, Ettakatof, winning 9.7% of the vote and 21 seats. These two parties are engaged in talks with Nahda over the formation of a coalition government. Nahda has been eager to dispel suspicions that it has a fundamentalist Islamic agenda. It reassured women that their rights will be protected and they will be represented in the government. They have also reassured the business community that they are pro-free market. In a meeting with stock exchange executives on October 26, Rachid al-Ghannouchi, the head of Nahda indicated that he strongly supported foreign investment and favored more companies listing on the stock exchange.

Rachid al-Ghannouchi also said Nahda has no intention of making Islamic banking “universal”, the “market is central to Nahda’s economic philosophy”, the tourist industry would be protected and alcoholic drinks and bathing suits on beaches would not be prohibited. Not everyone in Tunisia was reassured by the moderate stance adopted by Nahda. There is suspicion that Nahda has an alternative agenda to impose Islamic values. The urban secular communities in Libya, Egypt and Tunisia are clearly concerned that elections will empower Islamists parties who are the best organized political force and they will use their political influence to impose Islamic law and roll back women’s and civil rights. The Islamist parties, however, have denied seeking to impose religious rule and curb the rights of women and minorities. Despite this, there is much unease about what policies they would pursue if indeed they gained control over the levers of power. Foreign investors are clearly worried about the political and economic risk that might prevail in the event that Islamic forces gain the upper hand in the political process. It is too soon to know which way the winds are blowing as it will be some time before the dust settles. In the meantime, the poor economic environment in Egypt, Libya and Tunisia suggests there will continue to engender much discontent and anger which may spark more protests. There is also concern that the unstable political environment in North Africa could provide a sanctuary for AlQaeda of the Maghreb which has been active in the Sahel region where they have kidnapped Western tourists. Europe would be very worried by such a development given North Africa’s proximity to it.

Other countries are watching events in Egypt, Tunisia and Libya with nervousness and concern. There have been demonstrations in Morocco urging a relaxation of King Hassan’s powers. He responded in June by outlining a series of reform measures to change the constitution. These proposals would reduce his nearly absolute powers and create a political system in which the prime minister would be the leader of the party with the most seats in Parliament instead of being selected as now is the case by the King. The prime minister would have the authority to appoint government officials and ministers and Joab’s Technologies and Research, Natu Court Flat B.

POLITICAL AND ECONOMIC OVERVIEW

have the power to dissolve Parliament. The judiciary, meanwhile, would become an independent branch of government. Currently, the king heads a council that approves all judges. The proposed changes to the constitution were approved in a July 1 referendum. The approval of the referendum appears to have taken the steam out of much of the protest movement in Morocco.

Algeria is clearly concerned about the possible rise of Islamic parties which might come to power in Egypt, Tunisia and Libya. It was plunged into a brutal civil war in December 1991 when the ruling National Liberation Front (NLF) cancelled elections after the first round of voting that saw the Islamic Salvation Front (ISF) capture 48% of the popular vote and win 188 of the 232 seats in Parliament. The ISF began a guerrilla war against the government and its supporters after it was denied the opportunity to form a government. Violence spread throughout the country igniting a bloody civil war that lasted till 2003. The government was able to defeat the ISF and remain in power, but the cost of doing so was very high. An estimated 150,000-200,000 people died in the conflict. There is discontent in Algeria particularly among the large numbers of young people who are out of work. Corruption is another major issue that is fueling discontent and dissatisfaction.

There have been sporadic demonstrations in Algeria against the government but the police have been quick to put them down and disperse demonstrators. Presidential and National Assembly elections will be conducted in August, and if they are rigged as they always have been, it may prompt demonstrations and protests that would challenge the NLF’s continued hold on power. According to a US Embassy cable, the 2009 presidential elections were "carefully choreographed and heavily controlled", with the official turnout figure "exaggerated" by at least 45%.”

The Arab Spring Seeps into Sub-Saharan Africa The Arab Spring has inspired democratic movements and antigovernment protests in Sub-Saharan Africa. There were major demonstrations in Senegal in June to protest the changes President Wade wanted to make to the constitution that would have assured him a third term. Under the proposals, the threshold for victory in a Presidential election would have been lowered to just 25% in the first round instead of 50%.

Furthermore, Wade proposed that a vice presidency be created. This was seen as a means of anointing his son as the next leader since the president under the proposal would have the ability to transfer power to the vice president at any time.

In the face of public protests, President Wade quickly retracted the proposals.

In Malawi, there were anti-government demonstrations in July protesting the increasingly heavy handed role of President Page 46 of 104

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POLITICAL AND ECONOMIC OVERVIEW

Bingu wa Mutharika. He postponed the 2010 local government elections to 2014 and has intimidated opposition. A law has recently been passed that gives the police the right to search premises without a warrant. The President now has the authority to ban any publication that is deemed “critical of the government.” Anger with the government is spurred by a shortage of fuel and medicine, a relatively high inflation rate of 7.7% (year to September) and an inadequate supply of electricity.

Unrest has also spread to Uganda, where corruption and high food prices are sparking anger. In the year to October, consumer prices climbed by 30.5% from their levels one year ago.

In light of the Arab Spring, it will be interesting to observe how these elections play out and whether the Arab Spring has any influence particularly if there are flaws in the electoral process that might spark demonstrations and protests which could upend some governments and usher in changes to the status quo.

Sep-11 Oct-11

Jul-11

Aug-11

Jun-11

Apr-11 May11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Mar-11

High Inflation in Uganda

Assembly in May), Cameroon (National Assembly in July), Cape Verde (Local), Comoros (Island assemblies), the Democratic Republic of the Congo (President and Provincial Assemblies), Gambia, (National Assembly in March), Ghana (Presidential and National Assembly in December), Guinea Bissau (National Assembly), Kenya (Presidential and National Assembly on August 14), Lesotho (National Assembly), Mali (Presidential in April and Parliament in July), Morocco (Assembly of Representatives), the Republic of the Congo (National Assembly), Senegal (President and National Assembly), Sierra Leone (President and Parliament in August), Seychelles (National Assembly in May) and Togo (National Assembly).

Source: Uganda Bureau of Statistics A New York Times article on October 14, 2011 noted that “the Ugandan shilling is one of the world’s worst performing currencies against the dollar this year and the overall economic malaise is fueling an urban protest movement that has become the longest in Sub-Saharan Africa with many Ugandans saying they are drawing inspiration from the Arab Spring….Many Ugandans say that their government is corrupt and that their President, Yoweri Museveni, who after 25 years has ruled Uganda for longer than more than half the country’s population has been alive, is dismissive of their plight….lawyers, teachers, taxi drivers and traders have held various strikes and demonstrations. Government forces have clamped down violently at times, killing at least nine demonstrators since April and arresting hundreds, including top opposition leaders… President Museveni’s policies have helped Ugandans modernize, but that modernization has also unlocked Facebook and satellite television for millions of Ugandans, many of whom have been avidly following the Arab Spring as fellow Africans to the north overthrow their own leaders.”

In 2012, there will be elections in Algeria (legislative in August), Angola (Presidential and legislative), Burkina Faso (National Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MACRO

ECONOMIC INTRODUCTION Africa has made great strides in recent years by improving its business climate and reducing the bureaucracy that has impeded business formation and capital investment. This has encouraged a surge of foreign investment, particularly into the energy and mining sectors which have benefited from high prices prompted by increased demand from emerging markets, particularly China and India. However, the reform process of easing business regulations remains uneven. For example, nations like Rwanda are further along than countries like Chad, which has hardly made efforts to encourage foreign investment.

POLITICAL AND ECONOMIC OVERVIEW

the middle class, which, in turn, has fueled strong advances in the retail and banking sectors.

Africa has made significant progress in easing business regulations in recent years and is likely to continue to improve as it integrates further into the global economy.

Africa is an emerging giant. Its economic awakening from decades of lethargy could prove to have as great of an impact on the global economy as the rise of China and India.

Africa must wisely utilize the income it derives from commodity exports to diversify its economic base. This is especially important as the oil, natural gas and mining sectors actually account for a modest number of jobs. Agriculture and tourism could be a main source of employment, but in many African nations these sectors have been overshadowed by the resource sector.

Outside of South Africa, Tunisia, Egypt and Morocco, the manufacturing sector is relatively small. As a result, most capital, consumer and semi-finished goods have to be imported. Another area that needs improvement is that Africa does not add much value to the commodities that it ships overseas. Except for Botswana, which has a budding diamond industry, diamonds are not cut, polished and set on the continent. Instead, they are sent to Mumbai, Tel-Aviv, Antwerp, New York and Amsterdam to be cut, polished and set.

Many oil producing nations do not have adequate refinery capacity, and, therefore, must import refined products. Nigeria, for example, is a major oil producer, yet imports refined products. While West Africa dominates cocoa production, it does not produce chocolate. The Democratic Republic of the Congo (DRC) has abundant sources of coltan, which is critical to making cell phones; yet, the DRC does not manufacture cell phones. At the same time, these are all examples of how Africa is a critical supplier of raw materials to the global economy.

As wage rates continue to climb in the Far East, particularly China, labor intensive sectors such as footwear, clothing, and textiles represent an excellent opportunity for Africa to broaden its economic base and increase exports of light manufactured goods. To do so it will have to further improve corporate governance, reduce corruption, modernize infrastructure and streamline business regulations. Countries such as Ghana and Rwanda have taken these steps and have been rewarded with sharp increases in foreign direct investment. The improved business environment and growing FDI inflows in these nations have helped to bolster the ranks of Joab’s Technologies and Research, Natu Court Flat B.

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ECONOMIC TRENDS Foreign Direct Investment Foreign Direct Investment has soared in Africa in recent years, climbing 259.1% between 2000 and 2010 to $554 billion.

Despite this rapid growth, Africa accounts for just 2.9% of all FDI (measured in book value) in the world. As a result, Africa is still largely under-invested territory. For example, the total FDI in all of Africa is 6.1% below the level of the Netherlands, which has a population of only 16.65 million people. Furthermore, much of foreign investment is concentrated in the mining, oil, natural gas, and telecommunications sectors. With the exception of South Africa and Egypt, there is relatively little investment in manufacturing.

Together South Africa, Egypt and Nigeria, account for 48% of all FDI in Africa. Foreign Investment has been particularly strong in the major oil producers such as Libya (as a result of the end of economic sanctions), Sudan, Angola and Algeria (which also has substantial natural gas deposits).

FDI (Book Value) in Select African Nations 2010 % chg from % of total FDI in Country (US $bns) 2000 Africa South Africa 132.396 204.7 23.9 Egypt 73.095 266.3 13.2 Nigeria 60.327 153.6 10.9 Morocco 43.023 375.3 7.6 Angola 25.028 213.7 4.5 Algeria 19.498 451.3 3.5 Sudan 20.743 1383.8 3.7 Libya 19.342 4388.7 3.5 Other Africa 160.52 29.2 Source: UN Conference on Trade and Development (UNCTAD) Inflation Many African currencies were decimated by inflation. The most notable is Zimbabwe where the Zimbabwe dollar succumbed after inflation reached an estimated annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%) in midNovember 2008. This was the second worst hyperinflation episode since 1900, bested only by the great Hungarian inflation of 1946 when prices were doubling every 15 hours.

The Zimbabwe government was finally forced to abandon the Zimbabwe dollar and adopt the US dollar as its currency which ushered in economic and fiscal stability. The South African rand is also widely used. Other notable episodes of inflation that destroyed currency values occurred in Angola where the average annual increase in consumer prices was 1,149.9% per year between 1992 and 2000 and the Democratic Republic of the Congo, which recorded an annual average inflation rate of 23,773.1% in 1994.

Joab’s Technologies and Research, Natu Court Flat B.

POLITICAL AND ECONOMIC OVERVIEW

While inflation in many Africa countries is well above that of the major OECD nations, it is not as big of a problem as it was in the 1990s. The highest inflation rate presently in Africa is in South Sudan, where prices jumped by 61.5% in the year to September. Ethiopia has the second highest rate with a 40.1% rise in the year to September. The nations with the lowest inflation rates tend to be those in West African and Central African CFA zones, resulting from their link to the Euro. The IMF forecasts an annual average rate of inflation of 2%-3% in 2012 for these countries.

Average Annual Inflation Rates Country South Africa Nigeria Egypt Algeria Morocco Angola Sudan Tunisia Ghana Kenya Ethiopia Cameroon Source IMF

Average 2007-2011 7.2% 10.8% 12.3% 4.4% 1.9% 13.6% 13.3% 4.0% 13.2% 9.2% 19.7% 2.7%

2012 5.0% 9.0% 11.3% 4.3% 2.7% 13.9% 17.5% 4.0% 8.7% 7.4% 31.2% 2.5%

Lower External Debt Levels Many African countries have seen their debt burdens eased under the terms of the enhanced Heavily Indebted Poor Country (HIPC) Initiative which was launched in 1996 by the IMF and World Bank, with the objective of “ensuring that no poor country faces a debt burden it cannot manage.” Since its inception, multilateral organizations and governments have worked together to lower external debt levels to more sustainable levels. In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative which provides 100% debt relief on eligible debts owed to the IMF, the World Bank and the African Development Bank. To be considered for HIPC assistance, a country must face “an unsustainable debt burden” which is defined as having an external debt that is more than 150% of the exports of goods and services or more than 250% of fiscal revenue, “establish a track record of reform and sound policies through IMF and IDA (International Development Agency) supported programs” and have developed a Poverty Reduction Strategy Paper (PRSP). If these criteria are achieved, a country has been deemed to reach the “decision” point, and is thereby eligible for interim debt relief. In order to reach the “completion” point and receive “full and irrevocable” debt reduction, a country must “establish a further track record of good performance under Page 49 of 104

AFRICA MACRO IMF and IDA supported programs, implement satisfactorily key reforms agreed to at the decision point and adopt and implement the PRSP for at least one year.”

Of the 32 nations that have reached the “completion” point, 27 are African nations; Ghana, Benin Guinea Bissau Niger Bolivia Rwanda Burkina Faso, São Tomé and Príncipe, Burundi, Senegal, Cameroon, Liberia, Sierra Leone, Central African Republic, Madagascar, Tanzania, Republic of Congo, Malawi, Togo, Democratic Republic of Congo, Mali, Uganda, Ethiopia, Mauritania, Zambia Gambia and Mozambique. Four African countries; the Ivory Coast, Comoros, Guinea and Chad are perched between the “decision” and the “completion” point and Eritrea, Somalia and Sudan are in the “pre-decision” phase.

POLITICAL AND ECONOMIC OVERVIEW

2010, it was certified as having reached the “completion” point making it eligible for full debt relief. The decision to grant Liberia “completion” point status prompted its Paris Club creditors on September 16, 2010 to cancel all of Liberia’s outstanding debt. The IMF estimated that as a result of the multilateral and bilateral debt relief granted to Liberia, its external debt fell from $3.203 billion at the end of 2008 to $87 million at the end of 2010 (8.9% of GDP).

While other African nations have not witnessed such a sharp decline in their external debt as Liberia, they have experienced a significant reduction in their debt levels. In the case of Burkina Faso, debt relief was $930 million, for Guinea, it was $800 million, for Mali, it was $870 million, the Republic of the Congo received $1.9 billion in debt relief and Senegal saw a reduction of $850 million.

Multilateral and Bilateral Support in Africa

Source: IMF

As a result of debt relief under the terms of the HIPC Initiative, Africa has seen tens of billions of dollars of its external debt wiped out, thus freeing financial resources for social programs that would have otherwise gone to pay debt servicing costs.

One of the most dramatic reductions in debt was experienced

by Liberia, which saw its external debt balloon to $3.203 billion as a result of interest and penalties accumulated because of nonpayment during its civil war. This was equal to a staggering 892.5% of the exports of goods and services, 376.6% of GDP and about 1,459% of government revenue (including grants) for FY07/08 (FY begins in June).

On February 4, 2008, the IMF and the World Bank announced that Liberia had reached the “decision point” and on March Joab’s Technologies and Research, Natu Court Flat B.

ODA: Overseas Development Assistance

Privatization Following independence, most African countries followed an economic model that was based upon state control of the “commanding heights” of the economy which squeezed out opportunities for the private sector and was often a source of corruption and nepotism. Many of the largest companies still remain in state hands, such as those in the oil, electricity and airline sectors, but many governments are encouraging the development of the private sector and are attracting foreign investment by privatizing state holdings including those in the telecommunications sector. Many steel and cement companies, paper mills, banks, insurance companies, hotels, sugar refineries, flour mills and ports have also been privatized.

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AFRICA MACRO

Privatization in Sub-Saharan Africa (USD Millions) 3000

POLITICAL AND ECONOMIC OVERVIEW

an investment grade rating. In total, 23 African countries are rated by at least one of the major credit rating agencies.

Botswana and South Africa received the highest ratings.

2500 As the economic fundamentals continue to improve in Africa, so too will the credit ratings of many of the countries, thus bringing down their borrowing costs as has happened for many emerging markets in Latin America and Asia. In July, S&P raised its rating for Angola’s sovereign debt to BB- from B+ because of a strengthening of the budget situation resulting from high oil prices and structural reforms.

2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: World Bank North African countries have been the most active in selling state assets. According to World Bank data, Egypt raised $11.560 billion from privatizations from 2000-2008. While Morocco had $7.921 billion in receipts, Tunisia’s total was $2.250 billion and Algeria sold $1.541 billion in state assets. In Sub-Saharan Africa, Nigeria raised $6.387 billion, Kenya brought in $1.215 billion and Ghana had $1.16 billion in privatization revenue during this period.

Selling telecommunications companies has raised the largest amounts of money. Morocco, for example, garnered proceeds of $5.232 billion from selling four tranches of Maroc Telecom. Auctioning of mobile phone licenses has also brought in substantial revenues for some countries.

However, many countries have barely begun the privatization process. Angola had privatization proceeds of just $28 million between 2000 and 2008. The privatization process may be accelerated when the stock exchange opens in Angola in 2012.

Meanwhile, in Ethiopia, privatization revenues were just $64 million between 2000 and 2008, all of which occurred in 2000.

The Ethiopian government has recently restarted its privatization efforts, but there is no indication that it will relinquish control of the “commanding heights” of the economy or reduce its major stakes in the banking sector.

The increased appetite for emerging market debt has enabled many African nations to successfully float Eurobonds at relatively low interest rates. In April of 2010, Egypt issued a $1.5 billion two tranche Eurobond. It placed $1 billion of 10 year bonds at a rate of 5.75% and $500 million of 30-year bonds at a rate of 6.95%. Nigeria’s issued a $500 million 10year Eurobond in January 2011 at a yield of 7%. The offer was 2.5 times oversubscribed. In May 2011, Senegal issued a 10year $500 million Eurobond at a rate of 9.1%. The issue attracted $2.4 billion in bids.

On October 28, 2011 Namibia issued its first 10 year Eurobond. It carried a coupon of 5.5% and was priced to yield 5.75%. This was lower than the ten-year bond yield in Italy and was a clear indication that despite the recent global financial crisis and worries about the sovereign debt crisis in Europe, there is still strong interest among investors for frontier market securities.

Several nations have announced plans to issue Eurobonds later this year or in 2012, including Tanzania, Kenya, Zambia, Angola and Ghana. Each of them plans to launch $500 million offerings. Uganda has also indicated an interest in issuing a Eurobond. The recent success of the Namibia issue in the midst of the current volatile global capital markets should give encouragement to these nations that they can find buyers for their bonds.

Sovereign Debt Ratings The governments of Africa have increasingly turned to the global bond market to raise capital. The ability to do so has been facilitated by more African countries receiving credit ratings from the major credit rating agencies.

Fitch rates 18 African countries of which just three, Morocco, South Africa and Tunisia, are rated investment grade. S&P rates 17 African countries of which four, Botswana, Morocco, Namibia and South Africa, command an investment grade rating. Moody’s rates eight African countries of which four, Botswana, Mauritius, Namibia and South Africa, are assigned Joab’s Technologies and Research, Natu Court Flat B.

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POLITICAL AND ECONOMIC OVERVIEW

For S&P and Fitch, an investment grade rating is BBB- or above.

For Moody’s, an investment grade rating is Baa or above.

Joab’s Technologies and Research, Natu Court Flat B.

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Section 2: Micro Analysis

Key Sector Trends and Outlook

November 2011

Africa Micro | Key Sector Trends and Outlook

November 2011

Africa 2012: Emerging Giants HIGHLIGHTS Africa is under-banked. Only 20% of the population has access to banking services and the commercial sector has limited access to credit. Notwithstanding, total assets of Africa’s largest 200 banks amounted to almost a trillion US dollars in 2010 with significant growth potential.

Communications through cell phones has exploded throughout Africa as inexpensive smart phones that allow access to the internet and in some countries access to online banking.

Despite the explosive growth in recent years, cell phone use remains below that of other major emerging market economies thus suggesting there is still a great deal of room for growth.

Computer, internet penetration, and broadband use in Africa is very low when compared to the major industrial countries because of inadequate electricity supply, high connection charges, and the high costs of computers.

Great efforts have been made to improve Africa’s infrastructure, particularly with the assistance of China. Airports have been modernized to accommodate increased business and tourist arrivals. In addition to airports, ports have been improved in response to the rising exports of raw materials such as minerals and timber and increased imports of the consumer goods, and railway infrastructure. There are new roads are being constructed that will reduce travel time and reduce shipping costs for freight transport.

Africa’s growing middle class will be an attractive market for consumer product companies and retail companies. Reflecting growing international interest in the African market, Walmart paid $2.4 billion for a 51% stake in the South African discount giant Massmart Holdings, which it will use to spearhead its entry into other African markets.

Africa has enormous agricultural potential given its large amounts of arable land. The agriculture sector, however, has not lived up to its potential and as a result, most African nations are net food importers in large part because of the lack of modern farming techniques.

Africa is rich in hydropower, which is being used to increase the inadequate supply of electricity. China has been especially active in building hydro-power plants.

Africa’s has abundant mineral resources. It has 40% of the world’s gold reserves, 77% of the world’s platinum production, and significant amounts of other precious metals and minerals used in industrial production. Africa is also rich in oil and natural gas. About one-third of all the new oil discoveries in the world since 2000 have been in Africa.

Tourism is one of the most promising sectors in Africa. It could potentially spur economic growth and be a large source of employment. With continued investment in infrastructure against a backdrop of improved political and economic conditions, the tourist sector in most African nations will benefit. Major hotel chains and airlines are planning to expand their presence in Africa.

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AFRICA MICRO

BANKING AND FINANCIAL SERVICES Africa is under-served. In a December 2010 interview with CNN, Arnold Ekpe, the head of Ecobank (headquartered in Togo), one of Africa’s largest banks, indicated that “the banking penetration in most of our markets is less than ten percent”. A McKinsey study noted that just 20% of the population of Africa had access to banking services (this includes South Africa where the ratio is 60%). In Zambia, only one-fourth of the population has access to a bank. In Benin, there are just 2.89 commercial bank branches for every 100,000 adults. The comparable ratio in Germany is 18 and for Brazil, it is 14. In Nigeria, only 15% of adults have access to a bank account and in Uganda, the ratio is 20%. Banking services remain, to a large extent, a preserve of urban dwellers. Insurance penetration rates are low throughout Africa, averaging just 3%.

Micro-finance is expanding rapidly. It has changed the banking landscape by providing services to individuals who earn modest incomes. The provision of loans for vehicles or housing by micro finance institutions has helped to boost consumer spending as well as provide the start-up capital for small businesses. Some of the major players include ABIL (South Africa), Blue Financial Services (South Africa), Letshego Holdings (Botswana) and Real People (South African with exposure into East Africa, unlisted).

With the notable exception of a few nations, such as South Africa, Nigeria and Mauritius, the banking sector is still underdeveloped. There is limited access to mortgages, rural areas have a largely cash based economy, credit cards are rarely used outside of the major tourist areas, rural farmers have a difficult time getting loans and most loans are of shortterm duration. In many countries, the financial sector remains heavily regulated while in other countries, such as Ethiopia, some of the largest banks are either owned or heavily influenced by the government, and thus prone to political pressures to make loans to favored individuals and companies or to certain sectors of the economy the government wants to encourage. Most of the profits in the banking sector are generated by short-term trade financing, investments in government bonds and loans to the construction sector. In response to lack of bank coverage many communities have ROSCAs (rotating savings and credit associations) or savings clubs where members contribute and periodically receive lump sums to enable capital purchases, such as a cow.

South Africa dominates the financial sector in Africa, accounting for over 30% of all banking assets and 80% of life insurance premiums. Of the top 200 banks in Africa in 2010 by assets, the first four were South African. Of the next sixteen, four were from Egypt, three each were from Algeria, Nigeria and Morocco, two were Libyan and one was from Togo.

Joab’s Technologies and Research, Natu Court Flat B.

