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Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com

Standard Chartered Africa Focus | 03 June 2011

Beyond the hype

Highlights • Enthusiasm about African growth has come into its own, with many

recognising the region’s growth potential. This is playing out on a global level. South Africa’s membership in the BRICS grouping, India’s pledge of a USD 5bn package for Africa, and continued strong Chinese-African engagement are all signs of this.

• While African growth looks set to return to pre-crisis trend levels, inflation is a key near-term risk factor. Despite doubts about monetary policy transmission, many central banks will be forced to tighten, using blunt tools such as the cash reserve ratio if necessary. With yields in Africa undergoing a sharp correction, portfolio investor interest is back.

• African rates – We recommend long positions in Nigeria and Zambia. We are neutral on Ghana after taking profit on our 3Y trade. We remain cautious on Kenya and Uganda given the inflation outlook, which should put further pressure on local yields.

• Politics remain a key theme. Following elections in Nigeria, anticipation of further reform is running high. We examine the effort to move Nigeria away from a cash-based economy, and its implications. Local elections in South Africa suggest that the ANC still enjoys strong support as the party of liberation, but economic issues are increasingly important. In Botswana, public-sector strikes are now into their seventh week, with mounting risks to the GDP growth outlook. Nonetheless, regional momentum is strong, with growth acceleration more the norm than the exception.

Contents

Global overview: Living in interesting times 2-3

Regional overview: Beyond the hype 4-5

African rates: Overview 6-8

Economy insights:

Angola: Governance matters 9

Botswana: Winter of discontent 10

DRC: In recovery mode 11

Gambia: Growing threat of debt distress 12

Ghana: Today’s fiscal imbalance, tomorrow’s inflation 13

Kenya: Inflation susceptibility 14-15

Mauritius: Policy dividends drive recovery 16

Nigeria: Into the 21st century 17-18

Sierra Leone: Inflation bites 19

South Africa: Still black and white 20

Tanzania: Regional drought exacerbates inflation outlook 21

Zambia: Exploring the ZMK-copper correlation 22

Forecasts 23-25

Standard Chartered Africa Focus Global overview – Living in interesting times Marios Maratheftis, +9714 508 3311 Marios.Maratheftis@sc.com

02 June 2011 2

Growth, inflation and policy Introduction This year, Asia has faced the challenge of dealing with inflation and hot money inflows. In the US, meanwhile, the main challenge has been to promote growth. The policy response in Asia seems to have had some impact, with signs that China is finally slowing down. Just as there are signs that US inflation is bottoming out, there are indications in parts of Asia that inflation will soon begin to peak. The world has been hit by significant shocks in a very short period of time, ranging from the geopolitical events in the Middle East to the earthquake and tsunami in Japan. There has been an economic impact, and even though the situation in the Middle East is stabilising (or at least not escalating), there are still significant risks ahead. These include the end of quantitative easing (QE2) in the US and uncertainty regarding raising the US government debt ceiling. Add to these uncertainties the fact that US core inflation is slowly beginning to trend higher, and one can expect US Treasury yields to start rising from their current lows. Any move in yields is likely to impact currencies. When it comes to risks, the euro area looks increasingly like a car accident in slow motion. Even though the German economy remains robust, there are concerns over the sovereign-debt situation in southern European countries. This is back in focus following renewed concerns over the sustainability of Greece’s debt and Italy’s sovereign outlook downgrade by Standard & Poor’s. European debt concerns are here to stay.

Growth and inflation China’s tightening policy seems to be paying off, with signs of deceleration in economic activity and inflation. We expect a further slowdown in industrial production in the coming months. Markets have been concerned about inflation in China; slower economic activity has also led to short-term market jitters, even though this was the result of tighter policy (put in place to tackle inflation). While policy measures seem to be having the desired effect in China, inflation is still at the top of the policy agenda in India. The latest interest rate hike by the Reserve Bank of India was larger than expected. Further hikes look inevitable, despite concerns about growth. US Q1 GDP was much weaker than earlier anticipated; we expect growth to remain relatively weak for H1. Inflation, however, is bottoming out, with core inflation trending moderately higher. Slower growth was partly the result of higher oil prices amid elevated geopolitical risk in the Middle East. Although the situation in Libya and Syria is still fluid, the market is finding some comfort in the fact that there was no significant spillover into Saudi Arabia, OPEC’s swing producer. Oil prices have softened, following a reversal in risk appetite on the back of softer data from the US and China. We see this as a retracement rather than a reversal, with fundamentals remaining robust, especially when one considers the power-sector constraints in China. There should be significant developments on the US policy front. Quantitative easing was perhaps the main factor that stopped US money supply from contracting, as credit growth was declining at the fastest rate ever recorded. The Fed has announced that QE2 will come to an end in June. The hope is that private-sector credit growth will resume, ensuring that money-supply growth remains positive. One has to remember that nominal contractions in money supply are associated with recessions, not recoveries. The last time the US underwent a nominal contraction in its money supply was in the 1930s, during the Great Depression. It is also worth noting that Greece is experiencing a contraction in its domestic money supply at the moment. There are additional challenges for US policy makers. The US government has hit its USD 14.3trn debt ceiling, and Congress will have to raise the limit by 2 August in order for the US to avoid a default.

Chart 1: US consumer credit Credit conditions begin to improve

Sources: Bloomberg, Standard Chartered Research

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Standard Chartered Africa Focus Global overview – Living in interesting times

03 June 2011 3

It looks increasingly likely that it will take a last-minute agreement to resolve the situation. While we only expect the Fed to signal interest rate hikes in Q1-2012 before hiking in Q3, market interest rates could begin to edge higher earlier. The end of QE2, together with the bottoming out of inflation and the political uncertainty regarding the debt ceiling, could drive market interest rates higher from their current multi-year lows.

Impact on currency markets Of the several factors that affect currencies, interest-rate differentials are the single most important one impacting major currencies such as the euro (EUR) (see Chart 2). The rebound in the EUR over the past few months has been consistent with the interest-rate differential between the US and Germany. However, there are times when the relationship between rate differentials and the EUR is not as strong, with other factors coming into play. We are currently entering such a phase, as the market is becoming increasingly concerned about the debt situation in southern European countries. Greece faces significant challenges. Its fiscal deficit has widened YTD and looks likely to continue to do so as debt interest-rate payments increase. Government debt to GDP exceeded 150% in Q1; given that another nominal contraction in the economy looks likely, it is set to rise further. With yields on 10Y Greek government debt over 17%, it is increasingly difficult to see how Greece could access financial markets in 2012. There are also signs that the public is beginning to suffer from austerity fatigue, at a time when public opinion in countries such as Finland and Germany is becoming less supportive of future bailouts of troubled countries. This highlights a fundamental limitation of the euro area: there is one monetary policy for countries that face different business cycles.

Germany’s 2010 growth was the highest since the country’s reunification, and the economy has continued to exhibit robust fundamentals this year. In contrast, Ireland, Italy, Spain, Portugal and Greece are facing significant challenges. Greece is in desperate need of a significant real devaluation of its currency in order to restore competitiveness and help with the economic adjustment. In the absence of currency flexibility, all of the adjustment in the real exchange rate has to happen through the real economy, leading to a deep recession and higher unemployment. Given these significant challenges, we expect Greece to proceed with a soft restructuring of its debt by 2012 by extending maturities, but to avoid haircuts that could lead to problems in its domestic banking sector. There may be more finance forthcoming from EU governments, but only in conjunction with further austerity measures from Greece and ‘voluntary’ agreements from creditor banks to roll over maturing debt. This, however, will require agreement from all involved parties, in the absence of which Greece might have no other choice than to go ahead with a hard restructuring and significant haircuts. The EUR is entering a riskier phase. Interest-rate differentials have so far been supportive, but we expect the EUR to soften in H2 as yield differentials begin to change and as debt concerns weigh on the common currency. A slowdown in global growth and the end of the Fed’s QE2 programme are also likely to provide some broad support for the US dollar (USD) in the coming months. Interest-rate differentials are also significant when it comes to the Japanese yen (JPY). The JPY has been relatively strong on the back of repatriation flows, which were both seasonal and the result of reconstruction needs following the earthquake and tsunami. The JPY has been used in the past as the funding currency for carry trades, with the currency experiencing a strong rebound when those trades were being unwound in 2008-09. With ultra-low rates in the US, however, the USD was increasingly used as a funding currency. Changes in US yields, when they come, are therefore likely to have an impact on the JPY, given that Japan is unlikely to change its interest-rate policy any time soon.

Chart 2: EUR-USD vs. interest-rate differential EUR is usually an interest-rate play

Source: Standard Chartered Research

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Standard Chartered Africa Focus Regional overview – Beyond the hype

02 June 2011 5

on retained earnings than on banks to finance their activity, calling into question the activity-dampening effects of higher interest rates. But inflation, especially if sustained, will cut real disposable incomes in a direct way, with a negative impact on consumption growth. Even given doubts about the transmission of monetary policy, African policy makers will have to react to the threat of higher inflation. Increases in cash reserve ratios are a key theme in 2011. The record on monetary tightening so far in Africa has been varied, with Nigeria moving aggressively to tighten policy (although real interest rates remain negative), and other central banks opting for a more measured approach. Interestingly, all the hype about Africa’s growth prospects has yet to translate into meaningfully higher portfolio flows. The poor liquidity of many African frontier markets is only one factor. For many investors, yields in the African frontier market space have not been attractive enough to compensate for liquidity risks. This is now changing.

