ict presentation

East Africa’s ICT Outlook

As at July 23rd, 2015

Harnessing Possibili�es in East Africa’s Digital Economy

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A financial Advisory Company

Harnessing the Possibilities in East Africa’s Digital Economy

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Contents

Key Market Trends

Uganda

Kenya

Rwanda

Ethiopia

Tanzania

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01

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Key Market Trends

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East Africa Leads in FDI AccelerationDespite posting the lowest level of FDI inflow in 2014, Eastern Africa (including Ethiopia, Eritrea and Djibouti) registered the second fastest growth, in the same, both on a year-on-year basis and between 2009 and 2014. Eastern Africa’s future in FDI inflows looks promising given the growing attraction by consumer facing sectors as opposed to the traditional extractives that dominates West, Central and Southern Africa.

NOTE

Some of the key FDI deals in 2014 were the purchase of a 40.0% stake of East Africa’s largest milk processor, Brookside, by French food company Danone and China’s Jiangsu Lianfa’s investment into Ethiopia’s textile industry (the company now plans to build a USD 500.0 Mln factory in Ethiopia)

North AfricaEastern AfricaSouthern AfricaCentral AfricaWest Africa

Source: UNCTAD World Investment Report 2015, Ventures Africa, StratLink Africa

Region FDI Inflow 2014 (USD Mln)

2013 – 2014 Variance

2009 – 2014 Variance

Central Africa

Eastern Africa

Southern Africa

West Africa

North Africa

12,056.2

6,794.0

10,757.8

12,763.0

11,541.1

+33.4%

+10.8%

--2.4%

--10.2%

--15.0%

+11.7%

-2.1%

--2.3%

--8.6%

+16.4%

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Increasing FDI Channeled to ICT

Foreign Direct Investment into Africa by Sectors

Telecommunications, Media and Technology (TMT), Financial Services and Retail have registered strong growth in their share of FDI into Africa in the last decade, coinciding with a decline in the share of the Extractive Industry (Metals, Mining, Coal, Oil and Natural Gas). This is in line with growing consumption in Africa and the increasing integration of information, communication technology into the continent’s economy.

NOTE

Investment into the Extractive Sector has been negatively impacted by depressed oil prices in the global market that has left investors jittery.

Source: Ernst & Young Global Attractiveness Surveys, StratLink Africa

24.0%

14.0%

12.0%12.0%

38.0%

2003 - ‘07

5.0%20.0%

17.0%

15.0%

53.0%

2013

3.5%19.6%

14.1%

18.1%

44.7%

2014

Retail & Consumer Products

TMTFinancial Services

Others

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ICT Emerges as a Major Growth CatalystInformation, Communication and Technology has become a pronounced game changer in Africa’s economy over the last decade. Cellphone centric innovations (such as Kenya’s M-Pesa and Ghana’s Hellofood Application) have catalyzed economic activity and continue to engender new perspectives of the possibilities of linking ICT and Commerce.

How ICT is Changing Africa’s Economic Landscape

2013 2025(Forecast)

NOTE

In 2011, Africa became the second largest mobile phone market (by connections) after Asia. Between 2006 and 2011, connections grew at an average rate of 20.0% per annum

Source: McKinsey, GSMA, StratLink Africa

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Economic Outlook, Kenya02

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Economic Outlook: Weathering Monetary HeadwindsCore View:

Economic - Growth momentum is likely to remain moderated (from the 2010 high of 8.4%) in 2015. Q1, 2015 GDP growth (at 4.9%) suggests the economy is punching within its ‘new normal’ terrain (4.7% - 5.3%) and is likely to remain within the band in the subsequent quarters of 2015 following contractionary monetary policy from the Central Bank. Risks in the monetary environment (weak shilling and rising inflation) will remain elevated in the near term owing to domestic and external factorsPolitical - We are guardedly optimistic about the political risk environment owing to lurking terror threat and antagonism between the Central and County Governments over devolved functions

100

86.5

88.5

90.5

92.5

94.5

96.5

98.5

100.5

102.5

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4

14-S

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4

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4

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Kenya Shilling vs USD

-16.9%Year-on-year depreciation

• Bloomberg - 6.0%• IMF - 6.5% (June 2015, following a downward revision from 6.9%)• World Bank - 6.0%