KEY SECTOR TRENDS AND OUTLOOK Share of Top 100 African Bank Assets by Country Others, 11% Libya, 5%

Algeria, 6%

South Africa, 46%

Nigeria, 9%

Morocco, 10% Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Egypt, 14%

2010 Data, Courtesy: The Africa Report

In light of the rapid growth of the economy of many African nations the demand for banking and other financial services will grow rapidly in the next few years, thus driving an improvement in bank services. Already total assets of Africa’s top 200 banks amounted to almost a trillion US dollars in 2010 and growth projections are stellar. The banking sector will also benefit from the increased presence of foreign banks as well as the rapid expansion of such indigenous banks as Ecobank (Togo), Attijariwafwa Bank (Morocco), Mauritius Commerical Bank, Bank of Africa (Mali), Bank ABC (Botswana), Kenya Commerical Bank, Access (Nigeria), Bank PHB (Nigeria), Diamond Bank (Nigeria), Guaranty Trust Bank (Nigeria), United Bank for Africa (Nigeria) and Union Bank of Nigeria. Similar to their Asian counterparts, some of these banks will become global players.

There has been a sharp increase of interest in Chinese and Western banks in servicing the African market. ICBC of China for instance paid $5.5 billion for a 20% stake in Standard Bank of South Africa, which is the largest lender in the country and has a branch network across much of the continent. It also plans to expand its operations in Nigeria, Kenya and Angola in response to predicted fast growth in those markets. The Bank of China in January 2010 entered into a partnership with Ecobank, which has operations in 31 African nations, to help expand business opportunities. In August 2010, Banco Espirito Santo, Portugal’s largest publicly traded bank by market value, announced that Banco do Brasil and Bradesco were entering into a partnership with its African holding company to acquire stakes in financial institutions based in Africa.

French banks are also very active on the continent, particularly in their former colonies of West and North Africa. In March, BNP Paribas indicated it will soon open an office in Nigeria and would increase its investment banking activities in South Africa.

Societe Generale has operations in Benin, Burkina Faso, Cameroon, Chad, Ghana, Guinea, Equatorial Guinea, the Ivory Page 55 of 104

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KEY SECTOR TRENDS AND OUTLOOK

Coast, Madagascar, Mauritania, Senegal, and South Africa.

Credit Agricole is in Algeria, Libya, South Africa and Tunisia.

Kenya, Nigeria, Tanzania, South Africa, Uganda and Zambia.

COMMUNICATIONS AND TECHNOLOGY British banks are active in the former UK colonies. Barclays for example has operations in Botswana, Egypt, Ghana, Kenya, Mauritius, Nigeria, Seychelles, South Africa, Tanzania, Uganda, Zambia and Zimbabwe. In 2005, it bought a majority stake in ABSA Bank of South Africa, the largest consumer bank in the country which has a presence in Mozambique, Namibia, Tanzania, Angola and Zimbabwe. RBS is in Egypt and South Africa. Initially, HSBC has a presence in South Africa, Nigeria, Angola, and Kenya followed by Angola, Ivory Coast, Ghana, Mozambique, and Uganda through its acquisition of Equator bank in 2003. Standard Chartered is in Botswana, Cameroon, Gambia, Ghana, the Ivory Coast, Kenya, Nigeria, Sierra Leone, South Africa, Tanzania, Uganda, and Zambia. Portuguese and Brazilian banks have operations in Mozambique and Angola.

The State Bank of India operates in Mauritius and South Africa and Bank of Baroda (India) has branches in Mauritius, South Africa and Seychelles, subsidiaries in Botswana, Ghana, Kenya, Tanzania and Uganda and a joint venture in Zambia.

South African banks are making a major push into the African market. In December 2008, Nedbank entered into a strategic partnership with Ecobank Transnational Incorporated, the parent company of the Ecobank Group. Their goal is “to provide customers access to a combined Pan - African banking network covering 30 countries (including South Africa) with over 1,000 branches and banking outlets across the continent.”

Standard Bank has operations in Ghana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. First Rand Bank through its ownership of First National Bank has offices in Swaziland, Mozambique, Botswana, Namibia and Zambia.

Cell Phones There has been explosive growth in cell phone usage in Africa.

In Nigeria for example, the number of cell phone subscribers surged from 30,000 in 2000 to 87.3 million in 2010 while in Kenya, it leaped from 127,404 to almost 25 million and in Tanzania, it increased to 21 million from 110,518. As of 2010, there were just 12 million land phone lines in Sub-Saharan Africa (SSA) but there were 360 million mobile cellular subscribers. Although the use of cell phones has grown rapidly, it still remains low when compared to other areas of the world, thus suggesting the market is not in jeopardy of reaching a saturation point which would slow sales. In SSA, there are 45.2 mobile phones per 100 people while in Asia and the Pacific, there are 69.2 per 100 people and in Europe there are 117.7.

There are many African nations where mobile phone use still remains small. In the Central Africa Republic, for example, there are just 3.8 mobile phone subscribers per 100 people, in Ethiopia there are 4.9 and in the Democratic Republic of the Congo, there are 15.4. According to the World Bank, just 56% of the population of SSA is covered by a mobile phone network.

Among the major cellular phone companies operating in Africa are Portugal Telecom, MTN (Mobile Telecommunications Network, South Africa), Emirates Telecommunications Corp, French Telecom, Bharti Airtel (India), Maroc Telecom (Morocco), Orascom Telecom (Egypt), Millicom International Cellular (Luxembourg), Waird Telecom (Abu Dhabi), ZTE (China), Vodfone (UK), Telekom Malaysia and CeLimitedom (Israel).

Largest Banks in Africa by Assets (USDbn) Bank

Country

Standard Bank ABSA

South Africa South Africa

Assets 80.6 96.8

Earnings Deposits 4.2 2.9

103.6 47.3

Nedbank FirstRand

South Africa South Africa

76.9 76.2

2.2 1.6

63.3 57.6

National Bank of Egypt Attijariwafa Bank

Egypt Morocco

40.1 36.4

2.0 1.7

31.0 24.4

Banque Exterieure D' Algerie Gumhouria

Algeria Libya

30.0 26.1

0.5 0.5

22.7 2.5

Credit Populaire du Maroc Banque Maroc Du Commerce

Morocco Morocco

26.1 15.9

1.1 0.5

20.3 12.1

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

2010 Data At an African Investment Summit sponsored by Reuters on March 7, 2011, J.P. Morgan Chase indicated that it would open representative offices in Ghana and Kenya this year and a full branch in Nigeria by next year. Citibank has branches in Egypt,

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Computers, Internet and Broadband Use Computer, internet penetration, and broadband use in Africa is very low when compared to the major industrial countries. This

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KEY SECTOR TRENDS AND OUTLOOK

10% 5% Morocco(FR)V erdeEgy ptPrinc ipeAlgeria(UK)S udanDj ibo uti Gam biaGabonNamibiaCong oTog o(FR) d'Iv oireEritreaRwandaComorosBissauGuineaRep.C hadBurundiFasoRep.LeoneEthiopia ReunionCapeHelenaMay otte- AfricanBurkinaD em.Sierra &CoteGuineaEquatorial Tom eSaintCentralCongo, Sao

0%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Angola

15%

0 Ethiopia

20%

2

Nigeria

25%

4

Algeria

30%

6

Kenya

35%

8

Ghana

40%

10

Libya

45%

12

Egypt Morocc o

Africa: Internet Penetration

Personal Computers / 100 People (2009 Data)

Africa.S

Broadband service is being improved and within a few years it should be fairly common and more affordable. Some nations such as Botswana, Ghana, Rwanda and Kenya have already laid down fiber optical networks. Internet connections in parts of Rwanda are faster and better than in some developed countries. In addition, there are several major cable projects that will improve broadband service including the East Africa Submarine System (EASSy) which will run along the eastern coast of Africa from Port Sudan to Mtunzini (South Africa) via Mombasa (Kenya), Dar es Salaam and Maputo.

Packard, Acer and Lenovo all have offices in Africa and have seen computer sales rise at a fast clip in recent years.

Tunisia Sudan

is a result of an inadequate electricity supply, high connection charges, the inability of many people to afford the cost of a personal computer and inadequate telecommunication infrastructure. Low levels of literacy in many countries also militate against internet use. According to the World Bank, there were just 0.2 fixed internet subscribers per 100 people in Sub-Saharan Africa in 2009, 18 personal computers per 100 people, 0.1 broadband subscribers per 100 people and the cost of fixed broadband service was an average of $88 a month, putting it beyond the reach of the general population. In the US, by comparison, there were 78.1 fixed internet subscribers per 100 people, 80.5 personal computers per 100 people, 27.8 broadband subscribers per 100 people and the cost of fixed broadband service was an average of $20 a month.

Source: World Bank Africa is Facebook’s fastest growing market. The fastest growing African countries in 2010 were Nigeria (1.4m new users), Egypt (1.6m new users), and South Africa (750,000 new users).

INFRASTRUCTURE Poor infrastructure is a major problem in Africa and it is an impediment to growth and to doing business. In most African countries, the basic infrastructure is either inadequate or decrepit. In Liberia, Sierra Leone, the Ivory Coast and the Democratic Republic of the Congo, much of the infrastructure has not been rebuilt or repaired following periods of civil strife.

African countries have placed a high priority on improving their infrastructure and have stepped up their expenditures in this area. According to the McKinsey Global Institute, African governments and private sources are presently investing about $72 billion a year in new infrastructure across the continent.

The AfDB however has estimated Sub-Saharan Africa needs to spend a collective $118 billion per year to modernize and upgrade its infrastructure, achieve its development goals, and maintain its high growth rate. As Africa improves and develops its infrastructure, there will be a great demand for steel, cement, glass, asphalt, aluminum, and plastics. There is clearly much work to be done.

2008 Data, Courtesy of World Bank

There is plenty of room for growth in the ICT space given the low level of computer use, which is well below the emerging nations of Latin America and Asia. In Brazil for instance, there are 16.1 personal computers per 100 people, in Malaysia, there are 23.1, in Thailand, there are 6.7 and in Chile there are 14.1.

In Nigeria, the ratio is just 0.9 per 100 people while in Ghana, it is 1.1. Even in South Africa, the most advanced economy on the continent, the figure is only 8.4. Apple, Dell, Hewlett Joab’s Technologies and Research, Natu Court Flat B.

Airports The busiest airports in Africa in terms of passengers served in 2010 were Johannesburg, Cairo, Sharm-el Sheikh, Capetown, Hurghada (Egypt), Casablanca, Lagos, Nairobi, Durban, and Tunis. The largest airlines by passengers carried were Egyptair, South Africa Airways, Royal Air Maroc, ComAir (South Africa), Air Algerie, Ethiopian Airlines, Kenyan Airways, TunisAir, Arik Air (Nigeria), and Air Mauritius. Of these airlines, Egyptair, South Africa Airways, Royal Air Maroc, Air Algerie, Ethiopian Page 57 of 104

AFRICA MICRO Airlines, TunisAir and Air Mauritius are government owned (Air Mauritius has a minority stake held by private investors and Egyptair is autonomous). ComAir, ArikAir, and Kenya Airways are private companies with Kenya Airways having a minority interest held by the government. Air links are generally good with London and Paris, but they are less so with the US where direct or US carrier flights are limited to a few major cities such as Johannesburg, Cairo, Dakar, Casablanca, Accra, Lagos and Nairobi.

The only airports that have links to Asia are Cairo, Addis Ababa Luanda, Nairobi and Johannesburg. Flying within Africa can be problematic because many airports just service their geographical region. There are no flights for instance between Maputo, Mozambique and West and North Africa, no flights between Accra, Ghana and East Africa, no flights from Kigali, Rwanda to West Africa and at the Gaborone airport in Botswana there are only flights to Harare, Nairobi, Lusaka and Johannesburg. As a result, passengers have to fly to hubs such as Johannesburg, Cairo, London or Paris to make connecting flights.

Most of Africa’s airports were notorious for poor service, flight delays, and inadequate infrastructure conditions. However, in recent years, many governments have undertaken major programs to reJoab’s Technologies and Research.te, upgrade, expand and modernize their international airports in order to accommodate increased passenger traffic resulting from rising business and tourist arrivals. Among the airports that have undergone expansion and modernization are Luanda, Monrovia, Cairo, Lagos, Maputo, Addis Ababa, and Entebbe.

New international airports are being constructed in Luanda, Kigali, Dakar, N’Djamena, Khartoum, Bamako, Freetown and Ougadougou, with China taking the lead involvement in the expansion and construction of airports. It is for example building new airports in Bamako, Luanda, N’Djamena, Freetown, and Khartoum in addition to expanding, modernizing, and reJoab’s Technologies and Research.ting the airports at Nairobi, Mauritius and Zanzibar.

Ports The busiest port in Africa is Port Said in Egypt. In 2009, it was st the 31 busiest container port in the world handling 3,300,000 TEUs (twenty foot equivalent units). This is up from 860,000 in 2004. The port is located on the Mediterranean Sea on the northern terminus of the Suez Canal. It is operated by the Port Said Port Authority which is a government agency. Work is under way to double the terminal by 2012 which will make it the largest container terminal in the Mediterranean Sea. Durban, South Africa is the second largest container port and one of the largest container terminals in the Southern Hemisphere. In 2009, it handled 2,395,000 TEUs, up 39.5% from the levels of 2004. It has 59 berths excluding those used Joab’s Technologies and Research, Natu Court Flat B.

KEY SECTOR TRENDS AND OUTLOOK

by fishing vessels and for ship repair and has undergone an expansion in recent years to create more container handling facilities. In the fiscal year ending in March 2009, the port handled 4,554 ships. It accounted for 38% of all ships that were serviced in South African ports. Cargo handled during the FY 08/09 was 74,683,597 tons (including oil, petroleum products and containers). The car terminal is the largest import and export facility for the automobile sector. In FY 08/09, it handled 372,557 cars of which 84,511 were imports, 182,091 exports and 5,955 were transshipments. The port is owned and operated by Transnet, a public company that operates the railway, the ports and pipelines.

The Port at Richards Bay in South Africa is the third busiest port. It was built in 1976 to handle coal exports and is the largest coal export terminal in the world. In 2010, it handled 84.937 million tons of cargo. During FY 09/10, the port serviced 1,871 ships.

Mombassa in Kenya is the largest port in East Africa and the fourth largest port in Africa. It serves landlocked Uganda, Rwanda, Burundi, and the eastern part of the Democratic Republic of Congo. It struggles with inadequate capacity, deteriorating equipment, corruption and high costs. The transportation of a container of goods between Mombasa and Kampala can take twice the time and expense as transporting the same container between London and Mombasa. The productivity of the port is very poor with off-loadings of only 6.5 containers per hour per ship, which is well below the target of 25 per hour set by the Kenya Ports Authority, a government entity that operates the port.

In 2010, the port handled 696,000 TEUs, up 12.4% from the previous year’s level. Cargo tonnage of 19 million was similar to that of 2009 and is very close to the 20 million capacity. The ship turnaround time increased from 3.6 days to 4 days as a result of rehabilitation work on 3 berths. The port is expected to be the main port for the newly independent country of South Sudan.

Dar es Salaam is the fifth largest port. The container terminal has three deep water berths that can handle over 5.5 million tons a year. The port has recently benefited from the problems at Mombassa with shipping agents diverting ships to Dar es Salaam because of delays allocating berths and a shortage of loaders at Mombassa. It is the main export point for agricultural and mineral exports. It also serves as a port for the landlocked countries of Zambia, Malawi, Burundi, Rwanda, Uganda, and the eastern part of the Democratic Republic of the Congo. The port is operated by the Tanzania Ports Authority, a government entity that was created in 2005 “to coordinate the country's system of harbors, provide harbor facilities and services, construct new harbors, operate and maintain

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AFRICA MICRO navigational aids and provide warehouse services for cargo.” In the fiscal year ending June 2009, the port handled 7.795 million tons, up 4.2% from the previous fiscal year. This was 88% of all the cargo tonnage handled by the Tanzania’s port. The port’s capacity is 11 million tons but that will be increased under an expansion and modernization program.

The port of Beira in Mozambique is the sixth largest port. It is growing very rapidly. In 2010, it handled 1.29 million tons of cargo and this year, it is expected to handle 1.4-1.5 million tons. This data however does not include coal from the recently opened coal mine at Moatize in the western part of the country. Coal exports began in September 2011 and are expected to reach over 6 million tons a year. The recent dredging of the harbor will allow the port to service ships as large as 60,000 tons, 24 hours a day. There are plans to build a new dock, a fertilizer terminal along with both sugar and tobacco warehouses. Two new container cranes will be acquired by the end of 2012. Cargo tonnage handled is expected to double between 2010 and 2015. The Beira Container Terminal and the Beira General Cargo terminal are operated by Cornelder de Mozambique, a joint-venture between the Cornelder of the Netherlands (part of the Royal Burger Group), which owns a 70% stake, and the Mozambique Ports and Railway Company (CFM), a state owned company.

Throughout Africa, port facilities are being expanded, upgraded, reJoab’s Technologies and Research.ted and modernized to accommodate increased trade, particularly the export of minerals, coal and timber but also in response to increased imports. New ports have been built at Djibouti and Tangier, which is now the principle port for Morocco, handling 70% of all imports and exports. Ports are under construction in Lamu, Kenya, Techobanine in Mozambique and Barrado Dande, which is north of Luanda, Angola.

KEY SECTOR TRENDS AND OUTLOOK

Republic, Chad, Comoros, Djibouti (the rail link to Addis Abba is inoperable), Equatorial Guinea, Ethiopia (rail link with Djibouti is inoperable), Gambia, Guinea Bissau, Lesotho, Libya (a rail system was under construction but was halted by the civil conflict), Mauritius, Niger, Rwanda, Sao Tome and Principle, Seychelles, Sierra Leone, Somalia and South Sudan (there is a rail network but it is in such disrepair that it cannot be used).

Most of the rail systems are government owned with the notable exception of Cameroon. Its railway is operated by Camrail, a subsidiary of the French investment group Bollore. In Gabon, SETRAG, a subsidiary of the mining company COMILOG (67% owned by the French mining company Eramet), was granted a 30-year concession in 2005 to operate the TransGabon Railway. The Dakar to Koulikuro (Mali) line is managed

by Transrail, a Canadian-French management consortium that was bought in 2007 by the Belgian company Vecturis.

Except for South Africa, the electrification of the railway system is either very limited or nonexistent. In Algeria for instance, just 9.8% of the railway lines are electrified and in the Democratic Republic of the Congo, it is 23.6%. In Nigeria, all trains are pulled by diesel locomotives. There are about 200 locomotives, of which around three quarters are not operational. Of all the passenger coaches and freight wagons, less than half are in serviceable condition. No new wagons have been bought since 1993 and some wagons date to 1948. Tracks are in such poor condition that the speed limit is a maximum of 35 km per hour.

Many countries do not have rail links to other neighboring countries. Among them are Ghana, Benin, Togo, Angola and Togo. Passenger service throughout the continent is usually slow, crowded, and the condition of the coaches is generally poor. On some passenger lines there are no time table schedules and service is sporadic. The Botswana rail system ceased passenger service in 2009 because of the poor condition of the system.

The boom in port traffic has attracted a great deal of foreign interest. Dubai Ports for example manages the ports at Djibouti, Algiers and the Maputo Container Port and is responsible for operating and developing the port of Dakar.

APM of Denmark operates and manages port facilities in Abidjan, Douala, Luanda, Monrovia, Onne and Apapa in Nigeria, Tema, Ghana, Port Elizabeth in South Africa and Port Said in Egypt. In 2009, a joint venture between Getma International of France and Global Terminal Ltd of the US, signed a contract with Port Authority of Lome to expand and operate container services at the port of Lome under a 35 year concession.

Tanzania and Rwanda have committed themselves to the construction of a new rail line between the two countries.

Work will begin in mid 2012 and is expected to be completed within five years. The Dar es Salaam to Kigali line is expected to cost at least $5.3 billion.

Railway System With the exception of South Africa, the railway system is not extensive in Africa and much of it is in poor or decrepit condition which limits speed. Twenty nations have no railway service at all; Burundi, Cape Verde, the Central African

There are some ambitious rail projects in the development stage. Among them is a $3.4 billion project to link Tanzania, Rwanda and Burundi, a Dakar-Djibouti cross African rail line, the Africa Rail project for West Africa which would connect the railway systems of Ivory Coast, Burkina Faso, Niger, Benin and

Joab’s Technologies and Research, Natu Court Flat B.

Kenya has plans to build a modern commuter rail network for Nairobi, Mombasa and Kisumu by 2017. In August, the Kuwait Fund for Arab and Economic Development loaned Morocco $89.2 million as part of the first phase of constructing a HighSpeed Train project that will link Tangier and Casablanca.

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AFRICA MICRO Togo and later on Mali, Senegal, Nigeria and Ghana and a $30 billion high speed rail service between Johannesburg and Durban in South Africa (there is a high speed connection between Pretoria and Johannesburg). The high cost of these projects suggests that some of them may never be built.

Great priority has been placed on repairing, modernizing and reconstructing freight rail lines so they can be used to carry natural resources such as coal, copper and timber to ports for exports. In Liberia for example, China Union Investment took over a railway line as part of an agreement it signed with the government to invest $2.6 billion to revitalize the Bong Iron Ore Mines, modernize the port of Buchanan and construct a railway to transport iron ore to the port. The Lamco line in Liberia is being rebuilt by Arcelor Mittal (headquartered in Luxembourg) which has mining interests in the country. With the assistance of Chinese financial aid, Mozambique rehabilitated the Sena rail line which had been inoperable for two decades. It will be used to haul coal from the Moatize coal fields to the port of Beira for export.

Roads In many African countries road conditions are poor. A June 2008 World Bank report noted that “Fewer than 40% of rural Africans in Sub-Saharan Africa live within 2 kilometers of an all season road, by far the lowest level of rural accessibility in the developing world.” Another World Bank study released this year indicated, “In 2008 only about 25 percent of Sub-Saharan Africa’s primary roads were paved, compared to a global rate of 50 percent and a 67 percent rate in North America. In terms of total roads compared to population, the paved road length in SSA of 0.79 kilometers per thousand people is less than half of that of South Asia, and only about one fifth of the world average. In terms of road quality, there is significant variability in primary transport corridor quality with Central Africa having only 49 percent of primary roads in good condition, while southern Africa has 100 percent of the roads in good condition.

In terms of the unpaved roads, which are the majority of the roads on the continent, more than 80 per cent of unpaved roads are considered to be only in fair condition and 85 percent of rural feeder roads are in poor condition and cannot be used during the wet season. In Ethiopia, 70 per cent of the population has no access to all-weather roads.”

The EU, the World Bank and the AfDB are funding extensive road work in Africa. The most active nation in improving road conditions is China which has financed, constructed, improved or paved roads in many countries including Kenya, Ethiopia, Ghana, Angola, Mozambique, Tanzania, and Zambia.

Joab’s Technologies and Research, Natu Court Flat B.

KEY SECTOR TRENDS AND OUTLOOK

CONSUMER PRODUCTS Middle Class The growing middle class is beginning to attract the attention of some of the major international retail companies who see the continent as a growth market at a time when many of the major economies are experiencing sluggish economic growth.

Walmart for example paid $2.4 billion for a 51% stake in South African discount retail giant Massmart Holdings, which it will use to spearhead its expansion throughout Africa. Carrefour has stores in Egypt, Morocco and Tunisia, Metro of Germany has a presence in Egypt and Morocco and Galeries Lafayette opened a store in 2011 in Casablanca.

Consumer Goods Food and consumer product companies are beginning to recognize the growing importance of the African market and have begun to tailor their products to local needs. Unilever either has operations or sells its products in Algeria, Angola, Burundi, Egypt, Ghana, the Ivory Coast, Kenya, Libya, Malawi, Morocco, Mozambique, Nigeria, Rwanda, South Africa, Sudan, Tanzania, Zambia and Zimbabwe. It has focused on producing small packets to allow daily purchases for low-income consumers.

Nestle has more than two dozen factories in Africa. It is currently building a new factory in the Democratic Republic of the Congo. Pierre Trouilhat, the African regional director for Nestle who is based in Nairobi said of Africa, “The potential is huge…The growth is now there.” Pampers, a product of Proctor and Gamble, has a 40% share of the South African diaper market. The company has indicated it will make a big push into the African market by selling no-frills versions of its products in small sizes. Haier, the Chinese consumer appliance company has plants in Tunisia, Nigeria, Egypt, Algeria and South Africa and Nike has stores in Egypt, Kenya and South Africa.