On the policy front, the hope is that cyclically higher interest rates will not impede the structural shift that is underway, with improvements in financial-sector development. Kenya has led the way in this regard with its innovative approach to financial intermediation. But Nigeria, about to embark on ambitious plans to move away from its cash economy, looks set to benefit strongly too. Finally, events in the Middle East and North Africa region have cast the spotlight firmly on political risk. Sub-Saharan Africa will not be immune to this. While headline growth has bounced back comfortably since the global economic crisis, in many cases, this masks the still-substantial human cost of that downturn. But the region as a whole will also see 17 elections this year, providing an outlet for any disaffection. It is hoped that recent elections in Nigeria will now create the space for much reform. Similarly, South Africa’s local elections prove that optimism about eventual delivery is still in place.

Chart 3: Africa has the demographic advantage Working age population as % of total

Chart 4: Financial-sector depth remains a challenge Short-term credit is more readily available

Sources: UN, Standard Chartered Research Sources: MFWA, WB, Standard Chartered Research

Chart 5: Little maturity transformation in Africa Liabilities are dominated by short-term deposits

Chart 6: Strategic sectors receive relatively little credit Sectoral lending as share of GDP

Sources: MFWA, WB, Standard Chartered Research Sources: MFWA, WB, Standard Chartered Research

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Standard Chartered Africa Focus African rates – Overview Delphine Arrighi, +852 3983 8568 Delphine.Arrighi@sc.com

02 June 2011 6

Divergent trends across Africa While curve flattening has remained the dominant theme across Sub-Saharan African markets lately (in line with our expectations), market performance seems to be diverging, with some countries now facing more severe inflationary pressure than others. Stronger currencies in commodity-rich countries such as South Africa, Ghana and Zambia – which have also benefited from strong portfolio inflows – have helped to contain inflationary pressures. East Africa, by contrast, is battling surging CPI inflation as weaker currencies push up imported inflation from still-elevated global food and energy prices. With central banks now facing varying degrees of pressure to act, we expect market performance to continue to diverge across Sub-Saharan African rate markets, with some countries providing better investment opportunities than others. In particular, we continue to like Nigeria, Zambia and South Africa, where valuations offer a better premium against slow-rising inflation. However, we maintain a negative outlook on Uganda and Kenya, where we expect the respective yield curves to continue to bearish flatten amid more aggressive monetary tightening. We recently took profit on our Ghana position, where we revise our outlook from positive to neutral on the back of lagging fiscal improvements and rising inflation concerns.

Nigeria – Improving outlook We revised our outlook for the Nigerian bond market from negative to neutral on 19 April 2011, in the aftermath of successful presidential elections. While the currency

remained surprisingly weak in May, strong oil output and increasing offshore investor interest should help to reverse the trend. Although Nigeria continues to struggle with high inflation (CPI inflation fell to 11.3% y/y in April from 12.8% y/y in March), a greater reliance on FX appreciation in the coming months may limit the need for more aggressive increases in the Monetary Policy Rate. Fiscal policy improvements – with efforts to reduce high levels of pre-election recurrent expenditure – may also reduce the need for aggressive tightening, as signalled by central bank Governor Lamido Sanusi. With the budget deficit forecast for 2011 having been reduced from NGN 4.972trn to NGN 4.484trn (albeit still above the expected NGN 4.226trn that would have narrowed the deficit to the initially planned 3.6% of GDP), bond-market sentiment should continue to improve. However, a new benchmark oil price of USD 75/barrel will help to scale the deficit back to 2.96% of GDP. The results of the latest 3Y and 5Y bond auctions show that local demand remains strong. While local yields have rallied by 20-180bps across the curve since the beginning of May, they remain attractive within the emerging-markets space. We therefore expect demand from offshore investors, which is likely to be concentrated at the short to medium end of the curve, to somewhat offset the impact of the 50bps rate hike on 24 May (which brought the monetary policy rate up to 8%). The increase in the cash reserve ratio to 4% from 2% is expected to withdraw NGN 372bn of liquidity from the market. Rather than a strong tightening move, we see this as a measure to normalise interbank liquidity, partly offsetting the injection (estimated at NGN 600bn) that will result from AMCON activity.

Chart 1: Nigerian yields remain attractive within EM1Y benchmark bond yield, %

Sources: Bloomberg, Standard Chartered Research

Chart 2: Further MPR hikes will not depend only on CPI CPI inflation (% y/y), Monetary Policy Rate (%)

Source: Standard Chartered Research

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Standard Chartered Africa Focus African rates – Overview

03 June 2011 7

It should also be partly mitigated by the monthly statutory revenue allocations disbursed by the Federal Asset Allocation Committee. Hence, despite a potential knee-jerk reaction to the MPC meeting, we maintain our recommendation to go long the 1Y FGN (initiated at 10.25% on 12 May, target: 9%, stop-loss: 11%).

Zambia – Inflation premium still too high The Zambian yield curve has bearish flattened since the beginning of May, with the shorter end still behaving erratically, driven by irregular open-market operations by the Bank of Zambia. Despite a slightly weaker currency in May, owing largely to the drop in copper prices, inflation remains relatively well behaved, falling to 8.8% y/y in April from 9.2% y/y in March. With the outlook for copper prices still resolutely bullish (both from a fundamental and technical perspective) as demand from China improves, we expect currency weakness to be temporary. This, along with a bumper maize harvest, should continue to help tame inflationary pressures. Hence, although inflation is likely to exceed the central bank’s target of 7% this year (we forecast an average of 10.5% in 2011), we continue to think that the curve is too steep at current levels and the inflation premium on intermediate and longer tenors is excessive. We also note that despite a slight increase in the size of the monthly bond auctions for the 2Y, 3Y and 5Y tenors (from ZMK 150bn per month on average in Q4-2010 to ZMK 200bn in Q1-2011), supply remains well within the market’s absorptive capacity. Moreover, the size on offer for the 7Y,

10Y and 15Y tenors has decreased slightly, from ZMK 70bn to ZMK 60bn. The risk of an increase in government spending ahead of September’s presidential elections therefore seems somewhat exaggerated, especially given Zambia’s overall domestic debt-to-GDP ratio, which remains extremely low at 2%, according to Fitch. While our trade recommendation on the 7Y tenor recently breached its stop-loss (initiated at 13.98% on 17 February, stop-loss: 15.20%), we continue to see better value in the intermediate part of the curve, and still recommend going long at current levels. With the 5Y offering better liquidity than the 7Y, we recommend entering a long position on the 5Y bond at 16% (target: 13%, stop-loss: 17%).

South Africa – Flatter curve CPI inflation was surprisingly mild in April, rising slightly to 4.2% y/y from 4.1% y/y in March. This led to a momentary bullish steepening of the bond curve as investors pared back their expectations of future rate hikes. With the South African rand (ZAR) outlook still relatively volatile, we continue to believe risks are tilted towards the South African Reserve Bank (SARB) acting sooner rather than later – especially given that inflation is expected to breach the upper band of the SARB’s target range in Q1-2012. While offshore investor flows have remained resolutely positive recently despite a slump in commodity prices, we continue to prefer spread trades over outright longs, which are more susceptible to a reversal should the ZAR continue to weaken. If the ZAR resumes its appreciating trend, reducing expectations of a rate hike as early as Q3-2011, moderating inflation expectations and sustained demand from offshore

Chart 3: Real rates in Zambia are among the most attractive in the region 10Y real interest rates, %

*Ghana 3Y bond yield; Source: Standard Chartered Research

Chart 4: Foreign investors have remained net buyers of SAGBs, despite the slump in commodity prices Foreign investors’ net weekly purchases of SAGBs, ZAR bn

Sources: JSE, Standard Chartered Research

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Standard Chartered Africa Focus African rates – Overview

03 June 2011 8

investors should continue to lead to a bullish flattening of the bond and swap curves. If, on the contrary, the ZAR should weaken further, we would expect both curves to bearish flatten, with rising inflationary pressures increasing the risk of a more hawkish SARB. We therefore remain comfortable with our 2/10Y IRS flattener, initiated at 187bps on 21 March (revised target: 140bps, revised stop-loss: 160bps).

Ghana – No strong improvement We took profit on our long 3Y Ghana trade on 12 May after the results of the latest 3Y auction brought yields to all-time lows. Although inflation continues to surprise to the downside for now, risks are to the upside, with renewed currency weakness likely to further boost rising food and energy prices. Indeed, despite rising gold, cocoa and new oil exports, the Ghanaian cedi (GHS) remains under pressure due to persistently high USD demand from local corporates. In this context, the decision by the Bank of Ghana to cut rates by another 50bps in May seems overly optimistic, especially in view of rising fiscal pressures. While provisional data seems to point to a strong improvement in revenue collection, expenditure continues to exceed budget forecasts, showing little progress towards fiscal consolidation. Heightened competition ahead of the primaries in July 2011 (with presidential elections due in December 2012) is unlikely to provide much fiscal respite either. We therefore revise our outlook from positive to neutral and expect the curve to bearish steepen from here.

East Africa – Still battling surging inflation Kenya’s CPI inflation surged to 12.05% y/y in April from 9.19% y/y in March. In Uganda, April CPI inflation rose to 14.1% y/y from 11.1% y/y during the same period. On average, East African currencies have been more severely hit by rising energy prices, adding to imported inflation. This trend seems to have been exacerbated in Kenya by the central bank’s intent to build its FX reserves, increasing the chances of a more aggressive tightening cycle ahead. Investors seem to have become more wary of this risk in recent days, leading to a sharp repricing of rate-hike expectations at the shorter end of the yield curve. With yields having adjusted by 150-300bps across the Kenyan yield curve in the past few days, risks of further rate hikes beyond the May MPC meeting seem more adequately priced in. Although market sentiment is likely to remain bearish for now, we expect yields to remain range-bound in the near term, with the focus now shifting to the supply outlook for the next fiscal year (the official budget announcement is due on 8 June). While we have a more positive longer-term outlook on Uganda, the results of the recent UGX 95bn 2Y bond auction (held on 25 May) show that risks are still to the upside, with yields remaining on an upward trend amid larger auction sizes and the risk of tighter liquidity as inflation continues to trend north. We therefore maintain a negative outlook for now on both Uganda and Kenya, with a bearish-flattening bias.