GDP Growth Forecasts for 2015

• The weakening of the shilling is both relative and structural. It is relative in the sense that it is driven, to a large extent, by the greenback’s rally in view of an improving economic climate in USA with widespread expectation of a hike in in the Fed Funds Rate before the end of 2015. It is structural in the sense that it is, in part, driven by a deteriorating current account deficit

• We assess 74.0% probability that the shilling will close Q3, 2015 in the range 102.5 – 106.1 to the greenback and 78.1% chance that it will close Q4, 2015 in the 103.8 – 108.2 range

• The weakening shilling could translate into diminished sales, notably for imported products, as consumers’ purchasing power is depressed

Source: Kenya National Bureau of Statistics, Bloomberg, International Monetary Fund, World Bank, StratLink Africa

Kenya

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Weakening Shilling Constricts Kenyans’ Purchasing Power

-16.9%Margin by which the shilling’s purchasing power has declined with each dollar spend between July 2014 and July 2015

July 2014 =$1.0

Sale Kes 87.0Spend by Kenyan Consumer

July 2015 =$1.0

Sale Kes 102.6Spend by Kenyan Consumer

We assess 74.0% probability that the shilling will close Q3, 2015 in the range 102.5 – 106.1 to the greenback and 78.1% chance that it will close Q4, 2015 in the 103.8 – 108.2 range.

Forecast

Kenya

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ICT Solutions – Bridging the Informal Economy GapKey leverage - ICT solutions have become a game changer in the government’s quest to formalize hitherto informal segments of the economy. Despite considerable strides made on this front, we expect it to continue presenting a frontier for growth and expansion of ICT solutions driven firms. Since the roll out of the debut mobile money platform in 2007, the proportion of adult Kenyans excluded from formal financial services and those relying on informal services has steadily declined.

Source: GSMA, ICT Authority, Kenya National Bureau of Statistics, Institute of Economic Affairs, Kenya ICT Board, StratLink Africa

Access to Financial Services by Type

2006 2009 2014

Formal Informal Excluded

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

25.5%Market Opportunity:




Percentage of adult Kenyans that cannot access any form of financial service.

27.4%41.3%

66.7%

7.8%

27.2%

33.3%

39.3%31.5%

25.5%

Estimated size of the informal economy as a percentage of GDP. The government is pursuing ways of roping this segment into the formal economy.

Key Market Developments:• ICT has been growing faster than any other segment of the economy in the

last five years • On March 5th, 2015, the government launched a Public-Private Partnership

platform dubbed ‘Enterprise Kenya’ to spur the growth of an ICT driven innovations ecosystem

• Budget 2015/16 allocated USD 2.5 Mln towards the Digital Talent Project that aims at harnessing ICT skills in the population and channeling the same towards devising solutions for day-to-day challenges

Kenya

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03 Economic Outlook, Uganda

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Economic Outlook: External Environment Subdues OutlookCore View:

Economic - An adverse external environment renders the country’s economic outlook rather tepid (by Uganda’s growth standards) with 2014 growth having stood at 4.9% against an average of 6.8% between 2009 and 2014. We anticipate elevated risk from an adverse external position characterized by turmoil in South Sudan (one of the country’s main export markets) and depressed commodity prices affecting coffee (17.0% of export earnings). The shilling has come under immense pressure from the greenback and we expect further monetary tightening by Bank of Uganda (in July the monetary rate was hiked to 14.5%) in a bid to arrest an upward nudge in inflation Political - Uncertainty lurks in the horizon as temperatures rise ahead of the 2016 Presidential ballot as incumbent Museveni confronts mounting pressure from the opposition for an end to his 28 year rule.

• We assess a 78.0% probability that the shilling will close Q3, 2015 in the range 3,332.5 – 3,604.1 to the greenback, and a 71.2% chance it will close 2015 in the range 3,429.0 – 3,801.5FX Risk

The country is taking measures indicative of an attempt to woo oil investors in a price precarious environment. In May 2015, the government announced that firms would be exempt from Value Added and Withholding Tax whilst in the exploration phase. This came on the back of reports that companies were slashing exploration budgets in view of depressed prices in the global market.