Beer sales are growing rapidly. In the fiscal year that ended in March 2011, SABMiller of South Africa, the second largest beer company in the world, saw sales volume expand by thirteen percent (excluding South Africa). SABMiller sells beer in 31 countries. Diageo sells beer and liqueur in more than 40 African countries, while Heineken sells beer in Nigeria, South Africa, the Democratic Republic of Congo, the Republic of Congo, Burundi, Rwanda and Egypt. Africa is the largest market in the world for Diageo’s Guinness stout, consuming 41% of worldwide output. Castel, the French beer, carbonated soft drink and mineral water company, has operations in Angola, Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Democratic Republic of Congo, Ethiopia, Gabon, Ivory Coast, Mali, Tunisia, Morocco, Mozambique, Niger, Senegal and Togo.

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Beer Consumption Per Capita (Liters) 80 60 40 20

Beer Consumption South…

Per Capita (Liters)

Nigeria

Botswana

Angola

Camero…

Kenya Swazilan d

Ethiopia

0

Source: Access Capital, 2010 Data

Coca Cola has a major presence in Africa, which it sees as a major growth market. The average annual per capita consumption of Coca-Cola in Kenya for instance is just 39 servings. In Mexico, which consumes more Coca-Cola on a per capita basis than any other country, it is 655 servings while in the US, it is 399 servings. Coca Cola is the continent’s largest private employer, with 65,000 workers and 160 plants. Coke hopes to reach 106 million households in Africa by 2014 and plans to spend $12 billion in Africa during the next 10 years, more than twice as much as in the previous decade. In addition to investing in soda, it is also investing in fruit juice plants.

In August 2011, the Oppenheimer family of South Africa and Singapore’s sovereign wealth fund Temasek Holdings announced they established a $300 million private equity fund, Tana Africa Capital, to invest in the consumer goods and agricultural sectors in Africa. In March, Vital Capital Investments, a private equity firm, said that it had raised $250 million to invest in housing, agriculture, education, and health in Angola, Ghana and Mozambique. The Carlyle Group has indicated that it plans to invest in consumer goods, financial services, agriculture, and infrastructure in Sub-Saharan Africa.

Fast Food Africa is largely open territory for fast food. McDonalds for instance has sites only in Egypt, Morocco and South Africa. As of 2007, Burger King had just 2 locations in Africa; Egypt and Djibouti. In 2010 however it opened a site in South Africa and in 2011, it opened five sites in Ghana, one in Casablanca and one in Lagos. KFC is in Egypt, Nigeria, Namibia, South Africa, the Canary Islands, and Botswana and in 2011 it opened its first site in Kenya. Dunkin Donuts and Hardees are in Egypt, Baskin and Robbins is in Egypt and South Africa and Subway is in South Africa, Egypt, Zambia and Tanzania. Quick, the French food restaurant chain has franchises in Egypt, Morocco and Algeria.

Africa, like the rest of the world, is likely to latch on to fast food, presenting great opportunities for the fast food companies.

Joab’s Technologies and Research, Natu Court Flat B.

South Africa has been particular fertile ground for fast food.

Yum!Brands (U) is the largest fast food company with its KFC brand which has 613 outlets. The largest indigenous fast food company in South Africa is Famous Brands, which is headquartered in Johannesburg and is listed on the Johannesburg stock exchange. It is Africa’s leading quick service and casual restaurant franchiser. As of 2010, it had 1,764 franchised restaurants spread across South Africa, 17 other African nations and the United Kingdom. It owns Steers (specializing in beef), Wimpy (South Africa and the UK), Debonairs Pizza, Mugg and Bean (a coffee chain), FishAways, House of Coffees and Brazilian Café. The company also has food manufacturing, logistics, and services divisions. Chicken Licken, another South African fast food company is the largest non-American fried chicken franchise in the world with over 200 stores including franchises in Botswana, Nigeria and Zambia.

Cars Car ownership in Africa is in its infancy. Even in South Africa, it is well below the levels of the major industrialized countries.

South Africa is the only country on the continent with a well developed motor vehicle sector. BMW, Ford, GM, Mercedes Benz, Nissan Motors, Volkswagen, and Toyota have car manufacturing facilities. The motor vehicle sector accounts for 10% of manufactured exports, 7.5% of GDP and employs 36,000 people. In 2010, vehicle production was 472,049. This was up by 26.2% from the previous year. Cars accounted for 62.6% of vehicle output. Vehicle sales have been very strong, rising by 16.2% in the first nine months from the corresponding period of 2010. Car sales during this period advanced 17.8%.

Egypt and Morocco also produce vehicles. In 2010, Egypt manufactured 92,339 vehicles and Morocco produced 42,066 vehicles. In total, Africa produced just 493,084 vehicles in 2010, which represented 0.6% of global output. Most of the cars sold in Africa are imported at a huge cost. Motor vehicle imports for example accounted for 8.1% of imports for Nigeria in 2009 and 6.4% for Ghana.

As demand for vehicles rises in Africa in response to growing consumer spending spurred by rising incomes, foreign vehicle makers may find it more attractive to produce cars in Africa.

Currently though, the expense of building a facility outside of South Africa is not warranted given the low levels of sales. As of 2007 for example, there were just 1,225 registered cars in the Central African Republic, 53,300 in Malawi, 70,385 in Ethiopia and 80,900 in Tanzania. By comparison, Malaysia had 7.57 million registered cars, Peru had 923,000 and Albania had 238,000. As the middle class and per capita expands in Africa, it is likely to become a very lucrative car market that will rival that of China which by 2020 may account for half of all new car

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sales. Standard Bank of South Africa believes that car ownership in Africa will exceed 125 million by 2030 and by 2050 will be more than 400 million.

importer of wheat and the ninth largest of corn. Nigeria was the eighth largest importer of wheat and the largest importer of rice.

Wheat Imports (Metric Tons) FY July 2010

Cars per 1,000 people 80 70

Mexico

60

Nigeria Morocco South Korea EU27 Japan Algeria Indonesia Brazil Egypt

50 40 30 20 10 AlgeriaBeninBotswanaFasoBurundiVerdeCom orosDRC Egy pt EritreaGam biaGhanaB issauC oastT unisiaU ganda Burk inaCapeGuineaIvory

0

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

2007 Data, Courtesy of World Bank

AGRICULTURE Africa has great agriculture potential given its climate and large amounts of arable land. According to the Food and Agriculture Organization (FAO), “Out of the total land area in Africa, only a fraction is used for arable land. Using soil, land cover and climatic characteristics a FAO study has estimated the potential land area for rain-fed crops… if realized – would mean an increase ranging from 150 – 700 percent per region, with a total potential for the whole of Africa of 300 million hectares.”

Despite its great potential, Africa has seen a sharp decline in the importance of the agriculture sector and as a result, most African nations are net food importers, which place a severe strain on their trade positions. Nigeria for example was a major food exporter before the development of its oil resources. In the 1960s, it accounted for 60% of the global exports of palm oil, 30% of ground nuts, and 15% of cocoa. Nigeria however is now a major food importer. Wheat, fish, rice, and sugar are among the major food imports that cost about $4.2 billion annually and accounted for 10.6% of total imports in 2010. The Nigerian Bureau of Statistics admitted that “Unstable and often inappropriate economic policies (of pricing, trade and exchange rate), the relative neglect of the sector and the negative impact of the oil boom” were the major factors for the decline in the importance of the agriculture sector since the 1960s. Angola was another African nation that was once a major food producer but is now a major food importer. About one fifth of Senegal’s imports are food and live animals. In 2010, Egypt was the largest importer of wheat in the world and the fourth largest importer of corn. Algeria was the fourth largest Joab’s Technologies and Research, Natu Court Flat B.

MT

0

2000 4000 6000 8000 10000 12000

Source: U.S. Census Bureau

The Democratic Republic of the Congo (DRC) has vast potential for agriculture but that potential has been stymied by corruption, political instability and insecurity in many areas of the country. The International Food Policy Research Institute (IFPRI) estimates the DRC has around 80 million hectares of non-forest land available for agriculture that could produce food for 3 billion people with optimal land use policies. In an interview with Reuters, Joachim von Braun, the director general of the IFPRI said the DRC’s, “huge web of tributaries offer ample water for irrigation. The varied climate provides ideal conditions for a large number of crops. The potential of Congo is huge. It could be another Brazil…Eighty percent of land that could be farmed is either unused or underutilized…What farming exists is almost entirely subsistence agriculture. And amongst subsistence-economies, Congo performs worst. Yields for most crops are four to five times below what they could be with modest interventions…only 1 to 2 percent of state spending goes to investment in farming…farming could be the biggest and most cost-effective engine for social and economic progress.”

The agriculture sector in Africa is impeded by lack of banking facilities in rural areas, the small size of most farms, low use of fertilizers and pesticides, a lack of marketing infrastructure, the low level of mechanization and electrification, desertification, recent droughts, inadequate irrigation, limited storage facilities, poor access to credit by farmers, underinvestment, lack of scientific and technical support and poor roads that prevent farmers from bringing their produce to market.

In its Development Effectiveness Review for 2011, the AfDB highlighted the deficiencies of the agriculture sector, noting that, “At 733 million hectares, Africa has more than a quarter Page 62 of 104

AFRICA MICRO of the world’s arable land—more than either Asia or Latin America. But less than 4% of its water resources are harnessed, and only 7% of its cropland is irrigated. Sub-Saharan Africa ranks lowest in the world in its use of technology for boosting agricultural productivity, including mechanization, chemical fertilizer consumption, and the use of pesticides. The continent still depends largely on manual labor, and its crop yields and labor productivity are well behind those in other parts of the world. If trends continue, food imports (especially imports of commodities like rice, flour, sugar and vegetable oil) will more than double by 2030, leaving African households increasingly vulnerable to volatile international food prices. With its growing and rapidly urbanizing population, Africa urgently needs to increase its agricultural productivity. This means investing in adequate service infrastructure and improving access to markets, for example with better road networks, communications, rural electrification and water supply.”

With large scale investment, Africa could be a major food producer. This would have a dramatic impact on its economy by reducing food imports, increasing food exports, boosting employment, bringing down food costs, lowering levels of malnutrition and encouraging economic development in rural areas. A 2009 AfDB Report on foreign investment in agricultural land in Africa noted that “Africa is the only continent that still has vast unexploited agricultural land…foreign investment in agriculture expands production opportunities and activities, and create employment particularly for rural populations. Large parts of agricultural lands in Africa remain unexploited despite the fact that many countries on the continent face unsustainable food import bills…Sub-Saharan Africa records the lowest milk and meat production per animal, the highest crop land area per tractor, the lowest use of fertilizers in the world, and the lowest share of irrigated area. Sub-Saharan Africa also records the lowest yield for major crops, which are about a third of global averages. Given this low performance, foreign investment may offer a way of revitalizing agriculture in Africa.

These investments may benefit local farmers by giving them access to technology, connecting them to market opportunities and enabling them to benefit from foreign experience.”

HYDROPOWER Inadequate electricity capacity is a major problem in doing business in Africa and is an impediment to economic growth.

While North Africa has adequate electricity capacity with the International Energy Agency estimating the electrification rate in 2009 was 99.0%, this is not the case for Sub-Saharan Africa where the IEA estimates the electrification rate was just 30.5%.

Mauritius had the highest electrification rate at 99.4% while South Africa’s was estimated to be 75% and Ghana was 60.5%.

Malawi’s and Uganda’s electrification rate was only 9.0%. SubSaharan Africa, which has a population of 800 million, Joab’s Technologies and Research, Natu Court Flat B.

KEY SECTOR TRENDS AND OUTLOOK

generates about the same amount of electricity as Spain which has a population of 46 million. South Africa accounts for about three quarters of the total electricity generated in Sub-Saharan Africa. Many African nations rely heavily on hydropower as their largest source of electricity. Among them are Angola, Cameroon, the Democratic Republic of the Congo, Ethiopia, Gabon, Ghana, Mozambique, Namibia, the Republic of the Congo, Tanzania, Togo, Zambia, and Zimbabwe.

Per Capita Electric Power Consumption 2008 Country Per Capita (kwh) South Africa 4,759 Seychelles 2,423 Mauritius 1,816 Namibia 1,740 Egypt 1,484 Botswana 1,477 Tunisia 1,298 Gabon 1,156 Zimbabwe 1,023 Algeria 956 Morocco 742 Zambia 614 Source: World Bank

Chinese firms are particularly active in constructing and financing hydropower facilities throughout Africa. They are presently involved in $9.3 billion of hydro projects on the continent. Among the most ambitious is the Gibe III dam on Ethiopia’s Omo River. It will be the tallest in Africa and is expected to be finished by 2013. Chinese companies are also working on hydro projects in Cameroon, Ghana, Zambia, Sudan, Nigeria, Gabon, the Republic of Congo and Mozambique.

The Democratic Republic of the Congo has abundant hydropower resources that generate 99.4% of its electricity.

The main sources of hydroelectricity are the 2 Inga dams, 140 miles southwest of Kinshasa. They sit on top of the largest waterfalls in the world, Inga Falls, which has a drop of 96 meters.

The most ambitious hydropower project in the world is the Inga III and Grand Inga dams and hydroelectric stations in the DRC. The Inga III project is expected to generate 4,500MW and cost $8 billion. It is the centerpiece of the Westcor partnership which involves the interconnection of the electric grids of the DRC, Namibia, Angola, Botswana, and South Africa. The World Bank, the African Development Bank and the European Investment Bank have all expressed an interest in helping to finance the cost. Vika di Panzu, the cabinet director of the Page 63 of 104

AFRICA MICRO energy ministry told Reuters, “The top priority is Inga 3 because we are in a hurry now due to internal demand…The increase in internal demand is such that we need Inga 3 before 2020…By 2014/15 we can start construction and I think three or four years later we can start supplying from Inga 3.” Electricity generated by the hydro facility will be exported to southern Africa.

The Grand Inga project would generate 39,000 MW of power and would be the world’s largest hydroelectric project. Its construction though is not assured because of its enormous cost which has been estimated at $80 billion.

% of Domestically Produced Electricity Derived from Hydropower 2008 Country Mozambique 99.9% Zambia 99.7% DRC 99.4% Angola 96.3% Ethiopia 87.3% Republic of Congo 81.3% Cameroon 76.2% Ghana 74.1% Togo 74.0% Namibia 67.5%

KEY SECTOR TRENDS AND OUTLOOK

Botswana (diamonds – it owns 45% of DeBeers) and Namibia (diamonds), Glencore is in the Democratic Republic of the Congo (copper and cobalt), Zambia (copper) and South Africa (coal), Compahnia Vale di Rio Doce (Vale) is in Angola (coal), the Democratic Republic of the Congo (copper and cobalt), Zambia (copper), South Africa (coal), Mozambique (coal), Liberia (iron ore) and Guinea (iron ore), Goldfields of South Africa is in Ghana (gold), BSG Resources (Israel) is in Guinea (bauxite and iron ore), Randgold (headquartered in Jersey island) has gold properties in Mali and Tanzania, African Energy Resources (Australia) is in Botswana (coal) and Zambia (uranium), North River Resources (UK) is in Namibia (copper, gold and uranium) and Mozambique (coal, iron ore and uranium), Iamgold (Canada) has gold mines in Mali and Burkina Faso, Areva (France) mines uranium in Niger and is exploring for uranium in Gabon, Senegal, the Central African Republic and Namibia, Gold Star Resources (Canada) is in Ghana (gold), Anglo Gold (South Africa) has gold properties in South Africa, Mali, Guinea, Namibia, Tanzania and Ghana and ArcelorMittal is in Liberia (iron ore). Chinese mining companies are active in South Africa, the Democratic Republic of Congo, Gabon, Niger, Zambia and Zimbabwe and Vedanta of India has interests in Zambia (copper) and Liberia (iron ore).

Source: IEA

MINERAL RESOURCES Africa’s mineral riches have attracted a great deal of foreign interest in recent years as metal prices have risen in response to strong demand from Asia in particular. It has 40% of gold, 84% of chromium and 88% of platinum reserves and accounts for 77% of the world’s platinum production, 62% of aluminum silicate, 50% of uranium, about 40% of diamonds, palladium and chromium and around 20% of gold, cobalt, uranium, manganese and phosphate rock. Other major natural resources include bauxite, coal, copper, hydropower, iron ore, natural gas, nickel, silver, timber and zinc, and coltan which is used to make electrical capacitators for information and communication technologies.

All of the major mining companies have interests in Africa. Rio Tinto is in Guinea (bauxite), Cameroon (aluminum smelter), South Africa (copper and limenite), Zimbabwe (diamonds), Mozambique (titanium) and Madagascar (limenite), BHP Billiton is in Mozambique (aluminum smelter) and South Africa (coal), Freeport McMoRan is in the Democratic Republic of the Congo (copper and cobalt), Newmont Mining is in Ghana (gold), Xstrata is in Tanzania (coal) and South Africa (coal), Anglo America is in South Africa (platinum, iron ore, and diamonds), Joab’s Technologies and Research, Natu Court Flat B.

OIL AND NATURAL GAS Africa is a major source of oil and natural gas. It has about 10% of the world’s oil reserves. In 2010, Nigeria was the largest producer on the continent with production of 2.458 million barrels per day (mbpd), followed by Algeria at 2.078 mbpd and Angola had output of 1.988 mbpd. About one third of the new oil discoveries since 2000 have been in Africa. Among the most Page 64 of 104

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significant of these is off the coast of West Africa. Ghana’s offshore fields began pumping oil in December 2010.

Production is now around 120,000 bpd and by the end of next year it will be about 200,000 bpd. Oil has also been discovered off the coast of Sierra Leone but production has not yet begun.

New offshore discoveries will help lift Ivory Coast’s sagging production which dropped by 28.9% between 2006 and 2010 to 44,877 barrels a day. Oil has also been discovered in the Lake Albert rift basin of Uganda. Proven reserves are estimated at 2.5 billion barrels. Oil production will begin in 2012. Oil has also been discovered off the coast of Mozambique and Namibia and there is drilling off the coast of Tanzania.

Africa Major Oil Producers (mnb/d) %chg 2000Country 2010 2010 Nigeria 2.458 15.1 Algeria 2.078 40.1 Angola 1.988 166.4 Libya 1.789 21.8 Egypt 0.663 -16.5 Sudan 0.514 175.1 E. Guinea 0.323 92.7 R. of Congo 0.302 3.5 Gabon 0.228 -27.6

Yrs of Output for Proven Reserves 40.3 16.1 12.5 66.9 15.3 26.6 9.4 14.5 24.0

based on 2010 production Source: EIA

Africa’s oil is in heavy demand because much of it is light sweet crude which is easier to refine than most oils of the Middle East. This is particularly important as American and European refineries must adhere to strict environmental regulations that make it difficult to refine heavier varieties of crude without increasing the cost of refining. West African and North African oil fields are also closer to the US and Europe than those of the Middle East and as a result, shipping costs are less.

Traditionally, foreign oil companies in Africa operate under the terms of a production-sharing agreement. It awards a license to explore for oil on the condition that foreign oil companies assume the up-front costs of exploration and production. If oil is found, the oil company will share the revenues with the government, but only after its initial costs have been recovered. In many cases, foreign oil companies are partnered with the national oil company, which are usually state-owned.

Among them are the Nigerian National Petroleum Company, Sonangol of Angola, Société Nationale des Pétroles du Congo (SNPC), of the Republic of the Congo, Sonatrach of Algeria, the Sudan National Petroleum Company, the National Oil Company of Libya, GEPetro of Equatorial Guinea and the Ghana National Petroleum Company.

Joab’s Technologies and Research, Natu Court Flat B.

For global oil companies Africa has become a gold rush. All the major public and private oil companies are either exploring or drilling for oil or have refinery properties and gas stations.

Among them are BP, Royal Dutch Shell, Total, Repsol, ENI, Gazprom, Lukoil, Premier Oil (UK), Lundin Petroleum (Sweden), Svenska Petroleum (Sweden), ROC (Australia), OMV (Austria), Statoil (Norway), Pluspetrol (Argentina), Perenco (AngloFrench), Maurel and Prom (Anglo-French), Wintershall (German company owned by BASF), and Inpex (Japan). Tullow Oil (AngloIrish) has been in the forefront of the new discoveries in Ghana and Uganda.

In addition to oil companies from developed countries, there are a plethora of firms from developing countries that are active in exploration and refining. Petrobras of Brazil (which is controlled by the Brazilian government) operates in Angola, Benin, Libya, Namibia, Nigeria, and Tanzania. TPAO of Turkey has interests in Sudan and Libya, Petronas, the state oil company of Malaysia, has operations in Algeria, Cameroon, Chad, Egypt, Equatorial Guinea, Mauritania, Mozambique, South Africa and Sudan, the Korea National Oil Company is in Libya and Nigeria. PetroVietnam is in Sudan, Angola and Algeria and Sasol of South Africa is in Gabon, Nigeria and Mozambique.

% of Domestically Produced Electricity Derived from Nat. Gas 2008 Country Tunisia 88.7% Ivory Coast 65.1% Egypt 63.4% Nigeria 58.2% Libya 41.0% Gabon 24.7% R. of Congo 18.7% Morocco 13.5% Source: IEA

As well as being major oil producers, Algeria, Egypt, Libya, Equatorial Guinea and Nigeria have major natural gas resources with Algeria being the largest producer in Africa. Natural gas has been found off the coast of Mozambique and additional discoveries have been located off the coast of Tanzania which will add to its modest production. South Africa, the Ivory Coast, and Tunisia also produce modest amounts of natural gas. For Algeria, Ivory Coast, Egypt, Nigeria and Tunisia natural gas is the dominant means of generating electricity.

TOURISM Tourism is one of the most promising and untapped sectors in Africa. It could potentially spur economic growth and be a Page 65 of 104

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large source of employment. Unfortunately, the tourist sector in most African nations is woefully inadequate and the infrastructure is very poor. In many countries there is a dearth of four and five star hotels and luxury resorts. The highest ranking African country in the 2009 World Economic Forum’s Travel and Tourism Competitiveness Survey was Mauritius which was ranked 40 of 133 countries. Tunisia was ranked 44, South Africa was 61 and Egypt was 64. Egypt is the largest tourist destination with 14.051 million arrivals in 2010 which earned the country $12.528 billion. Morocco was second with 9.288 million arrivals and earnings of $6.720 billion, followed

by South Africa with 8.074 million arrivals and revenues of $9.070 billion and Tunisia had 6.902 million arrivals which brought in $2.654 billion. Some African countries barely show up on the radar screen, despite having major tourist attractions. Madagascar with its unique wild life and rainforests, and one of the most bio-diverse countries in the world, attracted just 196,000 tourists in 2010 and Angola had 425,000. Past political instability in some African countries may have colored perceptions of the continent as a tourist destination.

Given Africa’s close proximity to Europe, its unique wildlife, nature reserves, rain forests and its stunning beaches and scenery, it should be a mecca for eco-tourists.

Joab’s Technologies and Research, Natu Court Flat B.

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Africa Micro | Microfinance Sector

November 2011

Africa 2012: Financing Africa’s Emerging Economy HIGHLIGHTS Despite a booming financial services sector, most Africans do not have access to banking services. Banking services remain, to a large extent, a preserve of urban dwellers. In Zambia, for example, only 25% of the country’s population has access to banking services, in Namibia the ratio is about 48% and for Botswana, it is around 46%.

With the notable exception of a few nations such as South Africa, Nigeria and Mauritius, access to credit is low. There is limited access to mortgages, rural areas have a largely cash based economy, credit cards are rarely used outside of the major tourist areas, rural farmers have a difficult time getting loans and most loans are of short-term duration.

Even in South Africa, which has the most sophisticated economy and banking system on the continent, 25% of the population does not have a bank or a checking account. Insurance penetration rates are low throughout Africa, averaging just 3%.

In many countries, the financial sector remains heavily regulated while in other countries, such as Ethiopia, some of the largest banks are either owned or heavily influenced by the government and thus prone to political pressures to make loans to favored individuals and companies or to certain sectors of the economy the government wants to encourage.

As a result, microfinance is expanding rapidly in Africa. It has changed the banking landscape by providing services to individuals who have very modest incomes. The provision of loans for vehicles or housing by microfinance institutions has helped to boost consumer spending as well as provide the start-up capital for small businesses.

Major players in Sub Saharan Africa include ABIL (South Africa), Blue Financial Services (South Africa), Letshego Holdings (Botswana) and Real People (South African with exposure into East Africa, unlisted).

Microfinance institutions are increasing, being fuelled by a burgeoning middle class in Africa and improved economic and political fundamentals. The microfinance industry is growing (albeit unevenly) largely due to improved access to commercial funds, and to a lesser extent equity.

Joab’s Technologies and Research, Natu Court Flat B.