Chart 5: Inflation surges in East Africa CPI inflation, % y/y

Source: Standard Chartered Research

Chart 6: But tamed by stronger currencies elsewhere CPI inflation, %, y/y

Source: Standard Chartered Research

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Standard Chartered Africa Focus Angola – Governance matters Victor Lopes, +971 4 508 4884 Victor.Lopes@sc.com

03 June 2011 9

Eurobond plans revived USD 500mn to be issued in September Angola’s finance minister announced that the government intends to issue a USD 500mn eurobond in September. This amount is much more realistic for an inaugural issue than the USD 4bn that was announced in 2009; above all, it is within the non-concessional debt ceiling under the IMF Stand-By Arrangement (the ceiling was USD 2bn in 2009, but it has since been raised to USD 4bn). The timing is more favourable as well, as Angola now has an international credit rating (it is rated BB- by Fitch, B+ by Standard and Poor’s, and B1 by Moody’s), which it did not have when it first announced its intention to tap international markets in 2009. The dramatically improved macroeconomic outlook since the crisis is also a game-changer. Angola abandoned its previously planned issuance because of the financial crisis. Confidence was significantly dented by the liquidity crisis and the surprisingly high amount of domestic payment arrears that were accumulated (USD 6.8bn). Since then, the situation has improved and, according to the latest available IMF data, the government has been able to clear USD 3.6bn of arrears. In an interview with Reuters, the Minister of Finance said that USD 2.5bn remained to be cleared. Improved macroeconomic outlook Oil production this year has been hit by technical problems. According to OPEC data, April oil production was 1.6 million barrels per day (mbd), down from 1.7mbd in March.

The impact on external accounts and public finances is likely to be offset by rising oil prices (oil production so far this year is down 8% compared with its 2010 average, but oil prices are 39% higher over the same period). GDP growth will be stronger than in 2010, but lower than initially anticipated owing to lower oil output (we expect 4% y/y growth, versus 1.6% in 2010). High oil prices enabled the FX reserves to recover to USD 19.9bn in March 2011 from USD 14bn a year ago. These improvements have led Fitch to upgrade the country’s sovereign rating by one notch to BB-. As a result of a stronger external position, the Angolan kwanza (AOA) has been stable so far this year. Inflation remains in double digits (averaging 15% y/y in Q1, compared with 14.4% in 2010), as has historically been the case. The recent spike in food prices is causing additional pressure, but less so than in many other African countries that are starting from a much lower base. The last IMF review in December was relatively positive, and a new review under the Stand-By Arrangement is due to take place in the next few weeks. Investors to discriminate on governance issues Angola has a favourable balance sheet; however, governance, social and business indicators tend to be weak. Arrears accumulation probably contributes to the perception of weak governance, since this was the result not only of cash-flow problems but also, to a certain extent, of weak budgetary management. While cyclical constraints on Angola’s creditworthiness may have turned around, long-standing structural obstacles remain in place. Angola’s closest comparable is Nigeria, also an oil-producing country (Standard and Poor’s rates both Angola and Nigeria B+; Fitch rates both countries a notch higher, at BB-). Both countries’ balance sheets are strong, but Nigeria enjoys slightly better liquidity indicators and debt-service ratios. Business climate, social and governance indicators are weaker in Angola. Therefore, we believe that should the eurobond issue go ahead, investors will require a premium over Nigeria. Angola has made a number of improvements in governance and transparency (the national oil company’s audited accounts have been published, an audit board was created at the central bank, and budget and debt management have improved within the framework of the IMF programme), but governance issues are likely to continue to affect risk perception for some time.

Chart 1: Angola’s governance ranking is weaker than Nigeria’s Angola vs. Nigeria, international rankings

Sources: UNDP, World Bank, Transparency International

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Human Development Index

Ease of doing business

Corruption Perceptions Index

Standard Chartered Africa Focus Botswana – Winter of discontent Razia Khan, +44 20 7885 6914 Razia.Khan@sc.com

02 June 2011 10

Public-sector strikes weigh heavily The challenge of right-sizing government The intended fiscal adjustment, aimed at bringing the budget into balance by FY13, is facing its most severe test yet. More than 50,000 public-sector workers have gone on strike, initially demanding pay increases of 16% and then modifying this demand to 12%. The government has insisted that it cannot afford a pay increase above 5%. Although public salaries were recalibrated last year in line with a redefinition of the working month, inflation stood at 8.2% y/y in March. Pressured by administered levies, a weaker BWP-ZAR cross rate, and rising food and fuel prices, the Bank of Botswana (BoB) expects CPI inflation to remain above the 3-6% target until at least Q2-2012.

At the time of writing, the strike is into its seventh week. With the authorities implementing a ‘no work, no pay’ policy, the economic impact is bound to be severe in this country of 1.8mn, where the government is one of the largest employers and government spending typically accounts for 40% of GDP. Unions, unable to pay their members, want the ‘no work, no pay’ rule to be set aside, as it has directly affected striking workers’ spending, with reports of late payments of rents and utility bills and difficulties in servicing personal loans. Retail sales are down sharply. With much of the private sector dependent on government spending, delays in government orders as a result of the strike have had a wider impact. Private-sector firms are also downsizing and implementing cost-cutting measures. Some small, medium-sized and micro enterprises (SMMEs) face closure. An outright q/q contraction in non-mining GDP now looks plausible in Q2-2011, putting at risk our full-year GDP

growth forecast of 4.9% – despite an overall increase in government spending and a healthy rebound in diamond sales. The bigger picture Externally, the outlook has been improving for some time. Diamond exports have recovered to healthy levels, although not to pre-crisis peaks. Worldwide polished diamond sales increased 8% y/y in 2010 and were up 7% in the US, the largest market. In India and China, sales increased 37% and 26% y/y, respectively. The demographic boost to demand arising from the strong growth outlook for these economies is likely to be substantial. But this may not be sufficient for Botswana, where new mining projects on the scale seen in the early 2000s are unlikely. The maturing of large development projects aimed at diversifying the country’s economic base, which had involved significant capital imports, should at least see the trade balance return to surplus. Some of the necessary fiscal consolidation will take care of itself, with the development spending budget likely to be reduced sharply in the years ahead. However, concerns will now focus squarely on domestic growth.

Despite its historic economic success – post-independence per-capita income grew faster than it did in some ‘Asian Tigers’ – the need to develop an economic model that is less dependent on public spending is paramount. Given the small domestic market, any new model will necessarily need to be externally focused. But the policy challenges are significant, and any boost to competitiveness will need to be real rather than solely reliant on nominal FX depreciation.

Market calls Curbing inflation, a necessary means of boosting ‘feel-good’ sentiment during a difficult fiscal adjustment, will now need to be a key policy priority. Traditionally, with a large share of the country’s imports routed through South Africa, this goal was achieved through BWP-ZAR appreciation. However, South African rand (ZAR) strength, and the need to optimise USD-denominated fiscal revenue from mining, have brought FX cross rates close to parity. Should the ZAR weaken in the coming months, perhaps in line with a wider risk sell-off, this will need to change, with the BWP gaining versus the ZAR.

In May 2011, the BoB increased reserve requirements on local-currency deposits to 10% from 6.5%. This should remove around BWP 700mn of liquidity from the system, reducing the cost of sterilisation through Bank of Botswana Certificates. Fiscal savings here might offset some of the costs associated with much-needed currency appreciation.

Chart 1: Botswana, Sub-Saharan African growth –a contrast (Average GDP growth, %)

Sources: IMF WEO, Standard Chartered Research

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Standard Chartered Africa Focus Democratic Republic of Congo – In recovery mode Victor Lopes, +971 4 508 4884 Victor.Lopes@sc.com

03 June 2011 11

Progress on the macroeconomic front

The economy is recovering The Democratic Republic of Congo (DRC) has come a long way in terms of economic stability since 2009, when it was badly affected by the resurgence of a rebellion in the east and the global financial crisis. Growth is back on track, monetary stability has improved and relations with creditors have normalised. Politics, however, still cloud the outlook. GDP growth should continue its rebound in 2011 to around 6%, driven by rising output in the mining sector (especially copper in the Katanga region), as well as by high commodity prices, foreign-funded infrastructure projects and a recovery in agricultural production. Donor support has been increasing, with total grants at USD 1.7bn in 2010, up from USD 679mn in 2009. The DRC also obtained a USD 7.3bn debt reduction from the Paris Club as it reached the completion point of the Heavily Indebted Poor Country (HIPC) initiative, bringing its total external debt ratio to 29.8% of GDP in 2010 (from 137% in 2009). However, debt is set to increase again given new debt, mostly arranged with China. Despite political uncertainty, a very weak business environment and regulatory issues in the mining sector, the DRC has been able to attract significant foreign investment (USD 1.7bn in 2008 and USD 951mn in 2009). Chinese involvement is especially strong, as highlighted by the USD 6bn ‘infrastructure for resources’ mega-deal signed in 2010. China, which currently absorbs 20% of the DRC’s exports, is an increasingly strategic partner.