8.5%

10.5%

12.5%

14.5%

16.5%

18.5%

20.5%

22.5%

24.5%

-3.0%

2.0%

7.0%

12.0%

17.0%

22.0%

27.0%

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15Monetary Rate vs Inflation

Inflation Monetary Policy Rate (RHS)

Source: Bank of Uganda, Bloomberg, StratLink Africa

Monetary Rate vs Inflation

Uganda

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ICT Market: Hinging on E-Government StrategyKey Leverage - The e-government strategy, largely executed through Public Private Partnerships, has defined the ICT market in the last decade and is bound to remain so in the near term in the spirit of providing an innovative approach to tailoring pro-poor socio-economic policies. Mobile phone subscriptions continue to rise and indicate that this will remain a major change agent in commerce in the economy.

Mobile Phone Subscriptions (Mln)

0.0

5.0

10.0

15.0

20.0

25.0

2001 2003 2005 2007 2009 2011 2013 2015(f)

Points of Note:

• The government has partnered with private sector bodies in establishing ICT training centers and cyber cafes across districts

• Uganda Communications Commission (UCC), through the Rural Communications Development Fund, is reported to be subsidizing installation of Internet Points of Presence (IPoP) in a bid to boost internet penetration especially among the rural population (Available data from Global Information Society Watch indicates 32.0 districts have been covered under this program)

• UCC is also reported to be at the forefront of establishing District Information Portals to ease information sharing between state and non-state actors in development efforts

Source: Global Information Society Watch, Research ICT Africa, StratLink Africa

Uganda

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04 Economic Outlook, Rwanda

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Economic Outlook: Resilient Recovery, Low ConsumptionCore View:

Economic - The economy is exhibiting resilient recovery after the 2012/13 donor aid shock that decelerated growth to 4.6% in 2013. We anticipate diminishing susceptibility of the economy to aid shocks in the medium to long-term based on decreasing reliance on external funding for fiscal needs. The country continues to rank high in the World Bank Ease of Doing Business Index but we note that comparatively low spending power is likely to render markets such as Kenya more attractive

Political - The political climate is characterized by high risk perception notably from President Kagame’s likely bid for a third term in office. On July 14th, 2015 the parliament passed a motion that would allow Kagame to seek a third term if endorsed through a referendum. Whereas this, in a sense, dissipates succession jitters in the short-term, it is bound to evoke grave concerns over Rwanda’s preparedness for political transition in the long-term.

External Funding as % of National Budget Private Final Consumption (USD Bln)

Source: Ministry of Finance Data, Business Monitor International, StratLink Africa

35.0%

37.0%

39.0%

41.0%

43.0%

45.0%

47.0%

49.0%

51.0%

53.0%

2008/09 2010/11 2012/13 2013/14 2014/15

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2009 2010 2011 2012 2013 2014Ethiopia Kenya Rwanda Tanzania Uganda

Rwanda posts EA’s lowest private final consumption that has exhibited minimal growth in the last five years

Rwanda

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Financial Services - The government is pursuing a cashless economy with mobile money being viewed as a choice platform through which this target can gain traction. ICT Solution providers should invest in generating new innovations that can farther gains made.

Education ─ Rwanda is reported to have the fastest growing One Laptop Per Child project in Africa with an estimated 500 schools benefiting from the scheme. In 2013, the government in partnership with Samsung Electronics rolled out the ‘Solar Power Internet School’ Project aimed at meeting the growing need for smart ICT solutions in institutions of learning.

Agriculture ─ Deployment of ICT solutions in agriculture looks promising for investors given the role the sector plays in the larger economy. In Kenya, the innovation of a mobile phone application dubbed ‘M-Farm’ has eased information sharing thereby boosting the deployment of extension services via a digital platform. In Rwanda, farmers are benefiting from the e-soko platform which is a market price information sharing system.