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AFRICA MICRO

OVERVIEW An unbanked continent. Recent estimates indicate that over three billion people in developing countries are still without effective access to loan and deposit services. The problem is particularly acute in Sub-Saharan Africa, where only 5.0% to 25.0% of households have a formal relationship with a financial institution. The lack of access to financial services is therefore one of the largest constraints to private sector development in Africa. Our assessments across various countries on the continent show that the majority of Africa’s population is “locked out” of the continent’s financial sector, despite a booming financial services sector. Banking services remain, to a large extent, a preserve of urban dwellers. In Zambia, for example, only 25% of the country’s population is estimated to have access to banking services. In Namibia, about 48% of the population has access to formal banking channels whilst for Botswana the figure is around 46%. South Africa, on the other hand, with a more advanced economy has circa 25% of its population excluded from core banking services.

Low banking penetration levels due to “shadow economies”.

Within the wider frontier market space, Nigeria has become the proverbial “African giant”. With approximately 166 million people, this means that one in every seven Africans is now a Nigerian. However, a striking issue, which is also common across Africa is that the country is severely “under-banked”. It is estimated that approximately 120 million people in Nigeria do not have bank accounts. We note that the low banking services penetration levels are largely due to a significantly large informal sector. A key characteristic of African economies is the large size of their informal sectors compared to that of the formal business. In fact, countries such as Togo have reported that the informal sector accounts for circa 90% of the total economic activity. This informal, or “shadow,” economy has its own financing channels, which are equally informal such as small-scale, rotating savings-and-loan clubs; private lenders, such as traders and shopkeepers; different types of loan systems based on social proximity and informal systems for money transfers and remittances. Other examples of informal financial service systems are the tontines and “banques ambulantes” of francophone West and Central Africa, such as those in Cameroon, “susus” in Ghana and Nigeria; burial societies in South Africa and Lesotho; and the “hawala” systems in North Africa.

Microfinance institutions as financial intermediaries. By definition, micro-financing is the supply of loans, savings, money transfers, insurance, and other financial services to retail clients (in most cases low-income earners). Microfinance institutions (MFIs) encompass a wide range of providers that vary in legal structure, mission, and methodology. We note

Joab’s Technologies and Research, Natu Court Flat B.

MICROFINANCE SECTOR that the industry is growing, although disparately due to constraints around access to commercial funds and equity.

Commitments, by type of funders (2009) 120% 100% 13%

80%

31%

37%

16%

32%

25% 38%

46%

60% 40%

87% 69%

63%

84%

68%

75% 62%

54%

20% 0% Total

EAP

ECA

LAC

Private Funders

MENA

SA

SSA

Public Funders

Multi Region

Source: Microfinance Information Exchnage (MIX)

Commitments, by purpose (2009) 120% 100% 12%

17%

1%

9%

16%

12% 33%

80%

23%

60% 40%

88%

99% 83%

91%

88%

84%

67%

77%

20% 0% Total

EAP

ECA

LAC

MENA

Capacity Building

SA

On lending

SSA

Multi Region

Source: Microfinance Information Exchnage (MIX)

A positive development, however, is that MFIs have changed the African landscape by providing banking services to individuals who previously only had the ability to purchase what they could immediately afford (with cash). Microfinance largely exists to assist this sector to reduce poverty. Theoretical and empirical research has shown a positive correlation between a sound financial sector and economic development.

The provision of loan funds for vehicle or housing by microfinance institutions has also opened up the consumer’s ability to progress up the value chain and into the emerging middle class. Some of the key players in Sub Saharan Africa include companies such as ABIL (South Africa), Blue Financial Services (South Africa), Letshego Holdings (Botswana) and Real People (South Africa) with exposure into East Africa, unlisted.

Page 68 of 104

AFRICA MICRO Number of financial services providers by institutional type, by sub region (2009)

MICROFINANCE SECTOR

CURRENT TRENDS IN THE MICROFINANCE SECTOR MFI’s are now deepening and improving the range of products. This has included the use of new and better technologies such as national payment and transfer systems, ATM / credit and debit cards as well as mobile banking.

Housing microfinance, for example, is a micro financial tool aimed at supporting investment in the components of housing, including land purchase or access, provision of or improvement to services, full or incremental house construction, reJoab’s Technologies and Research.tion or maintenance. Housing micro loans are generally unsecured loans granted to individual borrowers (size may range from USD 100 – USD 5,000) for longer duration (1-5 years). The microloans are specifically for building (step-by-step or room-by-room) or for improvements.

Source: Microfinance Information Exchange (MIX) A move into Micro financing by traditional banks is a clear testimony of the vast opportunities. We opine that microfinancing is indeed one of the most promising in terms of growth in Africa. This is evidenced by a move by traditional banks into this space. In South Africa, for example banks such as ABSA are also focusing on micro financing and retail banking.

According to consultants Bain & Company, Africa's financial services industry may continue to grow at a CAGR of 15% to 2020, outpacing gross domestic product growth. Retail banking is expected to grow faster than corporate banking, and is likely to make up nearly 40% of banking revenue by 2020. Financial institutions are now employing diverse business models to respond to the pressing market demand for microcredit services. Savings banks such as Tanzania Postal Bank, National Savings and Credit Bank (Zambia) have also introduced a microcredit schemes in their product line. Others, such as the National Bank for Development (Egypt) have opened a specialized window for a direct participation while savings banks such as Post Bank (Uganda) and the People’s Own Savings Bank (Zimbabwe) have opted for an indirect participation through linkages with sustainable and promising microfinance institutions (e.g. refinancing with wholesale loans for on-lending to retail microfinance clients). It appears that well established banks in Africa are now downscaling into lower income markets. While, in some cases they have been nudged to do so by governments, we believe the motivation is mainly commercial given that their core businesses are also becoming increasingly mature. A good example of one bank that has been successful in micro-lending in Kenya is Equity Bank, which has over 5.0m accountholders, and serves more than half of the banked population in the country. The bank whose strategies are specifically geared towards a lower income customer base, has achieved great success pioneering inJoab’s Technologies and Research.tions such as opening branches in poorer neighbourhoods.

Joab’s Technologies and Research, Natu Court Flat B.

Regulations also intensifying. Another key trend is that central bank supervision and regulation has also increased. Regulations also restrict MFIs from mobilizing savings and prevent them from achieving financial self-sufficiency due to controls such as interest rate ceilings. It is also worth highlighting that political influence in this space is also growing, given that micro financing is viewed as a way of eradicating poverty.

Moving from micro-credit to consumer credit: Banks shifting their focus to Small to Medium Enterprises (SMEs). An analysis across the African continent clearly shows that bank financing to SMEs in Africa is less significant and more short-term than in other developing countries. Generally, in other developing countries, bank loans devoted to financing small firms average 13.1%, while only 5.4 % of loans are allocated to such firms by banks in Africa. Similarly, bank approvals for loan applications by small firms in non-African developing countries average 81.4% whereas only 68.7% of such applications are approved by banks in Africa. It is our view that SME access to financing remains more limited in Africa than elsewhere in the world. As highlighted in the map below, there are considerable differences between African countries, but financing constraints still remain a major stumbling block across Africa.

Traditional banks have largely been avoiding providing finance and other banking services to Africa’s SME markets because of the perceived high risks.

According the World Bank (see chart on page 71), there are many SMEs in Kenya which, despite their high potential, have been unable to access financing from existing institutions in the financial sector. Such situations may be due to the inability of the SME to offer sufficient loan collateral or to operational issues within the SME requiring more hands-on assistance than commercial banks and leasing companies, for example, are normally able to provide. However, we are seeing more financial institutions (mostly banks) being involved in the SME

Page 69 of 104

AFRICA MICRO financing activities given the opportunities in this sector.

Standard Bank Group has set a target to treble its financing of SMEs in Africa over the next three years as it consolidates its support for a sector widely seen as crucial to economic development and poverty alleviation. The bank now provides unsecured micro loans of between USD 300 and USD 30,000 for periods from three to twelve months as well as other forms of finance to traders. High growth areas targeted include countries such as Ghana, Tanzania, Nigeria, Kenya, and Namibia. The International Finance Corporation (IFC) on the other hand, is working to develop solutions to close the SME financing gap, by collaborating with local financial institutions across various countries in Sub-Saharan Africa. As of June 2010, IFC committed a total of USD 705.4m to SME finance in SubSaharan Africa.

By definition, a microcredit is a small credit for poor entrepreneurs to finance productive business purposes.

Typically, this type of lending is not secured by collateral but based on the client’s ability to generate the necessary financial means for repayment based on his or her business activities. In contrast to microcredit, consumer credit has no defined financing purpose. Loans are approved based on the existence of collateral. Clients are typically salaried workers (such as civil servants). With this requirement met, additional information on the function of the credit has no relevance to the lender. In consequence, credit analysis is simple, fast and can be handled at low operational cost. Consumer credit portfolios are often of lower quality because in case of default, it is relatively easy for the lender to fall back on collateral for loan loss recovery, typically the borrower’s salary or in some cases the object purchased on credit. Thanks to these qualities and because it is often more flexible and dynamic than microcredits, consumer credit lending is a fast-growing market.

MICROFINANCE SECTOR This therefore means that consumers can easily “borrow or spend for consumption” using the mobile money platform.

Other examples include the likes of Equity Bank (Kenya) and Capitec Bank (South Africa) whose strategies are specifically geared towards the consumer. Equity Bank was originally established as a building society that moved into microfinance and eventually converted into a bank to provide services to “the microfinance and missing middle sectors”. Capitec’s roots were in commercial micro lending before starting to take deposits.

The next big thing…Micro Insurance Another interesting area is indeed Micro-insurance. Insurance penetration rates are also very low across Africa. On average, Africa’s insurance penetration rate stands at around 3.0%.

Industry estimates indicate that insurance companies in most African markets have traditionally targeted only the top 5.0% of the adult population, and this, in our view creates an obvious opportunity for micro insurance. South Africa, for example has an untapped micro-insurance market which provides insurance companies vast opportunities to sell low-cost insurance products, with estimates saying less than 30% of low-income adults in South Africa have any form of insurance, while in the rest of Africa the untapped market for micro-insurance could be as much as 40% of the adult population. African insurance markets (excluding South Africa) typically contribute no more than 2.0% of GDP and serve less than 5.0% of the population.

Insurance companies in these markets tend to fight for market share in an already-served market, without looking outward to grow their markets. We believe there is much value to be realized from the low-income market. Of course, to do this, companies have to realize that insurance policies cannot simply be a low-value replica of what they provide for the higherincome market. They will need to be able to address the needs of the low-income market in a unique way.

Business models more inclined to the “Consumer” We also note that most players in the sector are now focusing on “financing the consumer” as opposed to simple loan advances. A good example is African Bank Investments Limited’s (ABIL) strategy of offering credit products for the purchase of consumer items through its furniture retailing business, Ellerines Holdings Limited (EHL). In Kenya, the largest telecommunications company; Safaricom is now evolving its financial and digital inclusion agendas through the M-PESA platform. The group envisages M-Pesa accommodating the diverse needs of customers through micro insurance, micro savings, micro credit and easy payment facilities. Safaricom’s M-Pesa, in Kenya, is by far the most successful mobile money deployment anywhere. M-Pesa has transformed the financial landscape of Kenya profoundly. In May 2010, Safaricom announced that M-Pesa users in Kenya without a bank account will be able to use their mobile phones to open proper savings account (called M-Kesho) with Equity Bank through M-Pesa.

Joab’s Technologies and Research, Natu Court Flat B.

Page 70 of 104

AFRICA MICRO

MICROFINANCE SECTOR

Africa: Getting Credit Index and Credit Bureau Coverage

Source: World Bank The Getting Credit Index computed by the World Bank measures the extent to which a country’s legislative and regulatory environment fosters credit activity. This index takes into account the institutional environment relating to the circulation of information in the financial sector as well as legislation relating to bankruptcy and guarantee enforcement. The Credit Bureau (public and private) Coverage, which was also designed by the World Bank, measures the proportion of the adult population for which information on credit behavior is recorded by (at least) one credit bureau in the country.

Joab’s Technologies and Research, Natu Court Flat B.

Page 71 of 104

Section 3: Initiation of Coverage

November 2011

Initiation of Coverage

Sub Saharan Africa Region| South Africa | Microfinance

Joab’s Technologies and Research.

November 11, 2011

Ticker: ABL SJ Exchange: JSE Current Price: (ZAR) 34.62

Target Price: (ZAR) 40.00 COMPANY VALUATION ABL SJ 34.62

Current Price (USD)

4.48

Target Price (ZAR)

40.00

Target Price (USD)

5.15

Upside/Downside

16%

Share Price Performance -5.5%

3,605.0

Shares (m)

804.2

Free Float

20%

Ave. Daily vol ('000)

2,960

Financial Year End

30-Sep

Sector

Financial

Company web

www.africanbank.co.za

Restructuring to re-position the group. ABIL, once the darling of the exchange, lost its way sometime in the 2000’s. For a few years leading up to 2008, African Bank was a “hot stock” offering good share price growth and phenomenal dividends. The company’s dividend policy has been one of its most attractive features. The dividend yield reached as high as 9.3% in 2008. However, strong management has emerged and we believe the determined strategy will result in ABIL returning to its former glory and beyond. In the run-up to FY 2011 earnings announcements, we see now as an opportune moment to gain exposure.

Financial Summary (ZARm)

A2010

F2011

F2012

Gross Margin on Retail Business

1,974

2,191

2,377

Interest Income on Advances

5,950

6,511

7,126

Net Assurance Income

1,600

1,520

1,520

Non-Interest Income

2,491

2,865

3,294

Profit from operations

2,828

2,724

2,741

Attributable income

1,906

1,813

1,824

4,000

2.37

2.26

2.27

3,500 3,000

EPS (ZAR) DPS (ZAR) NAV/share (ZAR) Dividend Cover Ratios

ABIL: Price & Volume 4,500

1.85

1.76

1.77

16.02

16.09

16.11

1.28

1.28

1.28

A2010

F2011

F2012

2,000 1,500

RoaA

5.1%

4.3%

3.9%

RoaE

15.5%

14.6%

14.6%

2.2

2.2

2.1

14.6

15.4

15.3

500 -

6.8%

6.5%

6.6%

5.2%

5.3%

4.4%

Exchange Rate 1 ZAR = USD 0.1294 USD 1.00 = ZAR 7.7228

8,000,000 6,000,000 4,000,000

1,000

PER (x) Dividend Yield

10,000,000

2,500

PBV (x) Earnings Yield

12,000,000

2,000,000 -

Volume-RHS

03-Nov11

27,841

Market Cap (USDm)

22-Sep-11 06-Oct-11 20-Oct11

Market Cap (ZARm)

25-Aug-11 08-Sep11

30.77

Key Company Information

14-Jul-11

52-Week Low

We initiate coverage on African Bank Investment Limited. Based on a Dividend Discount Model, we establish a target price of ZAR 40, representing 16% potential upside.

28-Jul-11 11-Aug-11

40.46

02-Jun-11 16-Jun-11 30-Jun11

-5.0%

52- Week High

24-Mar-11 07-Apr11 21-Apr-11 05-May11 19-May11

36.43

24-Feb-11 10-Mar-11

36.65

12 Months (ZAR)

30-Dec-10 13-Jan-11 27-Jan11 10-Feb11

6 Months (ZAR)

04-Nov-10 18-Nov-10 02-Dec10 16-Dec10

Current Price (ZAR)

African Bank Investments Limited (ABIL) has a history originating in the early 1990’s, a time when South Africa was emerging from apartheid into an era of democracy. Led by President Nelson Mandela, South Africa established itself as an example of democracy for the rest of Africa. With democracy, came freedom. All persons had the ability to establish themselves in this new nation and not only the privileged few. ABIL brought banking and micro finance to the mass market and opened up the possibilities.

07-Oct-10 21-Oct10

Bloomberg Code

Price (Zar)-LHS

Page 73 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

If the consumer lending market in South Africa can be compared to a game of soccer then the last five to eight years consisted of a session of frenzied kicking in the sixyard box …

INVESTMENT HIGHLIGHTS A new level of consumer lending in the South African market. As opposed to other developing nations in SSA, South Africa has experienced a rapid growth in consumer lending. Consumer debt more than tripled between 2003 and 2008, lifting household debt to income from 55% at the start of 2003 to a record 82% at the end of 2008. The aggressive expansion in credit was also been marked by an explosion in mortgage lending. For Africa’s youthful aspirants, the ability to access finance for vehicle and home loans, to start or expand entrepreneurial ventures, or to fund further tertiary education has become immensely supportive in driving the next phase of the continent’s growth. Although there is risk in micro lending, it appears that account holders have immense pride in their new found status and regard default as being dishonourable. One of the key players in this space has been African Bank Investments Limited (ABIL). We believe the company provides investors an opportunity to gain direct exposure in SSA’s micro finance industry.

Given the potential upside from turnaround situations which are executed well, we think investors should hold …

TN Holdings is Zimbabwe has replicated a similar business model. In January 2008, ABIL acquired Ellerines Holdings Limited (EHL), an established credit and cash retail furniture and appliance business. ABIL therefore consists of two underlying operations; the African Bank business unit, and the Ellerines Holdings Limited business unit. While the group has in recent years been working towards re-aligning the operations, we are confident in the business model. TN Holdings, a Zimbabwe Stock Exchange (ZSE) listed company has used a similar model in Zimbabwe by merging its banking unit (TN Bank) with its newly acquired furniture business (TedCo). Just like ABIL, TN Holdings has registered impressive growth in advances and customer numbers. Moreover, its share price on the ZSE has gained some 312% y-t-d.

The issue at hand is not the CV of the current management but rather what they can do for the company going forward…

Restructuring to yield positive results. Management expects the Ellerines acquisition to pay off as the restructuring is completed. ABIL has been striving for a low-cost model so as to stay “ahead of the pack”. Processes are constantly being reviewed to remove complexity, offer appropriately priced products and fend off competition. While we are far from regarding new management at Ellerines as proven, there are enough green shoots in recent data to show that the group has turned around. We think that a refocused management team coupled with an improving external environment will be the major reason for the strong growth, going forward.

Now heading into positive territory…

We like the adaptive business model. Management continues to actively engage with its staff and customers through workshops and information exchange events. This initiative appears to have been a success as both an illustration of management caring about the needs of staff and customers, but also in allowing management to gather information and ideas for where the business needs improvement and for new products and opportunities for growth. Furthermore, on 06 May 2011, ABIL announced that Moody’s had updated its credit opinion on African Bank and maintained its national scale ratings of A1.za (long-term) and P1.za (short-term), and its foreign currency deposit ratings of Baa2 (long-term) and P-2 (short-term). The rating reflects African Bank's niche franchise as South Africa's largest specialized unsecured credit provider as well as its historically good profitability, efficiency and capitalisation metrics.

Joab’s Technologies and Research.

Page 74 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

GDP Growth Rates, Unweighted Annual Average

6 5 4

Asian Countries

3

African Countries

2 1970s 1980s

1990s

2000s 2011-15

Source: The Economist/IMF

Household Debt (ZAR trillions)

Source: SARB

Bank Loans to Private Sector by Type of Credit (%)

AN OVERVIEW OF SSA ECONOMICS Within the Sub Saharan African context, a number of countries have seen remarkable growth in recent years with GDP growing at average rates of c5.5%.

An important note is that countries such as South Africa (the continent’s largest economy), Nigeria and Kenya have emerged as leading economic power houses.

In addition, Africa is seeing its population emerging out of poverty and this, together with a positive economic outlook, has contributed to a growing African middle class. This emerging middle class is driving the demand for goods and services. As a result, large global companies are setting up offices and listings in Africa. Examples of global companies with exposure into the fast emerging African consumer include the likes of Nestle, Heineken, Diageo, SABMiller, Shoprite, Massmart (Wal-Mart) and major car brands such as Toyota.

Another key trend is that financial institutions have begun to increase their African footprint. The financial sector in Africa now makes up a sizable percentage for the listed market capitalization. The big retail banking operation have expanded their coverage across the continent with Standard Bank from South Africa (20% owned by ICBC) now operating in 17 countries while EcoBank’s operations now extend across central Africa from Ivory Coast to Kenya. This together with an alliance with Nedbank South Africa (recent target of HSBC) gives both banks the ability to transact across Sub Saharan Africa. Amalgamated Banks of South Africa (ABSA) was also purchased by Barclays Plc in order for the UK bank to enter the African retail banking sector.

THE SSA MICRO FINANCE SECTOR Majority of Africans still “locked out” from banking services. Our assessments reveal that the majority of Africa’s population remains “locked out” of the continent’s financial sector, despite Africa having a booming financial services sector. A key highlight is that banking services remain, to a large extent, a preserve of urban dwellers. In Zambia, for example, only 25% of the country’s population has access to banking services. In Namibia, about 48% of the population has access to formal banking channels and for Botswana the figure is around 46%. South Africa, on the other hand which is said to have the continent’s most advanced economy has c25% of its population excluded.

Insurance penetration rates, on the other hand are still low across Africa. On average, Africa’s insurance penetration rate stands at around 3.0%.

Is Micro financing the solution to “banking the unbanked”? As a sub-sector of the financial sector, we have seen micro financing activities expanding across the continent. Micro finance operators have changed the African landscape by providing banking services to individuals who previously only had the ability to purchase what they could immediately afford (with cash). The provision of loan funds for vehicle or housing by micro finance institutions has also opened up the consumer’s ability to progress up the value chain and into the emerging middle class. Some of the key players in Sub Saharan Africa include companies such as ABIL (South Africa), Blue Financial Services (South Africa), Letshego Holdings (Botswana) and Real People (South African with exposure into East Africa, unlisted).

SOUTH AFRICA AS AN EMERGING ECONOMY South Africa dominates Africa’s financial services industry, accounting for 30% of all of banking assets on the continent. Of the total assets (USD 935.0bn) of Africa’s top 200 banks, about 46.0% are held by South African institutions.

Virtually all Sub-Saharan Africa’s top 100 banking assets are held in South Africa, Nigeria, Angola and Mauritius.

Source: SARB

Joab’s Technologies and Research.

Page 75 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED We note that the deepening of Africa’s financial sector is both a result and a driver of the strong macro-economic gains reflected across several of the continent’s core markets (such as South Africa) over the course of the past decade. The room for growth and improvements also exists.

Total Loans & Advances (% Change YoY)

With the world having undergone changes and predicaments in the recent past associated with the Global Financial Crisis (GFC), South Africa has managed to avoid a number of the problems faced by developed countries. With the introduction of the local National Credit Act (NCA), the South African banks were protected from the reckless lending seen in developed markets such as the United States of America (USA) and Europe. With the banking sector exhibiting stability, the rest of the economy has only been exposed to some shifts in global supply and demand.

South African Credit Extension South Africa has seen a huge increase in domestic credit extension over the past 5 years. This is a result of the emerging middle class, labour wage increases and aspirational spending. Although the percentage year on year change has been decreasing over the last 5 years, we can see that the rate has begun to increase since December 2009.

Source: SARB

Total disposable Income & Debt Servicing Payments 350,000

35%

300,000

30%

250,000

25%

200,000

20%

150,000

15%

100,000

10%

50,000

5%

-

0% LSM 1

LSM 2

LSM 3

LSM 4

Annual debt servicing costs by LSM group

LSM 5

LSM 6

LSM 7

LSM 8

Annual total disposable income

LSM 9

LSM 10

Percentage of disposable income

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

NAV Vs EPS 1,800

Lower-income earners now getting a slice of the cake. Historically, the upper class earners where the persons who had access to personal loans and credit.

With the introduction of the micro finance banks, lower income earnings now have access to these facilities. Our graph illustrates the annual disposable income per lifestyle bracket (LSM), together with annual debt servicing costs. We have then highlighted the percentage debt servicing to disposable income, and observed that higher lifestyle income earners also have a higher percentage debt obligation. Micro finance banks such ABIL are targeting the lower brackets as these potential customers have the need for their products and the ability to pay.

AFRICAN BANK INVESTMENTS LIMITED (ABIL) COMPANY PROFILE ABIL is a publicly listed management holding company with wholly owned businesses within the credit and consumer finance environment. The group operates in South Africa, Botswana, Lesotho, Namibia, Swaziland and Zambia.

The banking group has two key operating divisions; the provision of personal loans and banking facilities through African Bank; and retailing of furniture and appliances for cash and credit through Ellerines Holdings Limited. Additional major subsidiaries are Standard General Insurance Company, a registered life insurance company and Relyant Insurance Company, a short term insurance company. African Bank is the sixth largest bank and the largest unsecured loan provider in South Africa with total assets of ZAR 41.7bn (USD 6.0bn) as of 30 March 2011.

1,600

Following its acquisition by the JSE-listed Theta Group in 1998, African Bank was merged with King Finance Corporation, Unity Financial Services and Alternative Finance, three loan finance companies owned by the Theta Group. Non-core assets and business activities of the former African Bank were disposed of, and only the business activities relevant to the core business were retained to form the new African Bank. In addition, African Bank’s original retail deposit taking and transaction banking activities were phased out.