Inflation has been trending down (it averaged 46.2% in 2009, and was 23.6% in 2010), as the Congolese franc (CDF) has been more stable since its large devaluation in 2009. The CDF has benefited from rising export receipts, increasing foreign investment and donor support, which have led to larger foreign-exchange reserves – currently at USD 1.25bn, up from a low of USD 29mn in January 2009. However, despite tight monetary policy (the central bank increased interest rates by 7.5ppt to 29.5% in July 2010), rising oil and food prices will prevent more rapid progress on the inflation front. Rising oil and food prices represent a key risk The DRC is particularly exposed to rising oil and food prices, which account for more than half of total imports. Food represents 50% of the CPI basket, and the country’s vulnerability to rising food prices is exacerbated by its high poverty rate. Domestic fuel prices are supposed to be increasingly adjusted to match rising international oil prices. However, to avoid social discontent ahead of the presidential elections (planned for November 2011), these subsidies, which weigh on the budget, are likely to remain in place. Other election-related spending, coupled with a higher public-sector wage bill, will put pressure on government expenditure. Despite higher fiscal revenues (notably from the mining sector’s rising contribution), the fiscal deficit is expected to remain large. Given extensive donor support, the deficit is unlikely to be monetised to the same extent as it was in 2009, but there could be more pressure on inflation and the exchange rate. Politics remain uncertain The next presidential elections are due in November. Ruling President Joseph Kabila is the favourite, particularly as there will only be one round of voting (following the Ivorian political crisis, the DRC authorities changed the voting system, arguing that a two-round contest would fuel instability). While there is little doubt about the likely winner of the next elections, the political outlook remains uncertain. A recent attempted attack on the presidential palace was a reminder that despite much progress, political stability remains elusive. The eastern provinces are likely to remain unstable. The UN mission in the DRC (its largest, with around 16,000 peace-keepers) is to remain in place for some time, highlighting the fact that instability remains a key concern.

Chart 1: Exchange-rate stability likely to be tested inpre-election period

Sources: IMF, Standard Chartered Research

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Standard Chartered Africa Focus Gambia – Growing threat of debt distress Amina Adewusi, +44 20 7885 6593 amina.adewusi@sc.com

03 June 2011 12

Agri-driven growth continues Offsetting slow tourism demand Despite expectations of a modest budget deficit, the Gambia’s historic fiscal performance and accumulated public debt suggest an increasing risk of debt distress. While a doubling of budgetary spending on agriculture should drive 5.5% GDP growth in 2011 (5% in 2010), compensating for a slow recovery in tourism, this may not be rapid enough for the Gambia to grow out of its domestic debt problems. Higher revenue collection and extension of domestic debt maturities are needed to overcome the structural constraints threatening macroeconomic stability. Gambia is at high risk of debt distress The Gambia’s plans in the current fiscal year are modest, with the deficit forecast to narrow to 1.5% of GDP, from 2.1% last year. Nonetheless, the country is unlikely to achieve a balanced budget until at least 2015 (Chart 1). Worryingly, IMF debt sustainability simulations suggest that even if the deficit remains at 1.5%, the Gambia’s debt-to-GDP ratio will increase to 81% in 2029 from 55% in 2009. Domestic debt equates to 28.7% of GDP (March 2011), up from 23.9% a year ago, putting a huge strain on public finances; we estimate interest payments on debt were equivalent to 14% of public spending in 2010. While still very high, this is down from over 29% in 2005. There is high debt rollover risk, because 63% of total debt is in the form of T-bills, most of which are of the 364-day tenor. Further, interest rates are among the highest on the continent (Chart 2). The IMF estimates the Gambia’s external debt at 33% of GDP. It was reduced to USD 299mn (42% of GDP) from

USD 678mn (133% of GDP) after debt forgiveness under the 2007 Multilateral Debt Relief Initiative, but weak re-export performance, a depreciating Gambian dalasi (GMD) and expensive domestic borrowing have kept debt high. Increased tax revenue needed to narrow deficit The key challenge will be increasing tax revenue, currently around 13% of GDP. This is vital to easing the deficit and reducing new debt issuance. Corporate tax declined by 2ppt to 33% last year and a further 1ppt decline is expected this year. There are also promising developments in revenue collection; a new fuel-pricing mechanism, which lowers the level of government subsidies, was enacted last year. The authorities also intend to introduce VAT by 2013. Currency, political risks offset attractive T-bill yields High inflation and public debt demand make Gambian T-bill yields appear attractive. However, the GMD remains weak and the Central Bank of the Gambia has underscored its commitment to a market-determined exchange rate, with FX market intervention limited to sterilisation purposes. Furthermore, presidential and parliamentary elections are scheduled for September 2011 and early 2012, respectively, which may lead to additional fiscal slippage and greater pressure on the currency. President Jammeh, who came to power in a coup in 1994, is highly likely to win the elections. Previous landslide victories reflect his powers of patronage and iron grip on the country. Despite uncertainty over foreign assistance, given recent events in Libya, a change to the status quo is unlikely.

Chart 1: Gambia has had persistent fiscal deficitsFiscal deficit (% GDP); forecasts begin from 2009

Sources: IMF, Standard Chartered Research

Chart 2: Gambian T-bill yields are among the highest in major African markets (91-day T-bill yields)

Sources: Respective Central Banks, Standard Chartered Research

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Standard Chartered Africa Focus Ghana – Today’s fiscal imbalance, tomorrow’s inflation Razia Khan, +44 20 7885 6914 Razia.Khan@sc.com

02 June 2011 13

Warnings over fiscal discipline Ghana eases rates With most African central banks tightening policy, the Bank of Ghana (BoG) has stood apart, with its 50bps rate cut in May taking the Prime Rate to 13%. Regulated fuel prices, as well as favourable food-price trends and a strong currency, have all helped to keep Ghanaian inflation relatively stable. Inflation, which touched a multi-decade low of 8.6% last December before January’s 30% average fuel-price adjustment, remained around the 9.1% level for much of Q1-2011. In April, CPI decelerated in y/y terms to only 9%.

With its attractive yield, the Ghana 3Y bond has long been one of the most favoured trades in the African frontier market space. Appealing fundamentals as the country becomes an oil producer have boosted investor sentiment and translated into strong demand at government bond auctions. Recently however, IMF warnings against greater fiscal slippage have sounded a note of caution. Although the Fund approved the disbursal of USD 94.3mn to Ghana at the end of May, waivers for the non-observance of fiscal performance criteria as well as the net change in domestic arrears were needed. Here, we explore fiscal trends, and – given Ghana’s past history – consider the impact on the inflation outlook.

Despite good intentions . . . Following the fiscal slippage of previous years, improving revenue performance remains the overarching theme for policy makers, but this will have to be done in a difficult environment. The 2011 budget outlined a slew of measures to increase revenue collection – the surprise was that January 2011 inflation did not increase even more. Customs reforms have been especially successful, with revenue improving 67.3% y/y in Q1. Higher-than-budgeted oil prices

(we believe the 2011 budget was based on USD 90/bbl) should create further revenue upside, although this share will be modest in the first few years of oil production. Despite this favourable performance, spending demands have kept pace with revenue over-runs. Revenue collection in Q1-2011 was 4.1% of GDP; expenditure was up to 5.2% of GDP. Despite some success in reducing official arrears – the proceeds of recent heavily oversubscribed 3Y auctions were largely used for arrears clearance – the inherited fiscal position remains a constraint. New data on the deficit for 2010, using rebased GDP, shows a revision up to -6.8% of GDP (estimates were c. -10% of ‘old’ GDP). The rebasing of GDP did not lift fiscal ratios significantly. The underlying position remains weak; plans to narrow the deficit to -4.7% of GDP in 2011 look ambitious. With the electoral cycle in 2012, and expectations running high given Ghana’s oil producer status, the temptation to spend will be significant. Already, public-sector salaries and wages account for 42.1% of domestic revenue. Improving revenue collection alone will not reduce the deficit.

What of traditional vulnerabilities – fuel and utility prices? The new utility-pricing regime implements an automatic tariff adjustment formula for water and electricity. There have been no further fuel-price increases since January, when the domestic price adjustment was aimed at compensating for a rise in global prices from USD 75/bbl to USD 93/bbl. Ghana has instituted a hedging programme but is believed to hedge only 50% of its crude imports. Eventually, there will be a need for further adjustment, although politically, this goes against one of the key electoral promises of the current administration.

Given the difficulty of factoring all of this into the inflation outlook, we consider three scenarios: a lower bound of CPI outcomes representing the best inflation performance in recent years (this might be plausible if the currency rallied again – in which case inflation would average 7% this year); an upper bound, assuming pressures are as significant as in the worst years in the recent past; and an average scenario. Under the average scenario, CPI inflation averages 9.5% in 2011, 10.6% in 2012, and 9.3% in 2013, and is in keeping with the BoG’s own CPI assessment. If inflation were more pressured, we forecast that it would peak at 15.5% in April next year, averaging 11% in 2011, 14.8% in 2012 and 13.2% in 2013. Fiscal out-turns suggest that we will be somewhere between these two scenarios, the average and the ‘high case’. Rates may have been cut in contrast to the rest of Africa, but they look likely to remain on hold for now.

Chart 1: Fiscal consolidation still needed Fiscal deficit as % of GDP, cash basis, rebased GDP

Sources: IMF, MOFEP

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Standard Chartered Africa Focus Kenya – Inflation susceptibility Razia Khan, +44 20 7885 6914 Razia.Khan@sc.com

03 June 2011 14

Supply versus demand Growth is back Is it just a supply-side shock, or is strong demand to blame? Afflicted by poor rainfall this year and regional disruptions to food supply, East Africa has suffered the rapid pass-through of external pressures to domestic inflation. In Kenya, the region’s largest and most industrialised economy, inflation has surged from just over 3% in October 2010 to close to 13% in May 2011. Food and fuel price increases were largely to blame, with FX weakness exacerbating the impact as the Central Bank of Kenya (CBK) accumulated FX reserves. The importance of manufacturing in Kenya is reflected in its dependence on imported fuel, with crude imports typically constituting over 20% of the country’s import bill. In a year of poor rainfall, dependence on non-hydroelectric sources of power is usually more intense. At least the country is spared more severe macroeconomic fallout – the rapid pass-through of higher prices means that consumption is impacted at the outset. A supply response, to the extent that one is possible, usually comes through reasonably soon, and the inflation fallout is not long-lasting.