ICT: Three Sectors to Watch

Source: onelaptop.org, Ministry of Youth and ICT Rwanda, esoko.gov.rw, StratLink Africa

500 schools

1 LaptopPer Child

Rwanda

0.0

100,000.0

200,000.0

300,000.0

400,000.0

500,000.0

600,000.0

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

2011 2012 2013 2014 (f)

Mobile Money Dynamics

Mobile Money Subscribers (LHS)

Value of Mobile Money Transactions (USD '000)

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05 Economic Outlook, Tanzania

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Economic Outlook: Dimmed Short-term, Bullish Long-termCore View:

Economic - The passage of the contentious Petroleum Bill on July 05th, 2015 has eclipsed a sense of uncertainty around the country’s vast natural gas reserves (55.0 Trillion Cubic Feet) that was unsettling would be investors. In light of this, the extractive sector is bound to turbo charge economic growth in the long-term. In the short-term, however, we expect monetary headwinds characterized by a weakened shilling to inflict lethargy on overall growth in 2015. Fiscal pressures remain a challenge in the near term following the with-holding of development partners’ support in view of an energy scandal that implicated high ranking state officials.

Political - Indefinite postponement of the much awaited constitutional referendum earlier slated for April 2015 has deteriorated the country’s political risk profile. A new constitutional dispensation was widely viewed as a prerequisite for an electoral climate of enhanced freedom and fairness in October 2015 polls.

Tanzania Shilling vs USD

• We assess 83.5% probability that the shilling will close Q3, 2015 hovering in the 1,914.9 – 2,439.0 band to the greenback and an 87.0% chance it will close 2015 within the 1,883.3 – 2,566.4 band.FX Risk

Source: Bloomberg, Bank of Tanzania, Reuters, StratLink Africa

Tanzania

1,550.0

1,650.0

1,750.0

1,850.0

1,950.0

2,050.0

2,150.0

2,250.0

2,350.0

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Shilling reacts to 200.0 bps hike of cash reserve ratio to 10.0% by Bank of Tanzania on May 21st, 2015

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ICT: From Inclusion to InnovationKey Leverage - The National ICT Broadband Backbone, rolled out in 2009 with the aim of boosting integration of citizens into the ‘technological superhighway’ that internet is , remains the anchor of the country’s ICT landscape. Mobile phone subscriptions appear to be reaching a ceiling* and we anticipate the government will begin to gradually shift policy focus from ‘ICT inclusion/integration’ to innovation centers - Out of Africa’s top 100 technology hubs in 2014, Tanzania had five compared to Kenya’s eight (Uganda has four, South Africa has seventeen).

Source: Research ICT Africa, World Bank 2014, StratLink Africa

• iHub• Aro Fab• m:Lab East Africa• Start-Up Garage• GrowthHub• NokiaHub• @iLab Africa• NaiLab

KenyaUganda

Tanzania

• @TheHub• Outbox• Hive Colab• AppLab

• Kinu• CosTech• Dar es Salaam

Innovation Space• TANZICT Innovation

Space• Dar Tekinohama

Business Incubator

*We note that the government introduced SIM card registration and this could have decelerated subscriptions

Tanzania

-3,000,000

2,000,000

7,000,000

12,000,000

17,000,000

22,000,000

27,000,000

2005 2007 2009 2011 2013

Tanzania Shilling vs USD

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06 Economic Outlook, Ethiopia

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Economic Outlook: Moderating but High GrowthCore View:

Economic - Ethiopia remains one of the world’s fastest growing economies buoyed by a state driven economic model. We expect growth to remain moderated, albeit remaining in the high 7.0% - 9.0% growth band, in 2015 owing to the prospect of decelerating demand from key emerging markets such as China and India as well as low commodity prices that have depressed export earnings from coffee (28.0% of export earnings)

Political - A peaceful pre and post-election that saw the ruling EPDRF party claim overwhelming victory placed the country’s risk profile in favourable light. However, concern remains rife over the country’s anti-terror legislation which has seen journalists and bloggers arrested.