1,400 1,200 1,000 800 600 400 200 -

2002

2003

2004

2005

NAV/share (cents)

2006

2007

2008 EPS (cents)

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research.

2009

2010

In December 1999, Theta Group Limited changed its name to African Bank Investments Limited (ABIL). In August 2002, African Bank then acquired the ZAR 2.8bn Saambou personal loan book and the integration of this book into African Bank and the restructuring of competitive businesses spawned in its incubator (Nisela Growth, subsequently renamed Theta Investments) began in Sept 2002.

Page 76 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

Shareholder Structure Nominee and Trusts, 4.5%

Other corporates, 3.1%

Individuals, 5.0% Banks , 27.2% Investment Companies, 7.2% Insurance Companies, 7.8%

Pension/Provident Funds, 21.4% Growth Funds, 24.0% Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

In January 2008, ABIL acquired Ellerines Holdings Limited (EHL), an established credit and cash retail furniture and appliance business. This included the Ellerines, FurnCity, Town Talk, Savells Fairdeal, Beares, Lubners, Wetherlys, Osiers, Mattress Factory and Dial-a-Bed brands. For the past years, the group has focused primarily on optimizing its business model, enhancing its service offering to its clients, reestablishing appropriate growth patterns and providing its funders and shareholders with satisfactory returns. ABIL currently has a total managed book in excess of ZAR 47.0bn (USD 5.9bn), over 3.1m active customers (including EHL customers). Approximately 5.1m accounts -unsecured loans and credit cards (750,000 cards). The group collects over ZAR 1.9bn on a monthly basis as loan repayments and offers an average loan size ZAR 9,310 The share capital of ABIL consists of 804.2m shares. ABIL’s major shareholders are mainly banks, growth funds, pension/provident funds, insurance and investment companies. Some of the specific shareholders are the Government Employees Pension Fund (15.0%), ABIL’s BEE Programmes (7.2%), Liberty Life Association of Africa (4.0%), iShares MSCI Emerging Markets Index Fund (2.3 %) and Leon Kirkinis (2.1%).

ORGANISATIONAL STRUCTURE

African Bank Investments Limited

African Bank Limited Credit Banking (100%)

Theta Investments Investments (100%)

Ellerine Holdings Furniture & Appliance Retailer (100%)

The Standard General Insurance Company (100%)

African Contractor Finance (100%) Gilt Edged Management Services (100%) Miners Credit Guarantee (100%) A1 Taxi House (100%)

A1 Taxi Finance (100%) Soletrade Seven (100%)

Joab’s Technologies and Research.

Page 77 of 104

MICROFINANCE STRUCTURE OF ABIL’S COLLECTIONS UNIT

AFRICAN BANK INVESTMENTS LIMITED ANALYSIS OF COMPANY MANAGEMENT The key directors in the company are as follows; Mutle Constantine Magase, Independent Non-executive Chairman BComm; EDP and Grad Diploma in Corporate Governance Mutle has been an independent non-executive director of ABIL and African Bank since 2007 and currently serves as the non-executive chairman of ABIL and African Bank. He is currently the executive chairman of Vantage Capital Group. Vantage Capital is an investment and financial services group with interests in private equity, mezzanine funding and principal investments. Mutle was also a key member of the team that developed the Financial Services Charter. He was a chairman of the Micro Finance Regulatory Council (MFRC) and it was during his tenure that the National Credit Act was developed.

Gordon Schachat, Executive Deputy Chairman Gordon was one of the original founders and architects of the ABIL group in partnership with Leon Kirkinis, the current CEO. His business career spans nine years with the Schachat housing group, thereafter 13 years in the field of private equity and investment banking which, in partnership with the Hollard Group in 1995, culminated in the listing of the Boabab Investment Trust, the forerunner of the current ABIL group.

Leonidas Kirkinis, Group Chief Executive Officer-ABIL BComm; BAcc Leon, currently CEO of ABIL and MD of African Bank, founded African Bank Investments Limited (previously Theta Group Limited) in partnership with Gordon Schachat. He guided the company through the various mergers, acquisitions and the operational establishment of the present day African Bank Limited.

Source: Company Reports Collections at ABIL are managed centrally (with the exception of branch collections).The group uses a standard collections workflow system that involve the use of scorecards to drive collections strategies.

The collections unit collects over ZAR 1.4bn per month via Naedo and EFT payment streams and executes about 3.2m debit order strikes per month. The group operates through call centers that maintain relationships with clients.

ABIL COLLECTIONS CALL CENTRE

Source: Company Reports

Joab’s Technologies and Research.

Antonio Fourie, Chief Executive Officer – Ellerines Holdings Limited (EHL) Qualifications: BComm Antonio has had extensive previous experience in retail operations and has been instrumental in repositioning African Bank’s distribution footprint, branding and customer service propositions.

Nithiananthan Nalliah, Group Chief Financial Officer BCompt (Hons); P Grad Dip Tax Law (RAU); ACMA, CA (SA) Nithia is currently the group financial director and an executive director of ABIL and African Bank. He joined ABIL as chief financial officer in October 2006. Nithia is a CA (SA) and was a senior partner at Deloitte prior to his joining the group.

Comment on Management We rate the management team good. In May 2011, Moody’s updated its credit opinion on African Bank and maintained its national scale ratings of A1.za (longterm) and P-1.za (short-term), and its foreign currency deposit ratings of Baa2 (long-term) and P-2 (short-term). While the rating broadly reflects African Bank's niche franchise as South Africa's largest specialized unsecured credit provider, it also affirms our assertions that the management team is good and is geared towards growing the banking group. We are also confident in the groups’ collections strategy.

In our view, the board of ABIL fully embraces the principles of good corporate governance and recognizes the need to conduct the business with integrity. The group recently received an award from the Investment Analyst Society for best investor relations in its industry segment. This broadly reflects the company’s high reporting standards and adherence to JSE recommended standards.

Page 78 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED AN OVERVIEW OF THE BUSINESS UNITS

ABIL: Return Measures (%) 70 60 50 40 30 20 10 0 2002

2003

2004

2005

2006

2007

ROE

2008

2009

2010

ROA

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Gross Advances & NPLs 35,000

45 40

30,000

35 25,000 30 20,000

25

15,000

20 15

10,000 10 5,000

5

-

0 2002

2003

2004

Gross advances (ZARm)-LHS

2005

2006

2007

NPLs (ZARm)-LHS

2008

2009

2010

NPLs to gross advances (%)-RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Retail Unit: Number of Stores Geen & Richards 75 7%

Wetherlys 30 3%

Dial-a-Bed 67 7%

Furniture City 35 3%

Ellerines 640

Beares 61%

202 19%

AFRICAN BANK LIMITED A dominant player in its market. African Bank is without doubt the “first mover” in offering finance products to the lower end of the South African market on a national scale. It has a fairly entrenched position in this sector. Until recently, African Bank had no peers in offering unsecured lending to the mass market in South Africa. New players are beginning to enter the market and competition is increasing from the likes of Capitec Bank. In addition, market players such as ABSA are making moves to attract lower income clients. FirstRand has made a major push with FNB's EasyPlan branches, and Postbank hopes to acquire a banking license next year.

High return measures to remain a key characteristic. It is worth noting that African Bank’s business model is founded on the principle of taking credit risk, thereby generating an acceptable ROA (c10%), with moderate gearing of the balance sheet (6.0x). The ROE has also remained firmly in the double digits.

While, the acquisition of the Ellerines Group, funded by a fresh issue of ABIL shares, has largely diluted the overall group’s ROE, we expect ROEs to recover as the re-invigoration of Ellerines business begins to take effect.

Loan book growth coupled with improved quality. It is worth noting that African Bank’s loan book has been growing both in size and duration over the years. For example, in FY 2010, the average size of the loans was extended by 22% and the term of the loans by 27%. African Bank has taken a deliberate reduction in short term funding in favor of longer term funding as this ensures the Bank can achieve a lower average cost of funding. In addition, NPLs were flat as a percentage of gross advances at 31.8%.

ELLERINES HOLDINGS LIMITED (EHL) Strategic fit. EHL is a furniture and appliances retailer which provides affordable products and offers credit facilities through African Bank, for the purchase of its goods. It began operating in 1950a and the business has also spread in Botswana, Lesotho, Namibia, Swaziland and Zambia. When ABIL took over the Ellerines operations, c50% of customers were using their own credit. Already, this has decreased to below 40% as African Bank has pushed its own credit facilities. We note that most furniture retailers do not make a lot of money by just selling furniture but profits accrue from the interest they are able to charge on credit provided to their customers. We believe the Ellerines acquisition; will in the long term assist ABIL in growing its customer base. We think that the two businesses are highly complementary yet sufficiently diverse to provide maximum benefit to shareholders.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Retail Unit: Trading Area (m²) Wetherlys 52,786 7%

Dial-a-Bed 19,240 3%

Geen & Richards 58,092

8%

Furniture City 62,886

9%

Ellerines

360,513 52%

Beares 144,501 21%

Restructuring exercise to create value in the long term. ABIL continues to engage in restructuring activities aimed at re-invigorating the Ellerines business, through cost-cutting and better product selection. The aim is for the retail operation to also become profitable as a standalone business, rather than relying on profits from its credit offerings. In FY 2010, Ellerines increased headline earnings per share by 35.0%. Sales of merchandise increased by 7.0% to ZAR 4.48bn and the gross margin increased to 44.0% from 42.7% (FY 2009). Credit sales increased to 59.5% on the back of more favourable pricing and company initiated advertising campaigns. Furthermore, Ellerines was able to reduce their operating costs by 5.0%. We expect Ellerines to continue growing and we forecast revenue from the retail business in FY 2011 of 11%.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research.

Page 79 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED OVERVIEW OF H1 2011 FINANCIAL RESULTS A broad product mix drove the group’s top line. The biggest talking point of the financials was that profitability was largely driven by an increase in new credit and retail product offerings. ABIL experienced a substantial increase in the African Bank footprint through kiosks and branches within EHL stores. The group opened 122 kiosks and 12 carve-out branches. The group’s strategy has been to substantially increase the number of carve-outs and kiosks while the incremental costs are kept relatively low given that the infrastructure and staff are already in place in EHL stores.

Consequently, income from operations increased 18% on the year to ZAR 7.4bn (USD 936.0m), with the banking unit contributing c78% and the retail unit c22%.

H1 2011: Income from Operations

Retail Unit, 22.1%

Banking Unit, 77.9%

Overall, group earnings grew by 20% to ZAR 1.1bn. The banking business unit generated headline earnings of ZAR1.03bn whilst the retail business unit reported headline earnings of ZAR 144.0m.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Group Income Statement (ZARm)

H1 2011: PAT Contribution

Retail Unit, 12.1%

H1 2011

1,014

1,105

%∆ 9%

Interest Income on Advances

2,932

3,440

17%

Assurance Income

1,098

1,410

28%

Non-Interest Income

1,227

1,434

17%

Income from operations

6,271

7,389

18%

Risk Adj. Income from operations

4,578

5,360

17%

Profit from operations

1,337

1,663

24%

Profit before taxation

1,371

1,663

21%

Profit after taxation

948

1,112

17%

Attractive return measures. The group ROE improved from 15.3% in H1 2010 to 17.5%. The group also registered an economic profit (profit taking into account the cost of capital) of ZAR 155.0m. However, it is worth noting that returns in this business were affected by the ZAR 4.0bn of goodwill acquired in the Ellerines Financial Services transaction in September 2010. EHL generated a return on sales of 5.7% and a ROE of 9.9%.

Banking Source: Joab’s Technologies and Research.

Capital Joab’s Technologies and Research.

H1 2010

Gross Margin on Retail Business

Unit, 87.9%

Strong growth in total assets. The group’s balance sheet reflected a 21% growth in total assets to ZAR 46.0bn (USD 5.8bn). This was largely driven by a 34% growth in net advances to ZAR 30.3bn (USD 3.8bn). We note that this was a direct result of the company’s initiatives of growing it’s footprint by leveraging of the EHL stores.

On the liabilities side, the balance sheet also showed a 35% increase in long term funding (Bonds) to ZAR 25.1bn. Bond issues, we believe, will remain a critical capital raising option for the group as it continues to grow its customer base.

ROE Vs Economic Profit 500

60%

400

50%

300

40%

200

30%

100

20%

Balance Sheet (ZARm)

-

10% H1 2007

(100)

H1 2008

H1 2009

Economic Profit- ZARm-LHS

H1 2010

ROE-RHS

Source: Joab’s Technologies and Research. Capital Equity Partners

Joab’s Technologies and Research.

H1 2011 0%

Assets Short term deposits & cash Statutory assets-bank & insurance Inventories Net Advances Total Assets Liabilities and equity Short term funding Other liabilities Bonds and other long term funding Total Liabilities Total equity (capital & reserves) Total Liabilities & Equity

H1 2010

H1 2011

%∆

5,112 1,604 777 22,599 38,059

4,689 2,574 816 30,262 46,037

-8% 60% 5% 34% 21%

2,716 1,531 18,575 25,355 12,704

2,850 1,650 25,128 32,705 13,332

5% 8% 35% 29% 5%

38,059

46,037

21%

Page 80 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

Impairment Provisions & NPL Coverage 6,000

120

5,000

100

4,000

80

3,000

60

2,000

40

1,000

20

-

Banking Business Unit The growth in advances was the main driver. The large surge in credit demand (combined credit sales for African Bank and EHL) helped to push sales to growth of over 51%, with the total for H1 2011 of ZAR 10.0bn almost at the same level of sales for the FY 2010 of ZAR 11.0bn. African Bank credit sales grew by 58% to ZAR 8.0bn, while total disbursements at EHL increased by 29% to ZAR 2.1bn. ROE was at 21.5% (H1 2010: 18%) and gross advances are ahead of target. Whilst the total income yield declined 1.6% from 37.5% in H1 2010 to 35.9% this was offset by average gross advances that increased 25% y-o-y to ZAR 32.3bn (USD 4.1bn). Overall, the solid growth in advances resulted in income from operations increasing by 20% to ZAR 5.8bn (USD 736.0m).

2002

2003

2004

2005

2006

2007

2008

2009

2010

Banking Unit Income Statement (ZARm)

Total impairment provisions ZARm-LHS Impairment provisions to gross advances %-RHS NPL coverage %-RHS

Interest Income on Advances

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Assurance Income

H1 2010

H1 2011

%∆

2,890

3,377

17%

882

1,171

33%

Non-Interest Income

1,071

1,263

18%

Income from operations

4,843

5,811

20%

Risk Adj. Income from operations

3,180

3,832

21%

Profit from operations

1,139

1,462

28%

Profit before taxation

1,154

1,462

27%

854

1,050

23%

Profit after taxation

Asset quality continued to improve. Combined NPLs as a percentage of advances declined from 34% in H1 2010 to 28% on the back of the faster growth in performing loans and a lower migration rate from performing loans to NPLs. NPL coverage was 62.7%, compared to 65.3% in the prior period. Furthermore, the bad debt charge as a percentage of the advances book improved to 10.4% (H1 2011: 11.2%).

Overall, NPLs grew at a slower rate of 5% as the performing book grew by 38%. The combined effect of a significant growth in advances and an improvement in the quality thereof led to a 23% growth in headline earnings of ZAR1. 05bn for H1 2011 (H1 2010: ZAR 854).

Looking at the balance sheet, total assets were propelled by the growth in advances (+35%). Moreover, long term funding (main source of funds) was up +35% y-o-y to ZAR 25.1bn.

Average Cost of Funds Vs Capital Adequacy 45

16

40

14

35

Short term deposits & cash

5,054

4,702

-7%

Statutory assets-bank & insurance

1,473

2,317

57%

128 178

202 223

58% 25%

12

Other assets Other assets-EHL

10

Net Advances

22,325

30,063

35%

Total Assets

29,182

41,892

44%

30 25 8

Liabilities and equity

20 6 15 4

10

2

5 0

0 2002

2003

2004

2005

2006

African Bank capital adequacy %-LHS

2007

2008

2009

Average cost of funds %-RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

2010

Short term funding

2,258

2,429

8%

Short term funding-EHL

187

176

-6%

Other liabilities

496

529

7%

18,575

88 25,128

35%

23,809

31,172

31%

6,003

10,720

79%

29,812

41,892

41%

Other liabilities-EHL Bonds and other long term funding Total Liabilities Total equity (capital & reserves) Total Liabilities & Equity

Joab’s Technologies and Research.

Page 81 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED Retail Business Unit

Gross Profit Margin

The return to profitability achieved in 2010 carried through into 2011. Despite the adverse trading conditions in the furniture market, the retail business unit showed good improvements in profitability on the back of cost and margin management.

Headline earnings increased by 13% to ZAR 144.0m in H1 2011, while the economic loss after including a charge for goodwill reduced to ZAR 75.0m, (H1 2010: loss of ZAR 101.0m). Return on sales was 5.7%, while ROE improved from 8.4% in H1 2010 to 9.9% and operating margin up to 8% (6.5%).

46.0% 45.0% 44.0% 43.0% 42.0% 41.0% 40.0% 39.0% H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

H1 2011

Source: Joab’s Technologies and Research. CapitalJoab’s Technologies and Research.

Sales figure slightly below target. Although sales growth at 7.0% was below management’s target of 8.5%, we believe that if the forward momentum can be carried into H2 2011, the target is by no means out of reach. The credit sales mix increased from 59% to 64% of total sales. Also, despite a 6.0% growth in the cost of sales, the GP margin increased from 43.2% in H1 2010 to 43.9%. The reduction in gross margin can be attributed to the cyclical influence of promotional campaigns in the festive season, lower supplier volume rebates and discounts in the second quarter, as well as some stock losses and write-offs incurred due to the closure and relocation of Wetherlys stores.

Retail Unit Income Statement (ZARm) Sale of Merchandise

H1 2010 2,348

H1 2011 2,515

%∆ 7%

Cost of sales

(1,334)

(1,410)

6%

Gross margin

1,014

1,105

9%

42

63

50%

Assurance Income

216

239

11%

Non-Interest Income

199

245

23%

Income from operations

1,471

1,652

12%

Risk Adj. Income from operations

1,441

1,602

11%

Profit from operations

154

202

31%

Profit before taxation

173

202

17%

Profit after taxation

127

144

13%

Interest Income on Advances

Cost control was a strong focus. It is worth noting that savings were also achieved through changes to organizational design, streamlined management structures, logistics efficiencies and cost reductions at a head office level. Moreover, headcount continued to come down through a recruitment freeze aimed at driving personnel costs down further. The total number of staff reduced further from 12,456 in March 2010 to 11,304. There has also been improved buying and better promotions campaign management.

Merchandise Sales By Brand (ZARm) 1,400

Retail Unit Balance Sheet (ZARm) Assets

800

Short term deposits & cash

9 9 1

1,000

1, 1 7 5

1,200

H1 2010

H1 2011

Joab’s Technologies and Research.

158

183 164 Dial-aBed

149

275

273

Wet herl ys

Furniture City

Source: Joab’s Technologies and Research. CapitalJoab’s Technologies and Research.

Beares

Ellerines

-

H1 2011

%∆

42

69

64%

Statutory assets-bank & insurance

131

257

96%

Intergroup deposit- African Bank

187

176

-6%

Inventories

777

816

5%

Other assets

384

332

-14%

Net Advances 225 211

200

Geen &Richards

495

400

534

600

H1 2010

274

350

28%

3,905

4,148

6%

Short term funding

432

421

-3%

Intergroup loan- African Bank

178

214

20%

Total Assets Liabilities and equity

Trade and sundry creditors

609

707

16%

Total Liabilities

1,885

2,172

15%

Total equity (capital & reserves)

2,020

1,976

-2%

Total Liabilities & Equity

3,905

4,148

6%

Page 82 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED OPERATIONAL REVIEW It’s also a game of numbers. African Bank opened a total of 32 new branches during H1 2011. African Bank kiosks were also rolled out within EHL stores and contributed ZAR 188.0m of sales while the new carve-outs (full branches) in EHL stores contributed ZAR 140.0m in sales. African bank is planning a further rollout of kiosks and carve outs to all appropriate EHL stores, which is expected to substantially increase African Bank’s footprint at a low incremental cost.

Analysis of Dividend Payout 160

140

120

100

80

60

40

20

H1 2007

H1 2008

H1 2009

EPS (cents)

H1 2010

H1 2011

DPS (cents)

Source: Joab’s Technologies and Research. Capital Equity Partners

New product development and VAS (Value Added Services) to drive customer demand. The banking business unit launched a variety of new products, including a Payment Break product, an Interest Buster product, a loan-by-phone capability and a consolidation loan product during the period. An INSECONDS facility which provides an instant quote for clients by SMS or web was also launched. The ATM pilot has now been concluded and operationally embedded and more ATMs will be rolled out during FY 2011. As a result of these product development initiatives, the group managed to add 347,000 new customers In H1 2011, representing an increase of 16% on the 300,000 new customers added in H1 2010. The rollout of the African Bank credit card within the EHL stores is expected to increase its target market substantially.

A successful entrance into the international bond market. On 10 June 2011, African Bank Limited successfully priced its debut USD 300.0m, 5-year bond (EMTN).

The bond is listed on the London Stock Exchange and will be maturing in June 2016.

Despite the volatility on international capital markets on the back of head line risks around peripheral Europe , management note that there continues to be net inflows into Emerging Market dedicated bond funds and therefore appetite for South African issuers remains strong. During the capital raising process, the order book reached a comfortable level of just under USD 600m, allowing African Bank to price the desired amount of USD 300.0m in line with the official price guidance of MS+425bp (yield of 6.048%).

Funding (Distribution by Gegraphy) Other, 9% Europe, 9%

UK, 49%

Switzerland , 13%

Asia, 20% Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Funding (Distribution by Investor Type) Others, 2% Banks, 11%

Private Banks, 24% Source: Joab’s Technologies and Research.

Capital Joab’s Technologies and Research.

Joab’s Technologies and Research.

Asset Managers,

COMPANY STRATEGY & OUTLOOK Refining its strategic vision. ABIL’s strategic focus has been the acceleration of value creation from EHL. This involves the maximization of credit volumes from the EHL network. Through products such as EziCash and EziLoan and access offered by African Bank kiosks and carve-out branches within EHL stores, the group has an opportunity to substantially increase the size credit business. ABIL's financial objective is to more than double the size of its business in the next four years and to deliver a ROE of greater than 30%.

Building EHL into a premier cash retailer. From a strategic point of view, the retail business unit has come to the end a restructuring and re-engineering phase and can now, focus on its core business of retailing. Management is looking to improve the sales performance with particular focus on Wetherlys, Geen & Richards and Furniture City. Store development in respect of new stores, store refurbishments, kiosks and carve-outs and continuing to take costs out of the business.

We see significant opportunities in the target market. In 2008, the annual disposable income of the South African population was ZAR 1,357bn. Debt servicing costs made up ZAR 258.0bn, of which about ZAR 15.0bn was collected by ABIL, representing a share of wallet of c6.0%. The low ratio of debt servicing payments to total disposable income is an indication of the extent that the lower LSMs are underserved. Given the group’s low cost strategy and ability to manage risk, there is an opportunity not only to grow its share of wallet but also increase the overall wallet size.

63%

Page 83 of 104

MICROFINANCE

AFRICA

AFRICAN BANK INVESTMENT LIMITED SWOT ANALYSIS Strengths  Well established South African presence, with loyal and growing client base  Attractive valuation metrics.  Ability to utilize Ellerines Holdings to grow presence and client base without the additional costs of a branch rollout.  Product expansion to match client requirements i.e. increased loan size and term together with the introduction of credit cards.  Good quality assets and risk evaluation processes

Opportunities  Although African Bank has representative offices in sub-Saharan Africa, this make very little contribution to current earnings, expansion offers African Bank its biggest opportunity.  Product growth for lower earning markets giving additional revenue streams  Optimal utilization of Ellerines clients to enhance loans and advances.  InJoab’s Technologies and Research.tive and game changer products.

Joab’s Technologies and Research, Natu Court Flat B.

Weaknesses  Poor integration and utilization of Ellerines Ho turnaround.  African Bank had the initial advantage in South allowed competitors to overtake them.  Not renowned as an inJoab’s Technologies and Research.tive management t  Previously reactive and not proactive.  Still does not offer a full range of products to e throughout their life.