This year, however, other factors may come into play. Growth is back, with 2010 GDP estimated to have increased 5.6% in real terms. (During the 2008 food- and fuel-price crisis, domestic conditions were much more subdued amid Kenya’s own political crisis). With confidence relatively buoyant following Kenya’s successful constitutional referendum last year (threats of political volatility still lurk ahead of the country’s elections in 2012, but business

indicators have largely improved), there is concern that the negative output gap, which helps to hold down prices, might not persist. Kenya is now back to the average growth rate it experienced before its election crisis in 2007-08. A sub-regional boom is also helping. Oil-related developments in Uganda and Southern Sudan are fuelling a wave of infrastructure development. Cement consumption increased 14.4% in 2010, and the volume of cargo throughput at Kenyan ports has risen 16% since end-2008. Given these conditions, the potential for a secondary price impact in Kenya is substantial. Admittedly, evidence of second-round effects is difficult to gauge from the inflation data itself. Inflation was supposed to become less volatile with the adoption of a new CPI basket, in which food has a lower weighting of just 36%, but the nature of both the domestic and global food-price crises has over-ridden this. With food and housing/utilities inflation both running close to 20% y/y and transport inflation near 10%, the flexibility of the Kenyan model has been called into question. The authorities – otherwise known for their non-interventionist stance – have been forced to reduce taxes on kerosene, remove import duties on wheat and maize, and increase minimum wages. The former two measures will help to alleviate some of the pressure. May CPI data already reflected a pullback in the prices of some food items, moderating the overall m/m rise. Should this trend persist, inflation will peak at less than 20% this year (see

Chart 1: Kenyan inflation yet to peak With moderate tightening forecast, real interest rates will remain negative for a while

Sources: KNBS, CBK, Standard Chartered Research

Chart 2: Exchange rate is under pressure, worsening the inflation outlook USD-KES

Sources: Datastream, Standard Chartered Research

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Standard Chartered Middle East and North Africa Focus Kenya – Inflation susceptibility

02 June 2011 15

chart for our forecasts). But the increase in minimum wages may stoke demand pressures further, complicating the policy response. The policy response So far, the authorities have been adamant that supply-side factors – and not demand – are largely to blame for the upward pressure on CPI, resulting in a preference for more moderate tightening. The CBK reversed a late-cycle January rate cut in March, and raised the central bank rate a further 25bps at its May MPC meeting, to 6.25%. In order to compensate for the liquidity effect of continued FX buying aimed at building the reserves, it also raised the cash reserve ratio by 25bps to 4.25%. But bond yields had already spiked much higher than this in anticipation of the MPC meeting, with average rises of 200bps across different tenors. The market was disappointed that the CBK did not act more forcefully. Near-term, the Kenyan shilling (KES) is likely to remain under pressure as markets anticipate the need for further tightening. Market yields may have corrected, but the policy rate is still far below the levels needed to turn real yields positive, and to make Kenyan assets more attractive to domestic and offshore investors. Persistent currency volatility may mean that inflation will not peak just yet; on the basis of the unfavourable base alone, we think y/y CPI inflation has further to rise, even though m/m changes should now moderate from the 3.2% high seen in April. It is a vicious cycle, and the CBK may well have to tighten further. Kenya’s innovative approach to financial-sector development can be credited for much of its recent economic success.

Rapid deposit mobilisation has spurred asset growth, with the private sector benefiting. The spread of mobile-phone banking has changed the traditional behaviour of money supply. The number of ‘financially excluded’ Kenyans fell to 32.7% of the population in 2009 from 38.4% three years earlier, and has probably fallen further since. With the CBK rightly attributing much of the growth resurgence to the success of its policies to foster financial innovation, it may be reluctant to tighten too far, too fast. Concern over banks’ exposure to government bonds may also be an argument for a moderate pace of tightening. But unless the CBK acts more forcefully, persistently high inflation may risk undoing some of its hard-won achievements.

Chart 3: Fears of a pullback in private sector credit may be behind the reluctance to tighten more aggressively Credit to government, private sector, % change y/y

Sources: Datastream, Standard Chartered Research

Chart 4: Despite poor rainfall, growth momentum is still robust Quarterly GDP growth, % y/y

Sources: KNBS, Standard Chartered Research

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Standard Chartered Middle East and North Africa Focus Mauritius – Policy dividends drive recovery Wing Lo, +44 20 7885 7142 Wing.W.Lo@sc.com

02 June 2011 16

Post-stimulus resilience will be tested A broad-based recovery was seen in 2010 The Mauritian economy continues its recovery from the economic slowdown triggered by the global financial and European debt crises (Europe is Mauritius’ biggest source of tourists and foreign investment). Full-year GDP growth in 2010 bounced back to 4.4%, from a previous deceleration to only 3.1% in 2009, with a broad-based recovery seen. Among the ‘four pillar industries’, textiles grew 2.9%, tourism 5.0% and financial services 5.5%; only sugar cultivation dropped, by 6.4%. Newly developing sectors also recorded rapid growth: food processing expanded by 5.0%, and information and communication technology (ICT), the top performer, grew by 14.8%. Counter-cyclical policy helps recovery Recovery was attributed to the government’s loosening of fiscal and monetary policy in response to the global crisis. The government adopted a second stimulus package worth USD 380mn in August 2010; the first (worth USD 330mn) was implemented in 2009. Policies included accelerating public infrastructure, employing retrenched workers and encouraging exports to new markets. The Bank of Mauritius (BoM) also cut its policy rate, the repo rate, by 100bps in September 2010, to 4.75%. As a result, total exports increased by 11.6% in 2010, the first rebound since 2008. The industrial production index also rose by 2.8%. Private-sector credit grew 13% in 2010, in contrast to almost zero growth in 2009. However, the labour market remains weak: unemployment rose to 7.8% in 2010 from 7.3% in 2009. Q1-2011 data will show whether the recovery has been sustained after the stimulus measures ended in December 2010.

Strong FDI props up the economy and MUR Strong investment inflows are also crucial to help Mauritius weather the economic downturn. In 2010, inward foreign direct investments (FDI) reached a record high of MUR 13.9bn, mainly flowing into financial services (33% of total), real estate (25%) and the health-care industry (20%). Inward FDI has driven import demand and widened the current account deficit, which has nonetheless been fully offset by capital inflows, giving Mauritius a balance-of-payments surplus. The Mauritian rupee (MUR) was supported by buoyant inflows, strengthening from MUR 33 per US dollar (USD) in early 2009 to MUR 28 per USD currently. In the 2011 budget the government announced the launch of a sovereign wealth fund, designed to ensure FX stability and seek returns on the country’s foreign reserves. With an initial endowment of USD 500mn, the impact on the currency will be negligible. The MUR should be still on an upswing. Further growth subject to external outlook Given the revival in economic activity, the economy should continue to grow in 2011, subject to the external economic environment and the resilience of the recovery post-stimulus. Services, such as financial services and ICT, will benefit from increasing economic activity driven by the global recovery. Tourism may be under pressure until the European outlook improves. Tourist arrivals dropped by 2.8% y/y in March after two months of strong rebound, mainly due to fewer European and US arrivals, bringing total growth in Q1-2011 to only 2.8%. More tightening ahead in order to curb inflation Increasing inflationary pressure will pose additional risk. CPI inflation was 7.0% in April 2011, from almost zero in October 2010. The small island economy is vulnerable to imported inflation, driven by increasing international food and fuel prices, although currency strength may help ease the pressure in the short term. Measures have been taken to tackle inflation. In March, the government cut regulated petrol prices and the BoM started tightening, raising the policy rate by 50bps to 5.25%, before raising banks’ reserve requirements to 7% from 6% in April 2011. However, in order to keep the recovery on track, the BoM introduced a 15% investment cap on treasury bills, directed at commercial banks, to encourage lending to the private sector. While inflationary pressures persist and the economic outlook remains uncertain, we expect only another 50bps rate hike by the end of 2011, complemented by other monetary-tightening measures and less expansionary fiscal policy.

Chart 1: Higher inflation drives negative real interest rate% y/y

Sources: Bank of Mauritius, Standard Chartered Research

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Standard Chartered Africa Focus Nigeria – Into the 21st century Razia Khan, +44 20 7885 6914 Razia.Khan@sc.com

03 June 2011 17

Making Nigeria a cashless economy A time for reform Goodluck Nigeria. Much optimism surrounds reform prospects in the early days of President Goodluck Jonathan’s new administration. Just prior to his inauguration on 29 May, the bill establishing Nigeria’s sovereign wealth fund was signed into law. This will help to institutionalise the saving of Nigeria’s oil windfall for future generations, following the recent depletion of past savings. Much is expected of power-sector reforms, a key platform of Jonathan’s development effort, although success will only be gauged in the medium term. Banking reforms have stepped up their pace, with regulators moving closer to full resolution of Nigeria’s banking-sector crisis by setting an end-September deadline to complete the M&A process. Rescued banks that fail to secure merger agreements with approved private investors will be recapitalised through Nigeria’s asset management company (AMCON), in what is effectively a nationalisation. Refusal will result in these institutions facing liquidation. The gloves are seemingly off. Nigeria is getting serious about reforms, and there is a new urgency to get things done. Limits on cash withdrawals If the experience of other African countries is anything to go by, a fourth wave of reforms, possibly Jonathan’s most important yet, has the potential to transform Nigeria’s economic prospects. The Central Bank of Nigeria (CBN) intends to phase in limits on cash withdrawals from bank accounts in an effort to encourage greater use of e-platforms rather than cash notes in Nigeria’s economy. June 2012 has been set as an initial deadline. A recent circular issued by the CBN following consultations with Nigeria’s Bankers’ Committee sets limits of NGN 150,000 (roughly USD 970) and NGN 1mn (USD 6,450) on daily cash withdrawals by individuals and corporates, respectively. Cash withdrawals in excess of these amounts will be possible, but will attract fines – NGN 100 for every NGN 1,000 over the limit for individuals, and NGN 200 for corporates. The project will be piloted in Lagos in January 2012, given the higher density of ATMs in the country’s commercial capital. By June, the policy is expected to be operational in four other cities across the country – Aba, Abuja, Kano and Port Harcourt.