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

7.5%

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(f)

Economic Growth vs Govt Expenditure Growth

Real GDP Growth Govt Expenditure Growth (RHS)

120.0

125.0

130.0

135.0

140.0

145.0

150.0

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15

Coffee Price (US Cnts/lb)Coffee Price (US Cnts/lb)Economic Growth vs Govt Expenditure Growth

Source: International Coffee Organization, Business Monitor International, StratLink Africa

Ethiopia

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ICT: On the Cusp of Something GreatKey Leverage - Ethiopia has a vastly untapped ICT market that will present enormous opportunity (given its large population and rapidly growing economy) subject to market liberalization by the government. Ethiopia posts some of the lowest rates of financial and telecommunication services penetration (even by Sub-Saharan Africa) which will be major attraction points for ICT investors in the long-term. Market indicators suggest the government is gradually liberalizing key sectors of the economy.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

ATMs per 100,000 adults ATMS per 1,000 km2

Automated Teller Machine Penetration

Ethiopia Kenya Tanzania Uganda

Ethiopia

Signs of Progress:• The country’s pioneer mobile money platform, M-Birr, went live in

January 2013 as Ethiopia rushed to catch up with regional peers such as Kenya. In February 2015, a partnership between Lion International Bank, Somali Microfinance and Ethiopia based BelCash Technology launched HelloCash Mobile Money

• In November 2013, the government opened up electricity generation and distribution to private investors. Prior to this, the state owned Ethiopia Electric Power Corporation was solely handling electricity generation, transmission and distribution

• In December 2014, the Central Bank gave the green-light to Dashen Bank to roll out the country’s pioneer agency banking platform

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DisclaimerBy accepting this document, the recipient agrees that the use of this Report shall be subject to the terms of such confidentiality undertaking and that:

1. This Report is not intended to be a complete summary of the ICT sector. The information and opinions contained in this Research Report (which shall be deemed to include information that has been or may have been supplied verbally or in writing in connection herewith or in response to related inquiries) are provided as of the date hereof and the surrounding circumstances and facts are subject to change with time.

2. The data which is largely the basis of this report has been analysed as sourced. Whilst StratLink and its affiliates have exercised due care and diligence to test the accuracy and reasonableness of the data, StratLink does not consider themselves as an ICT expert and provide no assurance that the data is error proof.

3. Matters discussed in the Report may constitute forward-looking statements or projections. Forward-looking statements or projections are not statements of historical fact and can often be identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “will,” “may,” “continue,” “should” and similar expressions. Forward-looking statements include statements regarding: objectives, goals, strategies, outlook and growth prospects; future plans, events or performance and potential for future growth; economic outlook and industry trends; developments in markets and the impact of regulatory initiatives. The forward-looking statements in this Report are based upon various assumptions and subjective judgments, many of which are based, in turn, upon further assumptions and subjective judgments, including, but not limited to data available from third parties. Although StratLink believes that these assumptions were reasonable when made, these assumptions are inherently subject to significant known and unknown risks, uncertainties, contingencies and other important factors which are difficult or impossible to predict. Such risks, uncertainties, contingencies and other important factors may cause the actual results to differ materially from those results expressed or implied in this Research Report by such forward-looking statements. Such risks, uncertainties, contingencies and other important factors include, among other things: political and social developments; general economic, market and business conditions.

4. No person is authorized to provide any information or make any statements with regard to the Report other than the recipient as presented in this Report. If such information is provided or such statement is made, it should not be relied upon as information or statements authorized by StratLink.

5. This Report is not intended to form the basis of any investment decision. Any decision regarding any proposed investment or other purpose must be made solely on the basis of updated market information and independent judgement of the recipient at the time of decision.

6. This Report does not constitute or form part of, and should not be construed as, an offer or solicitation to making other investments in the countries covered or in any other territory.

7. This Report may not be used in any jurisdiction where such use is not authorized or is unlawful. The distribution of this Research Report in certain jurisdictions may be restricted by law. Persons into whose possession this Report may come are required to inform themselves about and to observe such restrictions.

8. This Report is intended for a limited audience only and is not for public distribution, or disclosure to any third party. Failure to comply with this restriction may constitute a violation of applicable laws.

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StratLink - Africa, Ltd

Delta Riverside, Block 4, 4th Floor Riverside DriveP. O. Box 1563 - 00606 Sarit Centre Nairobi, Kenya Email: [email protected]: +254 20 2572803/4/5 www.stratlinkglobal.com

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