Threats  Markets competitors who have got first mover market.  Increased competition in sub-Saharan Africa in players.  Increased regulation.  Unsecured lending has additional risks.  Changes in the interest rate environment in So

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

COMPANY VALUATION BANKING SECTOR COMPARATIVES African Bank

Nedbank

Standard Bank

Investec

Capitec Bank

ABSA

27,840.5 143.7

71,537.5 156.4

155,428.2 328.7

40,021.4 54.9

17,981.1 4.4

101,906.8 184.6

110,785.6 279.3

Price Earnings

14.6

11.5

12.6

9.4

25.1

11.6

10.7

13.6

Forward Price Earnings

15.4

9.1

9.9

6.5

13.5

9.2

8.7

10.3

Dividend Yield Forward Dividend Yield

5.2 5.3

3.8 4.1

3.9 4.0

3.8 4.2

1.5 2.1

3.7 4.2

7.7 5.1

4.2 4.1

Price Book

2.2

1.4

1.6

0.9

5.6

1.8

1.8

2.2

Price Sales

2.0

0.9

1.0

0.9

3.1

1.4

1.5

1.5

ROE

15.5

11.5

12.6

11.4

27.5

14.6

37.7

18.7

Price

34.6

141.0

97.9

50.7

190.0

141.9

19.7

Bloomberg Target Price

40.0

150.9

106.8

62.5

192.0

151.6

23.2

15.5%

7.0%

9.1%

23.2%

1.0%

6.8%

17.8%

Market Cap (Rm) Ave Daily Value Trades (Rm)

Potential Return

First Rand Average

Source: Joab’s Technologies and Research.

Capital Joab’s Technologies and Research.

Metric Price Earnings Ratio

Value 14.6

Dividend Yield

5.2

Price Book Ratio Price Sales Ratio

2.2 2.0

Price Cashflow Ratio

5.3

Price to Free Cash Flow

5.6

Return on Assets Return on Equity

5.2 15.5

Tier 1 Risk Based Capital

20.4

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

VALUATION We assign a target price of ZAR 40.00 on ABIL, representing a potential upside of 16% on the current trading price. We have used the dividend discount model to value African Bank Investments Limited. We are forecasting growth in Ellerines retail sales of 8.5%. This together with a marginally lower cost of sales will see revenue from the retail business increase by 11% in FY 2011. We are also forecasting an increase an 8.9% growth in income from operations. While increases in interest expense and operating costs may result in a slight decrease in attributable income, we however see this increasing from FY 2012 onwards.

We expect the dividend payout ratio to remain constant and we forecast an increase in dividend yield. We expect African Bank to continue to grow loans and advances by 25% in FY 2011 with a slow down predicted in FY 2012. We forecast a decrease in bad debts written off as the bank has ascertained that they are writing off debts too early in the cycle, it is currently set at 13 months with internal data suggesting 22 months is more optimal. We forecast an increase of 17% in net loans and advances.

Conclusion ABIL continues to be a player in the Southern Africa micro finance industry, having been the stock of choice in the early 2000’s. African Bank has exposure to South Africa’s neighbouring countries. While this currently represents a very small portion of the Bank, we believe it offers the Bank an opportunity to expand into the region. ABIL’s potential lies in optimizing the Ellerines Holdings advances book and increasing its exposure to the fast emerging consumer. The Ellerines chain gives African Bank the clients and the channel to access these clients. Given the growth potential and the high dividend yield of 5.2%, ABIL remains one of our favoured stocks in the financial sector.

Joab’s Technologies and Research, Natu Court Flat B.

Page 85 of 104

MICROFINANCE

AFRICAN BANK INVESTMENTS LIMITED

ABIL FINANCIAL SUMMARY INCOME STATEMENT (ZARm) Gross Margin on Retail Business Interest Income on Advances

A2007

A2008

A2009

A2010

F2011

F2012

-

1,313

1,791

1,974

2,191

2,377

3-Yr CAGR

3,268

4,627

5,437

5,950

6,511

7,126

22%

Net Assurance Income

742

2,045

2,081

1,600

1,520

1,520

29%

Non-Interest Income

707

1,768

2,251

2,491

2,865

3,294

52%

4,717

9,753

11,560

12,015

13,087

14,317

37%

(1,856)

(2,511)

(2,693)

(3,490)

(4,276)

48%

Income from Operations Charge for Bad and doubtful debts

(823)

Other Interest and Investment Income

-

Interest Expense Operating Costs Indirect Taxation: VAT Profit from Operations Capital Items Profit before Tax

-

367

390

410

430

(636)

(1,313)

(2,025)

(2,383)

(2,621)

(2,883)

(1,091)

(4,025)

(4,576)

(4,481)

(4,660)

(4,847)

60%

(38)

(56)

(18)

(20)

-

-

-19%

2,724

2,741

10%

-

-

2,724

2,129 -

2,503 (11)

2,129

Taxation

(754)

Preference Sharholders

-

2,492 (932) -

2,797

2,828

(7) 2,790

34 2,862

55%

2,741

10%

(935)

(920)

(876)

(881)

7%

(52)

(36)

(36)

(36)

Attributable income to shareholders

1,375

1,560

1,803

1,906

1,813

1,824

11%

Dividends

(1,070)

(1,479)

(1,528)

(1,488)

(1,415)

(1,424)

12% 11%

Retained Earnings

305

81

275

418

398

400

Income Statement Growth Measures Retail Income Growth

36%

10%

11%

9%

42%

18%

9%

9%

9%

Assurance Income Growth

176%

2%

-23%

-5%

0%

Non-Interest Income Growth

150%

27%

11%

15%

15%

Income from Operations Growth

Interest Income Growth

107%

19%

4%

9%

9%

PBT Growth

17%

12%

3%

-5%

1%

PAT Growth

13%

16%

6%

-5%

1%

A2008

A2009

A2010

F2011

F2012

3-Yr CAGR

BALANCE SHEET(ZARm)

A2007

Assets Short term deposits and cash

1,961

2,984

3,553

3,410

3,683

3,977

20%

Net Advances

8,998

16,532

20,486

25,360

29,717

34,171

41%

Total assets

11,998

29,223

34,259

39,202

44,284

49,497

48%

2,482

11,757

12,174

12,396

12,448

12,465

71%

483

483

483

483

483

483

0%

2,965

12,240

12,657

12,879

12,931

12,948

63%

Short Term Funding

808

4,219

3,108

1,038

1,038

1,038

9%

Other Liabilities

415

1,332

1,363

1,743

2,004

2,305

61%

Taxation

148

238

77

33

33

33

-39%

Deferred Tax Liability

-

294

265

392

392

392

Liabilities Held for Sale

-

-

-

-

Ordinary Shareholders Interest Preference Shareholders Interest Total Equity

Life Fund Reserve Bonds and Other Long Term Funding Subordinated Bonds, Debentures and Loans Total liabilities Total Equity and Liabilities

37

25

16

18

15

14

14

14

7,095

10,332

14,705

20,877

25,475

30,143

43%

305

511

2,044

2,226

2,449

2,693

94%

8,787

16,981

21,602

26,323

31,405

36,618

44%

11,998

29,223

34,259

39,202

44,284

49,497

48%

Balance Sheet Growth Measures Total Assets Growth

143.6%

17.2%

14.4%

13.0%

Growth in Equity

312.8%

3.4%

1.8%

0.4%

0.1%

93.3%

27.2%

21.9%

19.3%

16.6%

Growth in Total Liabilities

11.8%

Ratio Analysis Headline EPS (ZAR)

2.77

1.94

2.24

2.37

2.26

2.27

Adjusted EPS (ZAR)

2.77

1.94

2.24

2.37

2.26

2.27

DPS (ZAR)

2.15

1.84

1.90

1.85

1.76

1.77

NAV/share (ZAR)

3.69

15.23

15.75

16.02

16.09

16.11

RoaA

23%

8%

6%

5%

4%

4%

RoaE

111%

22%

15%

16%

15%

15%

Joab’s Technologies and Research, Natu Court Flat B.

Page 86 of 104

Initiation of Coverage

Sub Saharan Africa Region| Botswana | Microfinance

Joab’s Technologies and Research.

November 11, 2011

Ticker: LETSHEGO: BG Exchange: BSE Current Price: (BWP) 1.36

Target Price: (BWP) 2.08 COMPANY VALUATION Bloomberg Code

LETSHEGO:BG

Current Price (BWP)

1.36

Current Price (USD)

0.19

Target Price (BWP)

2.08

Target Price (USD)

0.29

Upside/Downside

52.9%

Share Price Performance 6 Months (BWP)

1.85

-26.5%

12 Months (BWP)

1.82

-25.4%

52- Week High

1.87

52-Week Low

1.35

Key Company Information Market Cap (BWPm)

2,700

Market Cap (USDm)

371.2

Shares (m)

1,985

Free Float

25%

Ave. Daily vol ('000)

1,742

Financial Year End

31-Jan

Sector

Financial

Company web

Financial Summary

www.letshego.com

We initiate coverage on an “emerging giants”, Letshego Holdings, a panAfrican micro finance institution that operates in various SSA countries such as Botswana, Mozambique, Namibia, Swaziland, Tanzania, Uganda and Zambia with a 12-month target price of BWP 2.08, implying 53% upside on the current price.

While fortunes may be thwarted in Botswana (its key market), we are of the view that Botswana is an ex-growth market at this stage (market penetration of 30.4%) and the real opportunity lies in the new SSA markets such as Kenya, Mozambique and Zambia. Of course, rewards will flow in the long term but we think “smart money” should be buying the dips and adding to core positions.

Moving towards a “Capitec Bank” Business Model. We think that Letshego’s business model is gravitating towards Capitec Bank. Capitec Bank is a deposit taking retail bank that offers a range of personal loans through its network of 474 branches throughout South Africa and has over 3.2m clients.

We think the strategy will solve a common “Micro financing Paradox” that a significant portion of the micro finance institution’s funding is sourced from banks, who are also competitors within the market. A cheaper source of funding through deposits would therefore be a point of strength for Letshego as it gears up its pan African expansion drive.

A2011

F2012

F2013

588,836

721,900

851,565

Interest Expense

(50,935)

(42,959)

(99,870)

Net Interest Income

537,901

678,941

751,695

Operating Income

823,156

925,951

1,137,271

NI Before Impairments & Tax

665,673

724,565

878,156

Profit before taxation Profit for the year

626,716 473,337

707,034 537,346

790,503 600,782

EPS (Thebe)

25.8

26.3

29.4

200

100,000

DPS (Thebe)

2.7

4.2

6.5

180

90,000

86.0

99.8

101.9

9.5

6.2

4.5

160

80,000 70,000

(BWP 000)

Interest Income

NAV/share (Thebe) Dividend Cover

Letshego: Price & Volume

A2011

F2012

F2013

140

Gearing

28.9%

49.8%

49.3%

120

60,000

RoaA

21.0%

18.1%

16.0%

100

50,000

RoaE

29.5%

27.9%

29.1%

Cost/Income Ratio

23.2%

26.8%

27.5%

80

40,000

1.4

1.3

60

30,000 20,000 10,000

21.6%

20

2.0%

3.1%

4.8%

0

1 BWP = USD 0.137500 USD 1.00 = BWP 7.27273 1 BWP = 100 Thebe

-

Volume Traded (000)-RHS

07-Nov11

4.6

19.3%

5.3

04-Jul-11

Dividend Yield Exchange Rate

5.2

19.0%

25-Jul-11 15-Aug11 05-Sep11 26-Sep11 17-Oct11

Earnings Yield

40

04-Oct-10

PER (x)

1.6

25-Oct-10 15-Nov10 06-Dec10 27-Dec10 17-Jan11 07-Feb11 28-Feb11 21-Mar11 11-Apr11 02-May11 23-May11 13-Jun11

PBV (x)

13-Sep-10

Ratios

Price (BWP)-LHS

Source: Joab’s Technologies and Research. Capital Research

Joab’s Technologies and Research, Natu Court Flat B.

Page 87 of 104

MICROFINANCE According to Peter Lynch, one should go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it. We think Micro financing is an uncomplicated business, particularly in Africa.

LETSHEGO HOLDINGS INVESTMENT HIGHLIGHTS Top investor Warren Buffet once wrote, in a letter to shareholders that, “The best solution is to avoid consumer debt if at all possible. The only types of debt that make any reasonable sense are student loan debts, mortgage debt on a reasonable small home, and car debt on your very first car. After that, you should do everything in your power to avoid further debt”. Our observations are that while credit is generally accessible to ordinary consumers in the developed world; the picture is completely different in most developing countries, particularly in Africa. However, within the Sub Saharan context, a company that has made a lot of headway in providing the so-called “reasonable debt” is indeed Letshego Holdings, a microfinance institution registered in Botswana and with operations in various SSA countries.

Sometimes bad news should be viewed as an investor’s best friend. It lets one buy a stock at a marked-down price….

Turning out to be an “Air-Pocket Stock” following some “Bad News”…

Letshego’s share price has taken a dip in recent trading sessions following news flow that the government of Botswana will cease facilitating the deduction at source, of loan and other repayments from public sector employees' wages, effective 1 December 2011. Botswana remains a key market for Letshego, accounting for c60% of its loan book (with more than 95% of loans extended to government employees). Of course, this development could have a direct negative impact on the company in the form of increased loan impairment charges and operating expenses associated with alternative collection methods.

Underlying sentiment remains positive but the usual emerging market speed bumps are to be expected.

A change in outlook NOT a downgrade…

Following, the recent news flow, Moody’s has changed its outlook on Letshego from “stable” to “negative”. The rating agency ascribes a Ba3 long-term issuer rating on the company. The “glitter” around Letshego has traditionally been the efficient loan recovery method which ensures recoveries of around 95%. In fact, the group’s regional initiatives have also been prompted by the company’s ability to recover loans at source through the Central Registry in various jurisdictions.

In the meantime, the market has been left to wonder and wander as management engages policy makers.

Will alternative repayment mechanisms suffice?

Management has assured stakeholders that should the revocation come into effect, Letshego Botswana will look into alternative methods for the collection of contractual monthly loan repayments. In addition, management is also looking to engage with the relevant authorities to obtain more clarity and a resolution to the matter. An important point is that Letshego already maintains direct debit agreements with all customers and can, in theory, convert to receiving loan repayments directly from customer's bank accounts. However, performing direct debit collections for around 35,000 accounts could initially prove an operational hitch. In addition, direct debt collections may also limit the company's ability to quickly effect credit risk management changes in its portfolio.

Quite clearly, Letshego’s share price has taken a knock and is trading near its 52week lows. However, on a mark to market basis, Letshego is a clear favourite. We like the fact that the cost to income ratio is significantly lower despite the group’s pan African expansion drive. In addition, impairment ratios are broadly expected to remain below its peers given the group-wide recovery levels of about 95%.

Letshego has traditionally maintained a cautious approach to lending and we therefore expect the quality of the loan book to remain, largely clean. We see an opportune moment to gain exposure in the counter.

Joab’s Technologies and Research, Natu Court Flat B.

Page 88 of 104

MICROFINANCE

LETSHEGO HOLDINGS AN OVERVIEW OF MICROFINANCE IN AFRICA We estimate that over three billion people in developing countries across the globe are still without effective access to loan and deposit services. In our view, the problem is particularly acute in Sub-Saharan Africa, where a large part of the

Distribution of African Population Classes Rich Class >$20, 4.84%

Middle Class $4$20, 13.44%

population does not have a formal relationship with a financial institution.

However, the good news is that microfinance institutions are increasing, being fuelled by a burgeoning middle class in Africa and improved economic and political fundamentals. According the Microfinance Information Exchange (MIX), microfinance institutions in Africa are looking to meet the needs of an increasing number of vulnerable people such as farmers, traders and micro-entrepreneurs.

The micro finance industry is growing (although disparately) largely due to improved access to commercial funds, and to a lesser extent equity. Letshego Holdings is an interesting case-study of a microfinance institution that has grown over the years and pursued regional growth in Sub Saharan Africa.

Floating $2$4, 20.88% Poor Class <$2, 60.84%

Source: Joab’s Technologies and Research.

Capital Partners Research

LENDING RATES (% p.a)

A MACRO-ECONOMIC OVERVIEW OF BOTSWANA

2005 2006 2007 2008 2009 2010 2011*

Bank of Botswana Bank Rate Monthly Average Overnight Rate Repo Rate Reserve Repo Rate Commercial and Merchant Banks Prime lending rate Average return on advances Mortgage Non-Bank Financial Corporations Short term loans Mortgage Other Financial Corporations All round lending Source: Bank of Botswana * July 2011

14.50 11.50 15.50 11.50

15.00 12.00 16.00 12.00

14.50 11.13 13.50 9.50

15.00 11.64 14.00 10.00

10.00 6.61 9.00 5.00

9.50 5.52 8.50 4.50

9.50 4.57 8.50 4.50

16.00 17.48 17.47

16.50 17.38 17.08

16.00 18.12 15.81

16.50 19.56 16.69

11.50 15.41 11.96

11.00 14.39 11.33

11.00 15.39 11.33

19.25 16.00

19.50 16.25

19.25 16.00

19.25 15.38

15.50 10.63

15.25 10.19

15.25 10.19

15.95

12.90

18.65

19.82

19.58

19.24

…

Local Government, 0.0 % Parastatals, 1.4%

Households, 40.3% Business Resident, 29.4%

Other, 6.3%

Business Services, 6.0% Finance, 0.2%

Agriculture, 0.6%

Transport, 1.2%

Source: Bank of Botswana

Trade, 6.5% Construction, 3.0 Electricity & water, 0.2% %

Speaking of the economy, concerns stem on the country’s over reliance on diamond revenues. This was evident during the Global Financial Crisis (GFC), when GDP declined by 9.2% from BWP 91.7bn in 2008 to BWP 83.2bn in 2009.

Mining is the main economic activity and traditionally contributes about 40% to GDP. However, over the past decade there has been an emphasis on diversifying the economy beyond and away from mining (mainly diamonds), through stimulating new sources of economic activity such as financial and business services, tourism, as well as some manufacturing and agricultural activities.

THE FINANCIAL SECTOR The main players in Botswana’s banking sector are the commercial banks, such as African Banking Corporation (now BancABC), Bank Gaborone, Bank of Baroda, Barclays Bank of Botswana, Capital Bank, First National Bank of Botswana, Stanbic Bank and Standard Chartered Bank Botswana. Botswana’s banking sector was indirectly affected by the GFC (through job losses in other sectors).

However, there was no apparent decline in the bank’s lending practices.

Botswana Distribution of Loans & Advances (H1 2011) Nonresident, 1.0%

Interestingly, Botswana has the highest credit rating in Africa and remains one of the most preferred investment destinations for most emerging market investors. We note that the openness of the country’s political system has been a significant factor in Botswana’s stability and economic growth. Each election since independence has been freely and fairly contested and has been held on schedule.

Botswana is interesting in the sense that recent credit growth has been driven by the growth of retail lending (mostly unsecured lending) as opposed to corporate lending. As a result, bank lending to households is high by the standards of low-income countries (at approximately 40.3% of total loans and advances as of H1 2011). Unsecured personal loans in Botswana stand at c10% of GDP, compared to 6.0% for South Africa, Zambia's 3.0%, India's 3.5% and China's mere 0.3%. In other African countries, lending to households tends to be dominated by lending for mortgages. In Botswana, however, mortgages account for a relatively small share of household borrowing, indicating that the majority of household borrowing is for consumption purposes rather than for investment. Botswana banks have however remained profitable despite most of their assets being unsecured loans.

Mining, 1.0% Manufacturing, 2 .9%

Joab’s Technologies and Research, Natu Court Flat B.

Page 89 of 104

MICROFINANCE

LETSHEGO HOLDINGS LETSHEGO HOLDINGS COMPANY PROFILE Established in 1998 and listed on the Botswana Stock Exchange (BSE), Letshego Holdings (formerly known as Micro Provident Botswana Limited) is a provider of unsecured consumer loans to formally employed individuals (mostly civil servants). The company is IFSC accredited and has operations in various SSA countries such as Botswana, Mozambique, Namibia, Swaziland, Tanzania, Uganda, Zambia and more recently Kenya. Letshego has two main product offerings; that is personal loan finance and vehicle finance. The group offers personal loans from BWP 500 up to BWP 150,000, allowing its customers to repay their debt over as long as 60 months. In addition, it also offers simple vehicle finance (for both second hand and new vehicles) of up to BWP 100,000 and repayments can be made over 48 months. Personal loan financing is the “cash cow” as it contributes approximately

95% to group revenue, whilst vehicle finance makes up the remainder.

Letshego Holdings Limited (Formerly Micro Provident Botswana Limited)

Letshego Financial Services Limited (Botswana) 100%

Letshego Financial Services (Mozambique)

80%

Micro Africa Limited 100%

Letshego Shareholder Structure

Letshego Financial Services Limited (Namibia) 85%

Hollard Life Namibia Limited cell 100%

Botswana Life Insurance, 16.5%

Others, 26.9%

PAIP-PCAP-FMO Letshego, 13.1%

State Street Bank (USA) , 2.4%

SQM Frontier Africa Master Fund, 2.4% Investec Asset Management -SSB 001/1, 3.9% Standard Chartered Bank of Botswana Nominees, 5.7%

Investec Asset Management 030/14, 5.9%

Botswana Public Officers Pension Fund Botswana Insurance Fund Management Ltd, 6.9%

, 9.2%

Flemings Asset Management , 7.1%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

Letshego Financial Services Limited (Swaziland) 100%

Letshego Tanzania Limited t/a Faidika 87%

Micro Provident Uganda Limited 85%

Letshego Financial Services Limited (Zambia) 100%

LHL/ Hollard cell captive 100%

Comparing Letshego with other Micro Finance companies such as Blue Financial Services is like comparing apples to oranges…

Letshego’s business model is unique when compared to other micro-finance institutions such as Blue Financial Services in that it has traditionally focused on civil servants and employed a model that ensures that loan repayments are deducted at source through the payroll systems of participating employers. It is against the same payroll deduction business model that Letshego has pursued a pan African expansion plan to ensure continued growth and geographic diversification.

SHAREHOLDER STRUCTURE The share capital of Letshego consists of 1,984,997,936 ordinary shares.

Letshego’s major shareholders are mainly developmental financial institutions and funds such as the International Finance Corporation (IFC), the Netherlands Development Finance Company (FMO)/ Kingdom Zephyr, Sanlam and Investec. However, some shares are owned by investors registered through asset management companies or trustees/funds. As of 31 July 2011, management estimates that approximately 80% of the total share capital was owned by residents of Botswana while c20% was in the hands of nonresidents.

Page 90 of 104

MICROFINANCE

LETSHEGO HOLDINGS

ANALYSIS OF MANAGEMENT BOARD OF DIRECTORS

REGIONAL CEOs

Cuthbert Moshe Lekaukau Chairman LLB; LLM; Commonwealth Certificate in Legislative rafting Appointed to the Board: 2002 Nationality: Botswana

Frederick W Mmelesi CEO (Botswana) AAT; MBA; EDP Nationality: Botswana Joined Letshego: 1999

John Alexander Burbidge Non-Executive Director CA Appointed to the Board: 2002 Nationality: UK

Melissa Huang-Williams CEO (Mozambique) CPA Nationality: USA Joined Letshego: 2010

Margaret Dawes Non-Executive Director CA Appointed to the Board: 2009 Nationality: South Africa

Willem Steenkamp CEO (Namibia) BA; DEd Nationality: Namibia Date Joined: 2003

Gaffar Hassam Non-Executive Director FCCA, MBA (Oxford Brookes) Appointed to the Board: 2009 Nationality: Malawi

Mbuso Dlamini CEO (Swaziland) BCom; CA (SA) Nationality: Swaziland Joined Letshego: 2010

Idris Mohammed CFA; BSc (Industrial Engineering); MBA Appointed to the Board: 2010 Nationality: USA

Marion Moore CEO (Tanzania) CPA; CISA Nationality: South Africa Joined Letshego: 2007

Legodile E Serema Non-Executive Director BSc (University of Minnesota); Various marketing qualifications Appointed to the Board: 2009 Nationality: Botswana Jan A Claassen Group Managing Director BCom; LLB; Advanced Executive Programme (UNISA) Appointed to the Board: 2003 Nationality: South Africa Dumisani Ndebele Director: Risk and Compliance BAcc (Hons); MBA (University of Derby) (UK); FCCA; FCPA Appointed to the Board: 2004 Nationality: Botswana

Geoffrey Kitakule CEO (Uganda) MBA; MSc Comp Science; Bachelor of Statistics; Master of Laws in IT & Telecoms Nationality: Uganda Joined Letshego: 2008 Brian Ballack CEO (Zambia) BCom Banking Nationality: RSA Joined Letshego: 2010

GROUP EXECUTIVES Colm Patterson Group CFO FCA (Ireland); CPA Nationality: Ireland Joined Letshego: 2007 Lydia Andries Group Head of Corp Strategy BSc & Msc Actuarial Science Nationality: Botswana Joined Letshego: 2008 Portia Ketshabile Group HR Manager Diploma in Personnel and Training Management; MDP Nationality: Botswana Joined Letshego: 2001 Shawn Bruwer Group Chief Information Officer BCom; CIMA Nationality: Namibia Joined Letshego: 2006

Barati Rwelengera Group Risk & Compliance Manager AAT; ACCA; CPA; (Botswana) Nationality: Botswana Joined Letshego: 2008

Onkemetse Mtonga Group Business Development Manager Bachelor of Accounting, ACCA Nationality: Botswana Joined Letshego: 2010 Annie Chaka Group Information Technology Manager MBL Nationality: Zimbabwe Joined Letshego: 2000 Mythri Sambasivan George Group Finance Manager CIMA; ACCA; ACPA Nationality: India Joined Letshego: 2010

Duduetsang Olsen Group Business Process Manager BBA; MSc Strategic Management Nationality: Botswana Joined Letshego: 2009

Based on our own assessment of management skills qualifications and experience, we rate Letshego’s management as “good”. Generally, management has a good track record given the company’s growth within Sub Saharan Africa over the years. As a Botswana Stock Exchange (BSE) listed entity and also having a listing of its bonds on the Johannesburg Stock Exchange (JSE), the company upholds strong corporate governance principles. It is also worth noting that the group has also directed its efforts towards implementing the recommendations of the King III report (“King III”) introduced by the Institute of Directors (South Africa). Letshego, in our view strives to maintain high standards of business ethics and integrity.