The rationale The broad thrust of the reforms is to do away with Nigeria’s cash economy and the costs associated with it. These costs include the facilitation of the informal economy (which accounts for as much as 60% of GDP by some accounts) and considerable transaction costs associated with the use of cash in Sub-Saharan Africa’s second-largest economy. The process of printing, securing, transporting and destroying old cash notes alone is thought to cost the CBN as much as NGN 200bn (USD 1.3bn) annually. The use of cash also takes a toll on the financial sector, with the country’s top seven commercial banks estimated to spend NGN 100bn (USD 645mn) on cash management each year. This, in turn, is thought to be a factor in Nigeria’s steep loan/deposit spreads. Banks must pay up for the use of cash across their branch networks. These high costs are then passed on to the borrower. An equity argument is often put forward to justify the need for Nigeria to move away from a cash economy. CBN data suggests that only 10% of Nigerians are comfortably able to withdraw over NGN 100,000 a day. Yet the wider population pays the price of a cash economy through the cost structure in the banking sector, providing a subsidy of sorts to the wealthier. In the context of Nigeria, the cash economy is often seen to exert other social costs. Governance shortcomings, money laundering, the oiling of the wheels of the country’s vast patronage networks, and even oil bunkering, which deprives both the federal and state governments of billions of dollars of revenue – all of these are made possible, it is believed, by the common use of cash, even for sizeable transactions. According to this argument, a move to a system where transactions might be more easily monitored would bring governance advantages too. However, this may be a secondary aim of the reforms. Of far greater concern in the near term is the risk of disintermediation following the period of low interest rates necessitated by the bank rescues. Because of their reliance on official guarantees of interbank transactions, banks have not had to bid up deposit rates in order to compete for deposits. Chart 1 shows that confidence in the financial sector was quickly restored after the bank rescues in 2009. With the authorities acting rapidly to ring-fence the institutions found to be undercapitalised, and intervening in the rescued institutions with new capital and new management, there was no wholesale flight of funds from Nigeria’s banking sector.

Standard Chartered Africa Focus Nigeria – Into the 21st century

02 June 2011 18

But the sector has faced a more insidious threat since then. Low interest rates – which are being corrected now – encouraged even greater cash balances to be held outside the banking sector over time. Encouraging credit growth will require attracting this cash back to the banking sector. Could limits on cash withdrawals help? The authorities argue that if the structural factors contributing to banks’ high operating costs are addressed, unfavourable loan/deposit spreads – the natural consequence of high operating costs – may ease over time. It is argued that banks will be able to pass on the benefits of their improved profitability through higher deposit rates, which they are precluded from doing at the moment. Even more significantly, if various e-payment channels (such as mobile phones) could be successfully used for the provision of credit as well as a payment platform, the potential economic benefits would be immense. Successful channelling of credit through an accepted payments system should mean more loan growth, increased transaction volumes and, ultimately, higher economic growth. These benefits are thought to be denied to Nigeria as long as the use of cash for most transactions, large and small, persists. The authorities hope that with supportive reforms in the banking sector (such as the move to a shared services platform among banks, which is already underway), the adoption of new technologies will become both affordable and possible.

The counter-argument However, critics of the CBN’s proposal contend that the reforms are unlikely to work in the Nigerian setting. Poor availability of power, the generally low density of point of sale (POS) systems and ATMs, a reluctance to engage in cheque transactions because of fraud-related fears, poor literacy levels in parts of the country, and a lack of IT access are all put forward as counter-arguments. It is feared that constraints on cash transactions, with few readily available substitutes, will ultimately have negative consequences for the economy. Concerns are particularly focused on SMEs that transact considerable cash volumes. While existing infrastructure is expected to be a hurdle, preparations are underway to phase in the necessary systems by June 2012. Nigeria already boasts the second-highest number of internet users in Africa (after Egypt), and mobile-phone penetration rates are estimated by some sources to be close to 80%. Evidence from other countries The evidence from other countries is worth considering. In Kenya, over USD 7bn, or 20% of GDP, was transferred via the mobile-phone payment platform in 2010, according to World Bank statistics. Facilitating new means of payment has reduced the costs associated with financial transactions and allowed for productivity gains. Information spreads more rapidly. Commercial transactions are facilitated. Financial exclusion falls dramatically. The overall effect is positive, boosting growth. Limits on cash transactions in Nigeria should at least encourage the development of other means of payment, even if there are doubts over whether the Kenyan model can be fully replicated in West Africa. There are other potential advantages too. If the changes succeed in attracting more money to the banking sector, Nigeria’s monetary policy transmission mechanism is likely to improve. Banks, even those without large branch networks, are likely to gain, boosting competition in the sector, but benefiting those institutions that are able to invest in improved technology. For now, persistent doubts suggest that delays to the timetable and adjustments to the cash limits on withdrawals are possible. Even so, if Nigeria keeps to the path of reform, the benefits should be considerable.

Chart 1: Nigeria to embrace e-technology to stall disintermediation trend Currency in circulation outside banks, y/y growth

Sources: CBN, Standard Chartered Research

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Standard Chartered Africa Focus Sierra Leone – Inflation bites Amina Adewusi, +44 20 7885 6593 Amina.Adewusi@sc.com

03 June 2011 19

Higher global food prices drive up inflation High base effects may provide support Growth in Sierra Leone will benefit from a strong reform programme and expansionary budget in 2011. We expect real GDP growth to increase to 5.2% in 2011, from 4.5% in 2010, in line with increased infrastructure and agriculture investment and foreign direct investment in mines. We also look for stronger growth from offshore oil reserves in the medium term. However, Sierra Leone, like other African countries, is pressured by higher commodity prices, which present policy challenges. Overall inflation rose to 13.88% y/y in February, particularly affected by global food prices, which comprise over 40% of the CPI basket. We see inflation remaining under pressure in 2011. Inflation may benefit from high base effects, as it began to rise in January 2010 from 14% y/y, having been in single digits for the whole of 2009; this partly explains the sudden easing in January 2011 to 13.5% y/y from 17.8% y/y in December 2010. While imported inflation risks remain to the upside, the favourable base effect will at least help. Fuel subsidy cut to improve revenue receipts The government has found itself vulnerable to fuel prices given that it subsidises the cost of fuel, which has cost USD 50mn annually in the last three years. Sierra Leone must repay the IMF USD 5.3mn in 2011. In a bid to ease pressure on debt obligations, petrol subsidies have been cut, leading to a 50% saving in the annual fuel subsidy bill. However, the excise holiday on fuel imports will continue, via which the government foregoes 80% of weekly revenue. The increase in fuel prices (30%) to SLL 22,750 per gallon from SLL 17,500, will further pressure CPI inflation.

Weaker SLL adds to inflation pressure Weakness in the leone (SLL) will also add to inflationary pressure, as import demand leads to sustained depreciation. The SLL opened the year at 4,125 bid against the US dollar (USD) and is now trading around 4,260. We see this continuing, given elevated global fuel and food prices and as government spending on infrastructure leads to increased import demand in 2011. The amount on offer at the Bank of Sierra Leone’s (BSL) weekly FX auction recently increased to USD 1mn from USD 400,000, indicating official acknowledgement that a depreciating SLL is hurting the import-dependent economy. Despite this, downward pressure on the SLL shows no sign of slowing and the BSL is unlikely to meet USD demand. We see the SLL averaging USD-SLL 4,300 in Q2-2011, and continuing its slide into 2012. The BSL is unlikely to support the SLL as it tries to maintain the five months’ import cover the IMF recommends. BSL downplays inflation risks Despite inflationary pressures, the BSL’s newly introduced monetary policy rate (MPR) was cut by 300bps to 23% from 26% in April. The rationale for this was primarily to align the new MPR with T-bill yields, which decreased to less than 23% in May 2011, from highs of over 30% in Q1-2011. We forecast 91-day T-bill rates of 27% in Q2-2010 due to the government’s infrastructure financing requirement – capital expenditure is set to increase by 38% y/y in 2011. The easing of the repo rate, set at the MPR+200bps, appears odd given the wider pressures facing Sierra Leone. However, the BSL claims that cutting the MPR was appropriate due to the decline in CPI inflation in January – although we attribute this to little more than the result of the favourable base in that month. Overly accommodative monetary policy risks increasing inflationary pressure. The BSL’s remaining policy options are limited to mopping up excess liquidity through open market operations. While loose monetary policy and government debt-demand has led to favourable T-bill rates, a depreciating SLL makes Sierra Leone an unattractive trade at present.