Joab’s Technologies and Research, Natu Court Flat B.

Page 91 of 104

MICROFINANCE

LETSHEGO HOLDINGS

The Payroll Deduction Model-Flow Diagram

EMPLOYER (e.g. Government of Botswana)

THE DIRECT PAYROLL DEDUCTION MODEL The recent development…

As afore-mentioned, the Government of Botswana has decided to cease facilitating the deduction of loan repayments to micro lenders and telcos. Micro lenders will be adversely affected as their business has been thriving on the lower default rates on repayments. Mobile phone companies will also be affected given that they had also put in place airtime purchase arrangements that ensure that money is deducted from source at month-end. Our enquiries reveal that there is a general “outcry” within the government that there is excessive lending (or rather reckless lending) to consumer clients. As a result, the government is withdrawing from managing the micro-lenders’ risks through Central Registries. It appears that the government is likely to tighten regulatory controls, particularly within the micro finance sector.

2 Letshego considers central registries as “best practice”…

Generally, the use of central registries is viewed as best practice. India, for example has also introduced central registers as a mechanism aimed at controlling fraud and also regulating the pace in the growth of consumer credit.

Central registries are service providers that are normally “privately” owned and are independent from the lenders. The main function is to act as a regulator by approving loans and maintaining a data base of consumer loans, repayment history and security pledged as collateral. Central registries also monitor indebtedness and therefore are critical in providing useful credit-related information. Letshego management also considers the set up of central registries as ideal and therefore actively promotes the setting of these, particularly in the various jurisdictions that it operates.

EMPLOYEE (e.g. Civil Servants)

3 4

CENTRAL REGISTRY 1

LETSHEGO

1.

Business relationship between civil servants/private sector employees and Letshego, the micro-lender.

2.

Employer/ Employee relationship.

3.

Employer processes salaries through a Central Registry.

4.

Central Registry acts as intermediary between employer and employees and deducts loan repayment amount and transfers to micro-lender whilst the balance is transferred to the employees.

The Central Registry also recovers its fee (based on the loan repayment amount).

Joab’s Technologies and Research, Natu Court Flat B.

A central registry also prevents frauds in loan cases involving multiple lending from different banks on the same immovable property, monitor repayment and credibility. Transactions relating to securitisation and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advances granted by banks and financial institutions can also be registered in the central registry. Most importantly, central registries are considered as market best practice as they encourage secured creditors to provide the much-needed credit to the productive sectors so as to help sustain economic growth and development.

The payroll deduction model remains a core part of the model…

An important point is that Letshego has grown rapidly due to its efficient credit management infrastructure, which has over the years ensured a fast credit approval. The revocation, will of course take some pace off the micro lender’s expansion programme given the likely high impairment levels in future.

However, the payroll deduction model remains a core part of Letshego’s business model. Central Registries are currently in place in Botswana, Namibia, Swaziland and Uganda and may also be introduced in Tanzania and Zambia.

A Change of Strategy?

Letshego is likely to change its strategy in Botswana of collecting the normal monthly loan repayments to other alternative collection methods such as electronic debit orders. According to management, all existing customers in Botswana have already signed direct debit mandates and therefore the changeover process should not be “cumbersome”. However, management has hinted that the process of changing over to a new collection will require some extra resources, though not significant.

Page 92 of 104

MICROFINANCE

LETSHEGO HOLDINGS Letshego Financial Services Limited (Botswana) Botswana operations bringing home the bacon…

Botswana is Letshego’s main market having been established as the group’s first in 1998. Botswana currently constitutes about 66% of the loan book and 65% of profit before tax. With a total population of about 1.98m people, it is estimated that approximately 539,000 people are formally employed, of which around 112,000 government employees are. Letshego currently has about 34,000 customers in Botswana, implying a market penetration of about 30.4%.

It is a no‐brainer that improvements in civil servant salaries provide a boost in net advances growth. The Botswana business remains one of the fully developed operations with a total of four main branches and seven satellite offices. As of July 2011, the net advances book stood at BWP 1.73bn with the lowest cost to income ratio of 8.6% and commendable collection rate of 96%.

Geographical Location of Operational Units

Until the formation of the Non-Banking Financial Institutions Regulatory Authority (NBFIRA) in Botswana, micro-lenders were not regulated. As a result, micro-lenders such as Letshego and Blue Financial Services benefited from the “laxity” as they had access to payrolls of the public service. However, the recent development that the government of Botswana will cease acting as an intermediary between microfinance institutions (MFIs) and civil servants for the collection of microloans could spell out a new paradigm shift for micro-lenders such as Letshego.

Joab’s Technologies and Research. Capital Joab’s Technologies and Research./Company Reports

BWP/SZL 1.080 1.060 1.040 1.020 1.000 0.980 0.960

03-Sep11 03-Oct11

04-Aug11

05 - Jul11

05-Jun11

06-May11

06-Apr11

07-Mar11

05-Feb11

06-Jan11

07-Dec10

07-Nov-10

0.940

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Letshego Financial Services Limited (Swaziland) Letshego Financial Services Swaziland currently trades as a non-deposit taking financial institution, after being registered by the Central Bank of Swaziland. It previously traded as MP Swaziland Financial Services and was registered as a micro lender and regulated by the Credit Financing and Money Lending Act of 1991. Letshego Swaziland operations commenced in February 2006. With a population size in the order of 1.2m people for Swaziland, it is estimated that approximately 100,000 are formally employed. In addition, government employees are estimated at around 35,000. Letshego currently has a total of 6,275 customers, implying a market penetration of 18%. The low penetration of 18%, compared with 30.4% for Botswana signifies that there is still potential for growth in the market. At a net advances book of BWP 167.9m, Swaziland constitutes about 7.0% of the group’s loan book and c7.0% of profit before tax.

Latest figures indicate a cost to income ratio 13.1% for the division and collection stats of about 99%.

Letshego Tanzania Limited t/a Faidika Broadly speaking, the East African Community (EAC) is increasing its population and as a result, there is a growing middle class in the region. Increased integration in the EAC is likely to provide a solid investment case for companies operating in the region. It is our view that Tanzania is a key growth market for Letshego. Tanzanian operations commenced in July 2006 and have been showing steady growth with a total of 13 branches and 77 satellite offices. With a population of around 45,0m for Tanzania, estimates indicate that 3.87m are formally employed, of which 573,000 government employees are. Letshego currently has 39,000 customers (market penetration of around 7.0%). As of 31 July 2011, the net advances book stood at BWP 145.5m (5.6% of total advances book) and the division contributed 6.0% to profit before tax. However, the cost to income ratio was above average at approximately 41.9%, while collections were at 97%.

BWP/TZS 245 240 235 230 225 220 215 210 205 200 03-Oct-11

03-Sep11

04-Aug11

05-Jul11

05-Jun11

06-May11

06-Apr11

07-Mar11

05-Feb11

06-Jan11

07-Dec10

07-Nov-10

195

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

Page 93 of 104

MICROFINANCE

LETSHEGO HOLDINGS

BWP/UGX 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00

03Oct -11

04-Aug-11

03-Sep11

05-Jul-11

05-Jun11

06-Apr11

06-May11

05-Feb-11

06Jan-11

07-Dec-10

07-Nov-10

-

07-Mar-11

50.00

Source: Joab’s Technologies and Research.

Capital Joab’s Technologies and Research.

BWP/MZN 6.000 5.000 4.000 3.000 2.000 1.000

03Oct11

03-Sep11

04-Aug11

05-Jul11

05-Jun11

06-May11

06-Apr11

05-Feb-11

07-Mar-11

06-Jan11

07-Dec10

07-Nov10

-

Micro Provident Uganda Limited Economic prospects in Uganda remain positive despite political set-backs experienced early this year. GDP is projected to increase to 6.3% in 2011 and 7.6% in 2012 benefiting from the emergence of a fledgling oil industry. The potential impact on Uganda’s economy of the discovery (commercial production now expected to begin early 2012), will be massive. Oil revenues are likely to exceed one third of total government revenues and contribute up to 8% of GDP, and thus can be expected to alter meaningfully Uganda’s productive, fiscal and financial landscape. Letshego commenced its operations in Uganda in November 2005 and has developed a fairly wide network of 13 branches and 16 satellite offices, with about 30,000 customers (market penetration estimated at 12% based on total government employees of 250,000). As of 31 July 2011, the net advances book stood at BWP 92.4m (3.6% of the group’s loan book).

Furthermore, the operation had a cost to income ratio 39.5% and contributed 3.1% to profit before tax. Collection rates were high at c99%.

Letshego Financial Services (Mozambique) Letshego Mozambique is one of the latest additions to Letshego’s stable having been launched in February 2011. However, there has been some progress in terms of re-aligning the business with group operations. Letshego has also secured a government salary deduction code in Mozambique. Furthermore, in order to mitigate against language barriers, a Portuguese speaking team has been put in place to facilitate market penetration. The division is currently in the cost recovery phase as shown by its cost to income ratio of about 240%. The division currently operates through a single branch with a net advances book BWP 53.8m (2.1% of total loan book). However, market statistics are encouraging. With a population of approximately 23,4m, 9.6m are formally employed, of which around 180,000 are government employees. Letshego Mozambique currently has approximately 2,900 customers, signifying a market penetration of just 2.0%. We think there is significant scope to grow on the back of a positive economic outlook driven by increased mining activity in Mozambique.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Letshego Financial Services Limited (Namibia) The purchase of Eduloan (Namibia) (Proprietary) Limited for a consideration of NAD 41.6m in 2008 was the first acquisition that the Letshego undertook as prior to that all its subsidiaries were established on a ‘green field’ basis. EduLoan Namibia has grown over the years and remains focused on financing education. It is worth noting that Letshego has also capitalized on Edu-loan South Africa’s relationship with South African universities and other higher learning institutions in the Southern Africa region.

BWP/NAD 1.0800 1.0600 1.0400 1.0200 1.0000 0.9800 0.9600

03-Sep11 03-Oct11

04-Aug11

05-Jul11

05-Jun11

06-May11

06-Apr11

07-Mar11

05-Feb11

06-Jan11

07-Dec10

07-Nov-10

0.9400

Namibia’s economy is largely hinged on the global commodity cycle with mining providing more than 50% of foreign exchange earnings. Rich alluvial diamond deposits make Namibia a primary source for gem-quality diamonds. In addition, it is the world's fifth-largest producer of uranium, and the producer of large quantities of lead, zinc, tin, silver, and tungsten. As the commodity prices recover, we expect growth to accelerate to c4.0%. With a population of c2.2m, it is estimated that 300,000 are formally employed, of which 80,000 government employees are. With a clientele base of around 43,000, we estimate a market penetration of around 53%. Letshego Namibia currently operates through seven branches and a single satellite office. Net advances as of July 2011 stood at BWP 409.2m (16% of total loans), with a cost to income ratio 25.2% and collection statistics of about 99%.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

Page 94 of 104

MICROFINANCE

LETSHEGO HOLDINGS Letshego Financial Services Limited (Zambia) Prospects looking good as Michael Sata is declared new president…

Zambia has created a new record for itself in Africa by successfully concluding “free and fair” elections, with opposition Patriotic Front (PF) president Michael Sata winning the presidential elections. While Sata’s campaign “mantra” was largely inclined on labour market reforms and a sterner approach towards foreign investors and equitable distribution of wealth, we expect the Zambian economy to continue on a positive growth trajectory. In 2010, GDP growth was 7.1%, marking twelve consecutive years of positive GDP growth averaging 5.12% p.a. A projected 2011 GDP growth rate of c6.5% is expected to be driven by key sectors such as manufacturing, transport, communication and construction,

BWP/ZMK 740.00 720.00 700.00 680.00 660.00 640.00 620.00

03-Oct11

03-Sep11

05-Jul11

04-Aug11

05-Jun11

06-May11

06-Apr11

07-Mar-11

05-Feb11

06-Jan11

07-Dec10

07-Nov-10

600.00

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

The recovery in global trade has seen strong demand for commodities from BRIC nations such as India, China and Brazil. Agriculture and mining have been the key growth drivers in Zambia. For example, the increased copper production of about 720,000 metric tonnes on the back of buoyancy in global copper prices that averaged cUSD 7,600/MT in 2010 was a major contributor to growth. Furthermore, the country recorded bumper maize production in the agricultural sector of about 2.8m MT (2009: 1.9m MT) and increased production from NTE’s (non-traditional exports) such as tobacco, sugar and cotton.

Zambian operations commenced in October 2007. Despite the fact that Letshego Zambia remains relatively small in the market, we think it is well positioned to take advantage of the economic growth in Zambia. With an estimated population size of 13.3m and approximately 500,000 formally employed individuals, government employees are estimated at around 150,000. The company currently has about 1,834 customers (market penetration of 1.0%). As of 31 July 2011, the net advances book was BWP 7.3m (representing 0.3% of the group’s loan book). In addition, the division contributed 0.7% to profit before tax, with an above average cost to income ratio 71.2% and collection rate of about 93%.

Micro Africa Limited: Letshego at the “end-game” for final approvals on the MAL acquisition...

In line with the Pan-African expansion, Letshego finalised the acquisition of a 62.52% interest in the issued share capital of Micro Africa Limited (MAL) for USD 3.3m. MAL is a private company incorporated in Kenya and has been operating in the country since 2000 with subsidiaries in Rwanda, South Sudan, Uganda and an associated company in Tanzania. According to management, the company has a loan book valued at USD 7.2m, 21 branches and a customer base of over 17,000. It is expected that the controlling share purchase of Micro Africa Limited will be finalised by the 31 October 2011.

BWP/KES 16.0000 14.0000 12.0000 10.0000 8.0000 6.0000 4.0000 2.0000

03-Oct-11

03-Sep11

04-Aug11

05-Jul11

05-Jun11

06-May11

06-Apr11

07-Mar11

05-Feb11

06-Jan11

07-Dec-10

07-Nov10

-

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

Short to medium term economic prospects in Kenya are currently “bleak” given the drought, inflationary pressures (around 17.3% y-o-y) and high interest rates. Increased food insecurity is likely to raise food prices in the short to medium term thereby raising the inflation rate further and political uncertainties surrounding the soon- to-be held elections in the country could further dampen foreign investments. While we have our concerns however, we strongly feel that the MAL acquisition will position Letshego on a level footing with other micro finance contenders in the East African region.

Page 95 of 104

MICROFINANCE

LETSHEGO HOLDINGS

OVERVIEW OF H1 2012 FINANCIAL PERFOMANCE A perennial performer. H1 2012 results were broadly in line with our expectations as net interest income was up 21% to BWP 393.7m (USD 54.1m). The biggest talking point of the financials was that performance was driven by the massive growth in net advances of 40% to BWP 2.6bn (USD 358.0m). Furthermore, operating income was up 17.2% to BWP 456.6m (USD 62.7m) on the back of an increase in commission and fee income.

H1 2012: Net Advances Mozambique , 2.1%

Zambia , 0.3%

Namibia , 15.7%

Uganda , 3.6% Tanzania , 5.6%

Botswana, Namibia and Swaziland were the star performers. The 40% growth in net loans was largely driven by continued strong performance in three countries in particular, signifying underlying business growth in customer numbers. These were Botswana (net book of BWP 1.72b, up 34%), Namibia (net book up 58% to BWP 409.0m) and Swaziland (net book of BWP 128.4m, up 31%). Other operations such as Uganda (+ 20%) and Tanzania (+12%) also posted healthy book growth in local currency terms, but were slightly dampened by the continued weakening of the currencies against the BWP.

Swaziland , 6.5% Botswana, 66.3% Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

H1 2012: Distribution of Net Advances (PWPm) 2,000 1,800

Income Statement (BWP 000)

1,725

1,600

Interest income

1,400

Interest expense Net interest income Premium income

1,200 1,000 800 600 409

400 168

200

146

92

Botswana Swaziland Tanzania

Uganda

54

7

-

Zambia Namibia Mozambique

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

H1 2012: PBT Contribution

H1 2011

H1 2012

343,419

423,664

23.4%

(18,026) 325,393

(29,948) 393,716 29,066

66.1% 21.0%

Insurance fees Net interest and insurance income

325,393

(3,167) 419,615

29.0%

Fee and commission income Other operating income Operating income

58,390 5,668 389,451

30,987 6,001 456,603

-46.9% 5.9% 17.2%

Employee benefits Other operating expenses

(38,290) (39,120)

(51,603) (51,674)

34.8% 32.1%

Insurance claims expense Claim mitigation reserve movement

Namibia , 19.2% Zambia , 0.7%

Net income before impairment and taxation Impairment of advances Profit before taxation

Uganda , 3.1% Tanzania , 5.9%

%

(6,536) (306) 312,041 (15,328) 296,713

346,484 (3,038) 343,446

11.0% -80.2% 15.8%

Income taxation

(75,357)

(41,434)

-45.0%

Profit for the period

221,356

302,012

36.4%

Swaziland , 7.1% Botswana, 65.1%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

H1 2012: Distribution of PBT (BWPm) 250 208.3

Botswana remains the main market. Letshego Botswana, which currently offers loans of up to BWP 200,000 (USD 26,500) and is collecting repayments totaling approximately BWP 66.0m (USD 8.7m) per month from civil servants, remains a significant contributor to earnings given that it constitutes 66% of the loan book and contributes 65% to profit before tax. However, this is expected to change in the long term as operations in other regional markets begin to gain momentum. In H1 2012, 35% of profit before tax was generated outside of Botswana versus 29% in 2010.

200

Total operating expenses up on the back of start-up operations. Letshego experienced a surge in opex largely due to Mozambican branch start-up costs. Other costs were related to the upgrading of branches in Tanzania, once-off legal and related costs associated with the establishment of the Group’s JSE-listed medium term notes programme.

150

100 61.4

50 22.6

18.8

9.8

-3.1

2.4

0 BotswanaSwaziland

Tanzania

Uganda

Zambia

Namibia

Mozambique

-50 Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

Low impairment charge. The total impairment expense for H1 2012 was 80% lower than H1 2011 due to the introduction of credit default risk insurance in Namibia and Swaziland and improved collections (c95%) in Uganda, Tanzania and Zambia.

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MICROFINANCE

LETSHEGO HOLDINGS

Gross Loans Vs Impairments 4,000,000

3.5%

3,500,000

3.0%

3.0%

3,000,000 2.4% 2,500,000

2.5%

2.2% 2.0%

1.7% 2,000,000

1.5% 1,500,000 1.0%

1,000,000

Balance Sheet (BWP 000) Cash and cash equivalents Advances to customers Other receivables PPE and intangible assets Goodwill

0.5% 0.6%

-

0.0% A2009

A2010

A2011

F2012

Gross Loans (BWP 000)-LHS Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

112,643

220,139

95.4%

2,601,117

39.6%

51,787

50,871

-1.8%

22,684 6,184

8,395

27,824

27,824

35.8% 0.0%

7,996

8,984

12.4%

2,069,313

2,940,014

42.1%

Liabilities and equity Trade and other payables(incl. tax)

182,673

78,936

-56.8%

Borrowings

348,760

832,761

138.8%

531,433

911,697

71.6%

Total Assets Vs Cost/Income Ratio 35%

4,000,000

%

Liabilities

F2013

Impairments-RHS

4,500,000

H1 2012

1,862,879

Short term investments

Deferred taxation

500,000

H1 2011

Assets

30%

Shareholders’ Equity Stated capital Foreign currency translation reserve

3,500,000 25% 3,000,000 2,500,000

20%

2,000,000

15%

Share‐based payment reserve Retained earnings Minority interest

1,500,000 10%

412,814

669,876

62.3%

(2,431)

(45,056)

1753.4%

7,701

5,203

-32.4%

1,092,392

1,353,642

23.9%

27,404

44,652

62.9%

1,537,880 2,069,313

2,028,317 2,940,014

31.9% 42.1%

1,000,000 5%

500,000 0

0% A2009

A2010

A2011

Total Assets (BWP 000)-LHS

F2012

F2013

Cost to Income Ratio -RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Net Interest Income Vs NIM 1,000,000

Impairment expense (annualized) on average loans and advances to customers was a mere 0.3% versus 1.8% in 2010. One of Letshego’s main strength, in our view is its strong collection and recovery focus in all countries. We opine that this has largely been possible through the company’s business model that ensures zero-rate default levels.

35%

900,000

30%

800,000 25%

700,000 600,000

20%

Double-digit growth on the bottom line. Overall, Letshego registered an overall increase of 16% in profit before tax. Furthermore, a lower tax charge for the period led to a 36% increase in the profit after tax (2010: BWP 221.4m) and an increase in the basic earnings per share from 12.1 thebe to 15.7 thebe.

500,000 15%

400,000 300,000

10%

200,000 5% 100,000 -

0% A2009 A2010 A2011 Net Interest Income (BWP 000)-LHS

F2012

F2013 NIM-RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

PBT Vs Return Measures 900,000

45%

800,000

40%

700,000

35%

600,000

30%

500,000

25%

400,000

20%

300,000

15%

200,000

10%

100,000

5%

-

0% A2009

A2010 PBT (BWP 000)-LHS

A2011

F2012 RoaA-RHS

F2013 RoaE-RHS

Joab’s Technologies and Research, Natu Court Flat B.

Funding remains a key issue. Looking at the balance sheet, we note that total borrowings increased by 139% to BWP 832.8m (2010: BWP 348.8m) leading to an increase in the debt to equity ratio from 23% in 2010 to 41%. However, management believes that the gearing levels are generally low relative to the industry. However, we also note that the Group’s interest-earning assets remain the largest component of total assets at 97% of BWP 2.94bn, and comprise BWP 2.6bn in net customer loans, and BWP 242.8m in cash and cash equivalents and shortterm investments. The group also managed to raise about BWP 2.59m, after divesting a 15% shareholding in Micro Provident Uganda Limited to a Ugandan citizen. However, the introduction of a 15% minority shareholder in Micro Provident Uganda is largely in line with the Group’s practice of encouraging local participation in regional operating subsidiaries.

OPERATIONAL REVIEW Regulations may continue rocking the boat in Botswana. Letshego continues to promote the establishment of independent Central Registries as it believes that it is an emerging model of best practice in the industry. Following on the intention of the Government of the Republic of Botswana to cancel existing agreements with the two Central Registries in Botswana, Letshego has engaged the relevant authorities so as to obtain more clarity and resolution in the matter.

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MICROFINANCE

LETSHEGO HOLDINGS

Equity Vs Debt Levels 2,500,000

120%

100%

2,000,000

80% 1,500,000 60% 1,000,000 40% 500,000

20%

-

0% A2009 A2010 A2011 Shareholders Equity (BWP 000)-LHS

F2012 F2013 Debt/Equity-RHS

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Botswana: Analysis of Advances to Customers 36 months, 2%

Executive , 19%

Other, 1% 60 months, 75%

48 months, 3%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Namibia: Analysis of Advances to Customers 60 months, 13%

Other, 2% Executive , 25%

48 months, 4%

36 months, 56%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Swaziland: Analysis of Advances to Customers

48 months, 11%

Global rating may open up funding channels. An interesting point is that Letshego is a globally-rated company. In June 2011, a credit rating of Ba3 (long term global scale rating with a ‘stable’ outlook) was obtained by Letshego Holdings Limited from independent ratings agency, Moody’s Investor Services.

However, the outlook of the Moody’s credit rating was changed from ‘stable’ to ‘negative’ during September 2011 as a result of the government on Botswana announcement of cancelling existing agreements with the two Central Registries in Botswana. On the other hand, Letshego has also concluded (in July 2011), the listing of Medium Term Notes (“MTN”) on the Johannesburg Stock Exchange (JSE).

36 months, 6%

Other, 1%

60 months, 82%

Looking to upgrade systems. Letshego recently finalised the selection of a new integrated core debtors’ and banking system in July 2011. Already, progress with the design and implementation of a system has started. We think this move is appropriate given the group’s aspirations of developing into a fully fledged bank in the long term.

Competitive threats looming. There has generally been an increase of new players in the micro-lending space in SSA. This, in our view has stiffened competition for Letshego. In Botswana, the main competitors are mostly commercial banks such as Barclays and FNB. It is worth noting that while most of these players do not follow the same collection model as Letshego; their presence still eats away at Letshego’s market share. This has also been heightened by the fact that even competitors that initially did not use the payroll deduction model have since adopted a similar model. However, Letshego’s approval turnaround and disbursement within 48hrs remains its competitive edge. Its peers (mostly banking institutions) take up to a week to disburse funds.

Within each of the African countries in which the group operates, Letshego also competes with several small, local “cash loan” operators who collect repayments directly from clients in cash. However, there are a few competing companies with significant penetration across several countries. These include companies such as Real People Ltd, an unlisted entity that operates an unsecured consumer lending model with formally employed sector in Southern and Eastern Africa.

Another one is Bayport Management Limited (BML), which was established in 2002 as a non‐listed holding company, domiciled on the island of Mauritius and offering unsecured credit products in Ghana, South Africa, Tanzania, Uganda and Zambia. In markets such as Kenya, banks such as Equity Bank Kenya (EBK) are also competitors. It is worth mentioning that Equity Bank Kenya (EBK) began in 1984 as a building society servicing tea and coffee farmers, before expanding into a top micro-lender and later into a fully fledged commercial bank listed on the Nairobi Stock Exchange.

COMPANY STRATEGY & OUTLOOK Focus on core competencies...

Letshego has over the years experienced rapid growth and evolved from being just a consumer lending entity to a fully fledged financial services company.

However, the group continues to focus on consumer finance as its main business line. We recall that in January 2010, the group sold its stake in Letshego Guard and Letshego Guard Insurance Company to Botswana Insurance Holdings Limited (BIHL) for BWP 57.0m. The rationale of the transaction was to focus on its core business of lending. We think the group’s strategy of focusing on micro-lending has and will continue to pay dividends for Letshego, given the growth in the loan book. Average yields on customer loans remain attractive at around 30%, versus an average cost of debt on the company’s book of about 12%.

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Joab’s Technologies and Research, Natu Court Flat B.

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MICROFINANCE

LETSHEGO HOLDINGS

60

Tanzania: Analysis of Advances to Customersmonths, 20% Other, 3%

Executive , 8%

36

months, 53%

48 months, 16%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Uganda: Analysis of Advances to Customers 60 months, 29%

Other, 6% Executive , 18%

36 months, 18%

48

months, 29%

Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

Zambia: Analysis of Advances to Customers 60 months, 33% 12 months, 23%

3 months, 1%

24 months, 13%

36 Source: Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

48 months, 4%

Moving into main stream banking operations...

Our enquiries reveal that management is “on its toes” and is looking at options of transforming the group into a broader based financial institution.

Already, the group has acquired a new banking system and also holds a micro finance banking license in Mozambique. Letshego is also at different stages of two banking license application processes.

Deposit taking to solve the “Micro financing Paradox”. The move towards main stream banking services strategy will ensure that Letshego will transform into a deposit-taking entity and therefore open paths for further financial service diversification. Most importantly however, we expect this to solve a common “Micro financing Paradox” that a significant portion of the micro finance institution’s funding is sourced from banks, who are also competitors within the market. Overall, we expect that a banking licence would mitigate other risks such as shrinkage of the civil service.

Moving towards a “Capitec Bank” Business Model. We think that Letshego’s business model is gravitating towards Capitec Bank. Capitec Bank is a deposit taking retail bank that offers a range of personal loans through its network of 474 branches throughout South Africa and over 3.2m clients and about 6,350 employees. Capitec was established on 1 March 2001 and listed on the JSE Limited on 18 February 2002. The retail banking group has generally focused on providing “easy and affordable banking services” to its clients and has employed the use of inJoab’s Technologies and Research.tive technology in its offerings.

“As a group, we want to diversify, we don't want to disturb the existing business, but rather add to the Letshego business. In theory, it could be a banking arm which can then run next to the consumer lending business," we quote Letshego Group Managing Director, Jan Claasen, in an interview, describing the micro-lenders strategy of introducing banking services. It would appear that the existing model and structure will not change significantly but the process would rather include the addition of a specialized banking arm. We think Letshego could “hit the jackpot”, should it pursue such a strategy given the low banking penetration levels in most SSA countries that it operates.

Peter Lynch once said, “The person that turns over the most rocks wins the game. And that's always been my philosophy”. We think Letshego’s “brave” stance of venturing into new African markets is one of its key strengths and may in the long term transform into significant income streams for the group. Following contact with management, we expect Letshego to continue pursuing a pan-African expansion strategy, particularly in countries such as Lesotho, Ghana, Zimbabwe, and Nigeria. The acquisition of a controlling stake in Micro Africa Limited in East Africa will assist in the aim of both regional expansion as well as capturing increased market share in new markets such as Kenya, Rwanda and South Sudan. That said, we like the fact that the group has been “dotting its i’s and crossing its t's” in as far as regional expansion is concerned without necessarily “rushing” into unknown territories.

months, 26%

Joab’s Technologies and Research, Natu Court Flat B.

Page 99 of 104

MICROFINANCE

LETSHEGO SWOT ANALYSIS Strengths Well established in several African countries- the group has expanded quickly and has already obtained “first-mover” advantage in numerous markets; Excellent track‐record through its broad product range; Strong and experienced management team; Strong asset quality (low NPLs and high recoveries) - the payroll deduction model, which is facilitated via electronic collections through a Central Registry largely mitigates potential repayment risk on the company's unsecured loan portfolio; Conservative gearing levels; Attractive return measure (RoaE and RoaA) relative to peers; InJoab’s Technologies and Research.tive product offerings- Letshego Swaziland, for example has introduced tailor-made products in that market that include creating a package where a highly indebted person can consolidate all their debt into one manageable loan; Strict control of normal operational expenditure in the more established business units ensures low cost: income ratios.

Weaknesses Narrow franchise; Key markets such as Botswana and Swaziland are consid Competition from local players who have cultural affinit Widespread network could prove difficult to manage; Relatively longer term nature of Letshego's receivables, extended at five-year maturities; Major risk if payroll deduction is discontinued in the ma

Opportunities Further expansion into Africa e.g. in East Africa through the MAL acquisition; Rollout of full product range into all countries in the region;

Threats While the group does not have any hard currency deno USD, GBP and Euro), volatility in the currency markets m regional operations; Margin pressure is expected in Botswana owing to incre impairments;

Move to transform into a retail banking institution also presents new opportunities.

Increased competition - success in Africa attracting new Political instability in several African countries (exposure High risks associated with unsecured lending in SSA; Operational capacity may be limited by an inability to ac Increased micro-lending regulations in Africa.

Joab’s Technologies and Research, Natu Court Flat B.

MICROFINANCE

LETSHEGO HOLDINGS

COMPARATIVE VALUATION BANKING SECTOR COMPARATIVES Bank Letshego

Market Cap (USDm) 371

Botswana Barclays Botswana First National Bank of Botswana Stanchart Botswana Kenya Kenya Commercial Bank Barclays Bank Kenya Stanchart Kenya Nigeria Zenith Bank First Bank Guaranty Trust Bank Stanbic IBTC UBA Access Bank Nigeria First City Merchant Bank Skye Bank Diamond Bank Average

PER(T+1) Div Yield (T+1) 5.2 3.1%

PBV (T+1) NIM 1.4 29.5%

Cost/Income NPL/Advances 23.2% 1.7%

RoaE 29.5%

RoaA 21.0%

784 1,074

8.4 14.8

5.9% 3.8%

4.1 5.4

8.7% 4.0%

39.0% 39.2%

1.8% 2.6%

45.3% 43.7%

4.9% 3.5%

412

11.8

7.6%

3.3

5.0%

38.7%

1.5%

44.2%

2.4%

854 1,056

6.2 8.8

5.9% 7.1%

1.2 7.0% 2.1 10.0%

66.0% 52.4%

10.0% 6.9%

21.1% 14.0%

2.9% 2.1%

760

9.3

6.3%

2.8 10.0%

48.1%

0.9%

27.8%

3.3%

2,484 1,980 2,448 1,163 772 596 434 416

6.1 4.9 8.0 15.0 6.2 4.3 6.1 3.9

0.6% 5.0% 6.4% 6.1% 1.4% 3.0% 6.2% 18.8%

1.0 0.9 1.7 2.2 0.6 0.5 0.5 0.6

7.5% 8.2% 8.2% 7.0% 4.8% 8.2% 6.9% 7.6%

64.3% 64.9% 51.5% 70.2% 75.3% 70.0% 76.8% 65.4%

3.3% 3.8% 3.6% 6.4% 10.8% 8.8% 5.4% 6.8%

12.1% 11.9% 23.5% 11.1% 2.1% 7.2% 7.9% 12.5%

2.1% 1.3% 3.5% 2.7% 0.0% 1.5% 1.6% 1.5%

312

8.5 8.2

-0.1% 5.6%

0.4 1.8

9.6% 7.5%

62.3% 58.9%

10.9% 5.6%

-1.9% 18.8%

0.2% 2.2%

Sourc e: Joab’s Technologies and Research. Capital Equity Researc h

MICROFINANCE COMPARATIVES Bank Letshego Banco Parana

Listing BSE Sao Paulo SE

SKS Microfinance

Mumbai Sensex

African Bank International Ltd JSE Real People

Not listed

Bayport Management Limited Not listed

Mkt Cap/ BV (USDm) PER Div Yield 371 5.3 2.0% 667 9.0 3.8%

Cost/Income 23.2% 61.0%

Loan Loss Provisions/Advances Loans/Total Assets RoaA RoaE 1.7% 94.6% 21.0% 29.5% 3.2% 49.4% 4.4% 16.9%

618 19.2

n/a

64.0%

0.4%

74.0%

4.9% 21.5%

3,605 14.6

5.2%

42.0%

18.0%

66.0%

5.1% 15.5%

122 13.0

2.4%

112.0%

17.5%

29.0%

4.1% 13.3%

16 2.5

n/a

93.0%

11.8%

93.0%

6.0% 108.0%

11.7

3.8%

74.4%

10.2%

62.3%

4.9% 35.0%

Average

Source: Letshego/ Joab’s Technologies and Research. Capital Joab’s Technologies and Research.

We have evaluated the Letshego share using two separate matrices. First, we compared Letshego with regional banking groups in Botswana, Kenya and Nigeria. Though Letshego is not a deposit taking financial institution, we think our method is justified given the group’s aspirations to become one. However, our findings are that Letshego offers above-average returns (RoaA and RoaE), that are firmly in the 20s, versus an average RoaA of 2.2% and RoaE of 19%. In addition, the micro finance business is also attractive on the basis of healthy net interest margins (NIM) of around 26% and a below-average cost to income ratio of 23% versus an average of 59% for regional banking stocks. Second, we compare Letshego with similar micro-finance institutions (both listed and unlisted) operating in emerging markets.

These include African Bank International Limited, which is listed on the JSE and offers unsecured loans to lower and middle income segments and Bayport Management Limited, which is domiciled in Mauritius.

On a mark to market basis, Letshego is a clear favourite as it remains the cheapest on a standout 5.3x historic PER against an average of 11.4x. We also like the fact that the cost to income ratio is significantly lower despite the group’s pan African expansion drive. Furthermore, the low impairment ratios are largely due to the business model which ensures that group-wide recovery levels are maintained at about 95% While impairments are likely to increase on the back of new regulations in Botswana (the key market), we welcome the group’s initiatives of introducing credit-risk insurance in some of its markets.

Based on our FY 2012 estimates, we expect the group to register an eps of 26.3 thebe. Applying this to our adjusted PER average of 8.0x (for microfinance institutions), an educated guess would put the counter on a target price of BWP 2.08, implying 53% potential upside on the current trading price. We note that the share price had de-rated on the back of “negative news flow” in Botswana. However, we see an opportune moment to gain exposure.

Joab’s Technologies and Research, Natu Court Flat B.

Page 101 of 104

MICROFINANCE

LETSHEGO HOLDINGS

LETSHEGO FINANCIAL SUMMARY Income Statement (BWP 000)

A2005

A2006

A2008

A2009

A2010

A2011

F2012

F2013

5-Yr CAGR

Interest Income Interest Expense Net Interest Income Premium income Insurance fees Net Interest & Insurance income

134,735 (7,040) 127,695 127,695

170,352 (11,986) 158,366 158,366

278,357 (34,485) 243,872 243,872

398,311 (72,196) 326,115 326,115

588,836 (50,935) 537,901 537,901

721,900 (42,959) 678,941 30,696 (2,358) 707,279

851,565 (99,870) 751,695 58,423 (4,257) 805,860

1,064,456 (120,843) 943,613 61,344 (4,683) 1,000,274

40% 44% 40%

Operating Income Net Income before impairment and taxation Impairment (charge)/write-back Profit before taxation Taxation

140,723 114,885 5,155 120,040 (24,806)

185,391 141,995 (3,262) 138,733 (32,072)

314,315 233,108 (15,666) 217,442 (48,481)

418,563 318,111 (29,421) 288,690 (69,626)

703,180 555,397 (50,191) 505,206 (125,206)

823,156 665,673 (38,957) 626,716 (153,379)

925,951 724,565 (17,531) 707,034 (169,688)

1,137,271 878,156 (87,653) 790,503 (189,721)

42% 42%

95,234

106,661

168,961

219,064

380,000

473,337

537,346

600,782

38%

Profit for the year Income Statement Growth Measures Gross Interest Income Growth

26%

63%

43%

48%

23%

18%

25%

Net Interest Income Growth Operating Income Growth Op exp growth (%) NI Before Impairments & Tax Growth PBT Growth

24% 32% 68% 24% 16%

54% 70% 87% 64% 57%

34% 33% 24% 36% 33%

65% 68% 47% 75% 75%

26% 17% 7% 20% 24%

11% 12% 28% 9% 13%

26% 23% 29% 21% 12%

PAT Growth

58%

25%

39% 44%

30%

73%

14%

12%

Balance Sheet (BWP 000)

A2005

A2006

A2008

A2009

A2010

A2011

F2012

F2013

5-Yr CAGR

Assets Cash and cash equivalents Advances to customers Property, plant and equipment Total Assets

5,496 317,951 2,196 328,023

4,276 430,543 3,874 444,999

9,201 787,926 4,384 811,919

5,165 1,342,557 7,152 1,401,021

104,462 1,682,257 6,610 1,915,421

51,848 2,298,880 7,045 2,430,230

58,588 3,103,488 9,400 3,330,292

67,376 3,724,186 10,575 3,970,485

57% 49% 26% 49%

17,006 351 69,007 86,364

19,345 4,161 97,929 121,435

31,109 12,818 306,725 350,652

80,114 5,042 644,385 729,541

129,698 38,769 377,638 546,105

109,200 28,100 505,174 642,474

283,439 32,315 986,580 1,302,334

863,864 37,162 996,446 1,897,472

45% 140% 49% 49%

Total Equity attributable to Equity Holders Minority interest Total shareholders equity

241,659 241,659

323,564 323,564

459,673 1,594 461,267

667,067 4,413 671,480

1,347,498 21,818 1,369,316

1,749,601 38,155 1,787,756

1,980,264 47,694 2,027,958

2,022,934 50,078 2,073,012

49%

Total Liabilities & Equity

328,023

444,999

811,919

1,401,021

1,915,421

2,430,230

3,330,292

3,970,485

49%

Liabilities and Shareholders Equity Trade and other payables Taxation Borrowings Total Liabilitites Shareholders' Equity

12%

41%

Balance Sheet Growth Measures Growth in Advances Total Assets Growth Growth in Borrowings Growth in Total Liabilities

35% 36% 42% 41%

83% 82% 213% 189%

70% 73% 110% 108%

25% 37% -41% -25%

37% 27% 34% 18%

35% 37% 95% 103%

20% 19% 1% 46%

Growth in Shareholder's Equity

34%

43%

46%

104%

31%

13%

2%

49%

Ratio Analysis Basic EPS (thebe) DPS (thebe) Dividend Cover Dividend Yield

63.5 16.0 4.0 11.8%

71.0 18.0 3.9 13.2%

112.0 28.0 4.0 20.6%

144.6 30.0 4.8 22.1%

21.2 2.9 7.2 2.2%

25.8 2.7 9.5 2.0%

26.3 4.2 6.2 3.1%

29.4 6.5 4.5 4.8%

Cost/Income Ratio

20.2%

27.4%

33.3%

30.8%

27.5%

23.2%

26.8%

27.5%

Asset Quality Ratios Impairments/gross loans

-1.6%

0.8%

2.0%

2.2%

3.0%

1.7%

0.6%

2.4%

Impairments/ PBT

-4.3%

2.4%

7.2%

10.2%

9.9%

6.2%

2.5%

11.1%

Capitalisation Ratios Equity/Total Assets

74%

73%

57%

48%

71%

74%

61%

52%

Loans/Total Assets

97%

97%

97%

96%

88%

95%

93%

94%

Return Ratios RoaA

29%

28%

27%

20%

22%

21%

18%

16%

RoaE

39%

38%

43%

38%

37%

30%

28%

29%

Capital Structure Debt/Equity Ratio

29%

30%

67%

97%

28%

29%

50%

49%

Margins Net Interest Income Margin PBT Margin PAT Margin

40% 89% 71%

37% 81% 63%

31% 78% 61%

24% 72% 55%

32% 86% 65%

30% 87% 66%

24% 83% 63%

25% 74% 56%

Effective Tax Rate 21% 23% 22% 24% 25% 24% Notes: In 2007, the Group changed its financial year-end from October to January. As a consequence 2008 was a 15 month period.

24%

24%

Joabâ&#x20AC;&#x2122;s Technologies and Research.

Page 102 of 104

MICROFINANCE

LETSHEGO HOLDINGS

MODEL ASSUMPTIONS

    

 

 

For FY 2012, we expect financial performance for H2 2012 to be in line with H1 2012, as per management guidance;



We expect the growth in earnings to be largely driven by the growth in the loan book as well as management efforts of controlling costs; We expect impairments to increase in FY 2013, reflecting the effect of the new collection methods in Botswana;





We expect a gradual rise in the company’s cost to income ratio on the back of transformational costs associated with new collection methods in Botswana s well as the group’s strategy of converting to a deposit-taking banking unit. Transformational costs include installation of IT platforms, cash handling training, and installation of security features.

We do not expect MAL, the Kenyan unit to contribute significantly to profitability in the short term.



We expect the Debt/Equity Ratio to gradually increase as the company funds its expansion drive, largely through debt financing;



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The material prepared by Joab’s Technologies and Research. Capital Research LIMITED ("JOAB’S TECHNOLOGIES AND RESEARCH.") is our opinion.

JOAB’S TECHNOLOGIES AND RESEARCH. believes that it fairly and accurately represents the subject matter reported upon. This communication is neither an offer to sell, nor a solicitation of an offer to buy or sell, any financial instrument mentioned herein. The text, images, and other materials contained or displayed on any JOAB’S TECHNOLOGIES AND RESEARCH. product, service, report, e-mail, or website are proprietary to JOAB’S TECHNOLOGIES AND RESEARCH. and constitute valuable intellectual property. This report is issued only for the information of, and may only be distributed to professional investors, or major institutional investors (as defined in Rule 15a-6 of the US Securities Exchange Act of 1934), and dealers in securities. This publication is confidential and for the information of the addressee only and may not be reproduced in whole or in part, nor copies circulated to any party, without the prior written consent of JOAB’S TECHNOLOGIES AND RESEARCH..

JOAB’S TECHNOLOGIES AND RESEARCH. accepts no liability for any loss resulting from the use of the material presented in this report. This disclaimer of liability may be prohibited, or limited, by specific statutes, laws, or regulations. JOAB’S TECHNOLOGIES AND RESEARCH. affiliates, shareholders, directors, officers, partners, and consultants shall have no liability, contingent or otherwise, for any claims or damages arising in connection with any errors, omissions, or inaccuracies. This report is not to be relied upon in substitution for the exercise of independent judgment. JOAB’S TECHNOLOGIES AND RESEARCH. may have issued, and may in the future issue, reports that are inconsistent with, and which reach different conclusions than, the information presented in this report. Reports may reflect different assumptions, views, analytical methods, and analysts who prepared them, and no part of the analysts compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. All views, opinions, and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results and should not be taken as an indication or guarantee of future performance. No warranty, express or implied, is made regarding such performance. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor.

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JOAB’S TECHNOLOGIES AND RESEARCH. personnel, or other professionals, may provide oral or written commentary or trading strategies to our clients that reflect opinions that are their own and are contrary to the opinions expressed in JOAB’S TECHNOLOGIES AND RESEARCH.’s research.

JOAB’S TECHNOLOGIES AND RESEARCH. is under no obligation to ensure that such other reports are brought to the attention of any recipient of any report. JOAB’S TECHNOLOGIES AND RESEARCH. and its respective affiliates, officers, directors, partners, and consultants, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication.

To the extent applicable and permitted by law or regulation, JOAB’S TECHNOLOGIES AND RESEARCH. believes that the direct author of this report has no position in, fiduciary interest proscribed, nor has been compensated by the subject(s) of this report, or other entities for the content, other than through direct compensation by JOAB’S TECHNOLOGIES AND RESEARCH.. © JOAB’S TECHNOLOGIES AND RESEARCH. Capital Joab’s Technologies and Research. 2011

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Joab’s Technologies and Research. Capital Joab’s Technologies and Research. Contributing Team

Joab’s Technologies and Research, Capital Joab’s Technologies and Research.

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Page 103 of 104

Joab’s Technologies and Research. Capital Research Disclaimer Notice The material prepared by Joab’s Technologies and Research. Capital Research ("JOAB’S TECHNOLOGIES AND RESEARCH.") is our opinion. JOAB’S TECHNOLOGIES AND RESEARCH. believes that it fairly and accurately represents the subject matter reported upon. This communication is neither an offer to sell, nor a solicitation of an offer to buy or sell, any financial instrument mentioned herein. The text, images, and other materials contained or displayed on any Joab’s Technologies and Research. product, service, report, e-mail, or website are proprietary to Joab’s Technologies and Research. and constitute valuable intellectual property. This report is issued only for the information of, and may only be distributed to professional investors, or major institutional investors (as defined in Rule 15a-6 of the US Securities Exchange Act of 1934), and dealers in securities. This publication is confidential and for the information of the addressee only and may not be reproduced in whole or in part, nor copies circulated to any party, without the prior written consent of JOAB’S TECHNOLOGIES AND RESEARCH..

JOAB’S TECHNOLOGIES AND RESEARCH. accepts no liability for any loss resulting from the use of the material presented in this report. This disclaimer of liability may be prohibited, or limited, by specific statutes, laws, or regulations. Joab’s Technologies and Research. affiliates, shareholders, directors, officers, partners, and consultants shall have no liability, contingent or otherwise, for any claims or damages arising in connection with any errors, omissions, or inaccuracies. This report is not to be relied upon in substitution for the exercise of independent judgment. JOAB’S TECHNOLOGIES AND RESEARCH. may have issued, and may in the future issue, reports that are inconsistent with, and which reach different conclusions than, the information presented in this report. Reports may reflect different assumptions, views, analytical methods, and analysts who prepared them, and no part of the analysts compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. All views, opinions, and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results and should not be taken as an indication or guarantee of future performance. No warranty, express or implied, is made regarding such performance. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor.

All representations, information, opinions, and estimates contained in this report reflect a judgment of the analyst, effective as of its original date of publication by JOAB’S TECHNOLOGIES AND RESEARCH., and are subject to change without notice. The price, value of, and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities and other instruments, the values of which are influenced by currency volatility, must assume this risk.

Joab’s Technologies and Research. personnel, or other professionals, may provide oral or written commentary or trading strategies to our clients that reflect opinions that are their own and are contrary to the opinions expressed in JOAB’S TECHNOLOGIES AND RESEARCH.’s research. JOAB’S TECHNOLOGIES AND RESEARCH. is under no obligation to ensure that such other reports are brought to the attention of any recipient of any report. Joab’s Technologies and Research. and its respective affiliates, officers, directors, partners, and consultants, including persons involved in the preparation or issuance of this report do NOT: (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report ; and (iii) acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report. ©Joab’s Technologies and Research. Capital Research 2011