Chart 1: The SLL has depreciated rapidly USD-SLL

Sources: Reuters, Standard Chartered Research

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Standard Chartered Africa Focus South Africa – Still black and white Razia Khan, +44 20 7885 6914 Razia.Khan@sc.com

03 June 2011 20

Economic issues are still relevant Interpreting local election results ‘Still black and white’ – the title of the recently re-launched Southern Africa Report – best describes South African politics after May’s local elections. Despite widespread media expectations that local elections would serve as a referendum on the ruling African National Congress’ (ANC’s) record on service delivery to municipalities, the country still voted along racial lines. The final tally revealed that the ANC won 198 councils, with 62% of the vote. The opposition Democratic Alliance (DA), with a traditionally ‘white’ support base, improved significantly on its performance in the last local elections, winning 23.9% of the vote and 18 councils, compared with 16% of the vote previously. However, rather than eating into the ANC’s majority, DA gains largely reflected increased support from other racial minorities. The DA captured only 4-6% of the so-called ‘black’ vote – not nearly enough to make it a significant threat at the national level. Local elections also saw the highest turnout in recent years, at 57.6%, compared with only 48% in 2000 and 48.4% in 2006. This defied expectations that discontent over the ANC’s patchy service delivery record would translate into a poor election turnout. Analysis is now focused on what the results mean, and their market implications. The economic backdrop to South African politics Despite the ruling party’s strong showing in local elections, high-frequency data continues to suggest a disappointing pace of economic recovery. Although retail sales volumes have increased in recent months, the breakdown of inflation

data is revealing. The South African Reserve Bank (SARB) has revised up its inflation forecasts and now expects a temporary breach of its 3-6% inflation target in early 2012, but this largely reflects supply-side shocks. Food and petrol have contributed meaningfully to CPI gains since last year. However, services inflation has been trending down, and durable-goods inflation is negative in y/y terms, although this may be attributable to South African rand (ZAR) strength rather than weak domestic demand. Low-income inflation, which was among the best-behaved of the CPI categories last year, is now accelerating the fastest. Fiscal receipts paint a similarly mixed picture. In FY11 (ended 31 March 2011), personal income tax collection rose 11%, and VAT and customs duties were up 24% and 36%, respectively. Corporate tax collection, however, was much slower to recover from South Africa’s downturn, declining by 0.5%. The modest pace of growth anticipated in the years ahead should keep the deficit wider than previously expected. Spending on infrastructure and social grants is set to increase, but room for further fiscal stimulus will be limited. Overall, the data supports our view that with little evidence of second-round effects from higher food and fuel prices on inflation, the SARB will try to keep monetary policy accommodative for as long as possible, tightening only in Q4-2011. There are risks that it may wait even longer, given the recent emphasis on flexibility in inflation targeting. Notwithstanding the SARB’s independence, it will remain important to gauge political influences on policy. The ‘real’ political battle – ANC elections in 2012 Investors’ focus will now switch to broad policy drivers and the ANC’s leadership elections, due in December 2012. Unlike the left-centre split that determined the fault lines at the 2007 ANC congress in Polokwane (a divide that ultimately led to the ouster of former President Mbeki by Zuma supporters), the economic outcome of the ANC’s political battles is now more difficult to predict. Ideology no longer plays the defining role that it once did, with patronage and personal political ambition much more important in determining alliances. The presidency is no longer sacrosanct, as demonstrated by the increasing attacks on President Zuma inspired by the ANC’s succession battle. Policy influences are therefore fluid. Youth League support for mine nationalisation will not die down soon. A strengthened ANC presidency post-2012 is a necessary, but not in itself sufficient, condition to ensure a focus on the structural challenges South Africa must still face. Until then, political noise is likely to heighten investor uncertainty.

Chart 1: South Africa’s recovery lags behind other EMsGDP recovery by country

Sources: Datastream, Standard Chartered Research

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Standard Chartered Africa Focus Tanzania – Regional drought exacerbates inflation outlook Wing Lo, +44 20 7885 7142 Wing.W.Lo@sc.com

03 June 2011 21

Growth prospects put ‘7% club’ in sight Ban on food exports to curb inflation Similar to other East African countries, increasing inflationary pressure poses significant risk to Tanzania’s economy. Its inflation rate rose to 8.6% in April 2011, from October 2010’s 4.2% trough. Given double-digit headline inflation in Uganda and Kenya, Tanzania is in a relatively favourable position, with food inflation more under control. Although the drought early this year reduced crop production, year-on-year food inflation in Tanzania was 9.7% in April 2011, in contrast with Kenya’s 19.1% and Uganda’s 30.8%. This was due in part to the National Food Reserve Agency’s strategic stockpiling of food; stocks rose to 226,281 tonnes in February 2011 from 64,461 tonnes in February 2010, which helped to ease food shortages in the Ngorongoro, Kilolo, Longido and Iringa districts. In addition, in order to avoid domestic food shortages, Tanzania has re-imposed a ban on food exports from April to June 2011, which had been lifted in October 2010 after a bumper harvest. This will help ease food inflation in the coming months, but at the expense of neighbouring countries which import crops from Tanzania. Nonetheless, food accounts for nearly 50% of the CPI basket, so further serious food supply disruption could put significant pressure on Tanzania’s inflation. Energy prices being driven up by severe drought Energy and fuel-price hikes due to electricity shortages pose an even greater risk, given their wider negative impact on the economy, especially the manufacturing sector. While mounting international oil prices have pushed up diesel prices, drought has also disrupted hydro-electricity generation, which accounts for 60% of total electricity supply,

driving up electricity costs. If the situation continues, it is likely to weigh on GDP growth in 2011, which otherwise could return to pre-crisis trend levels of around 7%. Long-term outlook remains favourable In spite of the short-term inflation risk, Tanzania is on track to achieve a more diversified economy. In addition to existing growth drivers, such as gold exports and tourism, Tanzania’s manufacturing sector has demonstrated impressive growth thanks to increasing economic integration with neighbouring East African countries. FY11 (ended February 2011) experienced a broad-based export recovery versus FY10. Traditional agricultural exports grew by 28% and tourism by 10%. Gold exports grew by 21%, but this was due to surging gold prices; export volumes declined. Manufactured goods recorded the biggest rise, of 103%, doubling FY10’s figure, and increasing their share of total Tanzanian exports to 26% from 17% last year. This was driven by the demand recovery in neighbouring countries and, most importantly, the launch of the East Africa Common Market Protocol in July 2010, which allows the tariff-free movement of goods and services among East African Community member countries, including Kenya, Tanzania, Uganda, Rwanda and Burundi. With its growing gold-mining sector, increasing privatisation of public utilities and the confirmed discovery of gas reserves, Tanzania should be able to attract strong global investment flows, enabling it to rejoin the ‘7% club’ (those whose GDP growth exceeds 7%) in 2012. Fiscal concerns persist Despite the positive growth outlook, long-term public finance remains a concern. Although a threatened cut in donor assistance has not yet materialised, Tanzania’s high donor dependency (27% of the government budget is financed by donors) means that any cuts will put public finance under stress. Tanzania has begun seeking other funding sources, shifting from mostly grants, to less concessional foreign loans and domestic borrowing. In May 2011, the Bank of Tanzania changed the frequency of treasury bond auctions from once a month to fortnightly to raise domestic funds for infrastructure projects. This has brought its net domestic borrowing to the IMF-agreed maximum level of 1% of GDP. With increasing financing costs and imminent grant cuts, the fiscal deficit, at 6.9% of GDP in FY10, will become unsustainable without a change in policy. Tax reforms and spending cuts will be important, as well as efforts to extend the maturity profile of Tanzania’s yield curve, and to liberalise access for foreign investors, in order to secure long-term financing.

Chart 1: Inflation is driven by food and energy prices%, y/y

Sources: Bank of Tanzania, Standard Chartered Research

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Standard Chartered Africa Focus Zambia – Exploring the ZMK-copper correlation Amina Adewusi, +44 20 7885 6593 Amina.Adewusi@sc.com

03 June 2011 22

ZMK-copper correlation weakens Copper was strongly supportive until Q4-2009 The correlation between copper prices and the Zambian kwacha (ZMK) gave confidence to those who saw ZMK strength in 2011 resulting from an elevated copper price and increasing Zambian mine output. However, since late 2009, the relationship between the ZMK and copper prices has weakened (Chart 1). Since early 2011, despite expectations that the ZMK would strengthen on the back of favourable fundamentals, USD-ZMK appears to have found support around 4700. We look at the possible reasons for this.

Elevated oil prices have increased local USD demand High oil prices have increased the government’s import bill, of which fuel is the largest component, thereby increasing USD demand. In 2009, fuel was 15% of the import bill, worth USD 536m. We forecast oil prices to remain within USD 105-118 (ICE Brent) on average in 2011, putting additional pressure on the ZMK, as the fuel import bill increases.

Offshore investor positioning Zambia’s domestic debt market was one of the first beneficiaries of rising investment flows to frontier Africa. Before the global financial crisis, in 2005-06 when Zambia’s debt market saw sizeable offshore investor interest following the receipt of external debt relief, yields were much higher. However, upon maturity of these investments, some investors have chosen not to put on new positions, given less attractive yields. Yields have declined significantly even compared with the recent highs of Q4-2010, when the Bank of Zambia (BoZ) was aggressively mopping up excess market liquidity. Upcoming elections and an ongoing effort to boost bank lending may be behind the apparent official preference for lower yields.

Mining tax changes Zambia’s proposed windfall tax on copper earnings, never properly implemented in 2008, was abolished following the global economic crisis. This has been replaced with a new tax regime, which seeks to tax profitability rather than turnover of mining companies. However, the net result is that tax receipts have fallen relative to the elevated expectations of 2008. This may have reduced some demand for the ZMK. However, the BoZ forecasts that tax collections from mining companies will improve in 2011 owing to high copper prices and production, with an expected increase to ZMK 3.4trn in 2011 from ZMK 1.7trn in 2010.

FX reserves have not played a stabilising role The BoZ has said that it intends to smooth volatility, but aside from this, it does not have a target for the ZMK, and FX reserves worth over 3.85 months of import cover have not played the stabilising role that they could have, with the BoZ preferring to let the FX rate be market-determined.

The case for strengthening remains supported Despite these factors, we remain constructive on the ZMK, seeing USD-ZMK at 4,600 by Q4-2011. Zambia’s trade surplus since mid-2009 and continued bumper maize harvests are key factors, as is the return of healthier offshore demand for Zambian assets. Domestic rates are currently subject to upward pressure, reflecting inflation sentiment (although Zambia has largely been spared the strong uptrend in CPI seen in other parts of Africa) as well as the risk of increased government borrowing ahead of elections due by September. Still, with Zambia due to issue a maiden eurobond of USD 500mn later this year, and domestic yields increasingly attractive, investor interest in one of frontier Africa’s highest conviction trades is likely to grow.

Chart 1: USD-ZMK copper correlation weakens Index (10-Jan-2008=100)

Source: Standard Chartered Research

Chart 2: Offshore investors could be exiting on maturity Total government bonds maturing in 2011 (USD mn)

Source: Standard Chartered Research

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Standard Chartered Africa Focus Forecasts – Economies and FX

03 June 2011 23

Forecasts in BLUE (RED) indicate upward (downward) revisions over the past month

* Fiscal year starts in April in India and Kuwait, July in Bangladesh, Pakistan, and Egypt Source: Standard Chartered Research

^ Inflation: Core PCE deflator used for US

Country

Majors US^ -2.6 2.8 2.5 3.4 1.5 1.3 1.4 1.6 -2.9 -3.5 -4.0 -3.2 N.A. N.A. N.A. N.A.Euro area -4.1 1.7 2.0 2.2 0.3 1.6 2.7 1.9 -0.6 -0.7 -0.4 -0.2 1.48 1.35 1.32 1.35Japan -5.2 3.9 0.1 3.6 -1.4 -0.8 -0.2 0.2 2.8 3.2 2.2 2.5 83.00 88.00 90.00 90.00UK -4.9 1.3 1.4 1.9 2.2 3.3 4.7 2.2 -1.1 -2.4 -1.8 -1.4 1.63 1.57 1.53 1.55Canada -2.3 3.1 2.6 2.5 0.3 1.8 2.4 2.5 -2.7 -2.4 -2.2 -2.0 0.95 0.94 0.96 1.01Sw itzerland -1.5 2.6 2.2 2.4 -0.5 0.7 0.9 1.0 8.3 12.5 11.0 10.5 0.85 0.95 0.98 0.95Australia 1.3 2.8 3.4 3.8 1.9 2.8 3.4 3.9 -4.1 -3.7 -3.6 -3.2 1.08 0.98 0.94 0.95New Zealand -1.6 1.5 1.0 2.9 2.1 2.3 3.9 2.4 -6.0 -3.5 -4.0 -5.0 0.81 0.71 0.70 0.72

AsiaBangladesh* 5.7 5.5 6.0 6.6 6.7 7.3 6.8 6.3 2.7 3.7 0.8 0.3 70.50 70.50 70.80 70.80China 9.2 10.3 9.3 9.0 -0.7 3.3 5.5 3.0 5.1 5.5 3.6 3.4 6.42 6.32 6.25 6.20Hong Kong -2.7 6.8 6.0 5.0 0.5 2.4 5.2 4.0 9.0 7.5 8.0 8.5 7.775 7.765 7.765 7.770India* 8.0 8.5 8.1 8.8 3.6 9.4 8.4 6.5 -2.8 -2.6 -3.2 -2.5 45.50 45.00 44.50 44.00Indonesia 4.5 6.1 6.5 7.0 4.9 5.1 6.5 6.6 2.0 0.8 0.5 0.3 8,450 8,600 8,300 8,200Malaysia -1.7 7.2 5.1 6.0 0.6 1.7 3.4 2.5 16.5 12.0 17.0 15.5 2.95 2.88 2.95 2.88Pakistan* 1.2 4.1 2.4 4.5 20.8 11.7 14.3 13.2 -5.6 -2.0 -0.6 -1.5 87.50 89.80 90.50 92.10Philippines 0.9 7.2 5.7 6.0 3.2 3.8 4.7 5.4 5.3 6.5 6.1 5.5 42.50 43.00 42.00 41.00Singapore -0.8 14.5 5.5 6.0 0.6 2.8 4.2 2.5 19.1 22.2 15.0 16.7 1.21 1.18 1.19 1.17South Korea 0.3 6.2 4.2 4.8 2.8 2.9 4.0 3.0 3.9 2.8 2.0 1.5 1,040 1,030 1,025 1,025Sri Lanka 3.5 7.8 7.1 7.5 3.5 5.9 7.4 7.0 -2.1 -1.4 -2.8 -2.5 111.0 110 109 109Taiw an -1.9 10.5 5.6 6.0 -0.9 1.0 2.2 2.2 11.2 9.6 8.4 7.5 28.50 28.30 28.10 28.10Thailand -2.3 7.8 4.4 5.8 -0.8 3.3 3.7 3.8 7.1 3.0 1.3 0.4 30.25 30.50 29.50 29.00Vietnam 5.3 6.8 6.3 7.0 7.0 9.2 18.7 8.5 -7.0 -8.5 -10.5 -8.5 20,900 21,800 21,800 21,800

AfricaAngola -0.2 2.5 4.0 6.5 14.0 13.3 11.0 10.5 -3.5 2.0 1.5 3.0 93.40 93.10 93.00 92.50Botsw ana -4.9 7.2 4.9 4.8 8.3 6.9 8.2 6.7 0.5 -0.5 -1.5 3.5 6.63 6.82 6.73 6.98Cameroon 2.0 2.6 4.5 5.5 3.0 3.0 3.5 2.5 -6.0 1.6 1.3 1.4 443 486 497 486Côte d'lvoire 3.7 2.4 -7.0 5.0 5.0 1.4 2.5 2.5 1.5 6.8 2.5 1.0 443 486 497 486The Gambia 4.0 5.0 5.5 6.0 6.5 4.0 5.0 5.0 -17.0 -11.1 -10.8 -10.3 27.50 28.00 28.50 29.00Ghana 4.7 6.5 12.3 8.0 19.5 10.9 10.3 12.7 -10.2 -8.5 -9.5 -7.0 1.56 1.52 1.46 1.44Kenya 2.6 5.2 5.8 6.3 21.1 3.8 13.6 9.8 -4.5 -4.2 -4.7 -4.5 86.00 84.50 83.70 83.00Nigeria 4.2 6.6 8.5 7.8 12.0 13.8 12.5 8.4 2.0 8.0 12.0 14.0 156 154 153 150Sierra Leone 4.0 5.0 6.0 6.0 10.0 16.5 9.0 8.5 -9.1 -9.3 -9.5 -9.0 4,300 4,320 4,350 4,370South Africa -1.8 2.8 3.6 3.8 7.4 4.3 5.3 5.8 -4.1 -3.2 -4.2 -4.9 6.75 7.30 7.20 7.60Tanzania 5.5 6.5 6.7 7.5 12.7 6.9 9.3 7.7 -9.0 -8.8 -9.1 -8.7 1,580 1,570 1,550 1,570Uganda 6.3 6.4 6.8 7.5 13.5 5.2 14.1 7.3 -6.4 -7.2 -7.8 -9.2 2,350 2,400 2,380 2,330Zambia 6.4 7.1 5.8 6.4 13.6 8.9 10.5 7.8 -3.2 -2.4 -3.9 -6.7 4,800 4,700 4,600 4,700

Middle East and North AfricaAlgeria 2.1 3.3 4.0 4.5 5.6 5.0 5.0 4.0 -1.0 1.9 15.0 12.0 72.0 74.00 76.00 74.00Bahrain 3.0 4.1 3.0 4.5 1.2 2.5 1.0 3.5 2.0 5.0 10.0 12.0 0.38 0.38 0.38 0.38Egypt* 4.7 5.1 1.4 2.0 18.3 11.3 12.5 10.2 -2.3 -1.6 -1.2 -0.6 6.0 6.1 6.3 6.2Jordan 3.0 2.3 3.5 4.0 0.2 5.0 4.6 4.2 -10.0 -7.1 -7.6 -7.8 0.71 0.71 0.71 0.71Kuw ait* -5.5 3.0 3.5 4.0 3.0 4.0 5.0 4.5 20.0 26.0 27.0 28.0 0.28 0.3 0.29 0.29Lebanon 3.5 7.5 3.0 5.0 3.4 5.0 6.0 5.4 -11.5 -16.0 -15.0 -14.5 1,500 1,500 1,500 1,500Morocco 4.0 3.1 3.5 4.7 1.2 1.0 2.7 2.5 -0.5 -8.0 -7.0 -6.0 8.0 8.4 8.5 8.4Oman 3.7 4.0 4.5 4.7 3.6 3.2 4.0 4.0 1.0 6.5 7.0 7.5 0.39 0.39 0.39 0.39Qatar 9.0 12.5 18.7 6.3 -5.0 -5.0 2.0 3.5 4.2 16.0 22.0 20.0 3.64 3.64 3.64 3.64Saudi Arabia 0.2 3.8 6.6 4.0 4.4 5.5 7.0 5.8 6.0 6.5 7.0 7.0 3.75 3.75 3.75 3.75Tunisia 2.0 3.7 -0.5 4.5 3.7 4.8 4.0 4.0 -4.0 -2.3 -1.1 -1.0 1.4 1.4 1.45 1.4Turkey -4.7 8.0 5.8 5.5 6.2 8.6 6.7 6.0 -2.3 -6.5 -6.8 -6.2 1.55 1.51 1.48 1.48UAE 1.3 1.5 4.0 4.5 1.5 0.9 3.0 2.5 0.0 5.5 6.0 7.0 3.67 3.67 3.67 3.67

Latin AmericaArgentina 0.9 9.2 5.0 3.5 6.3 10.5 9.2 8.5 3.6 1.0 -0.1 -0.2 4.08 4.10 4.12 4.18Brazil -0.6 7.5 4.1 4.5 4.9 5.0 5.8 4.9 -1.5 -2.3 -2.8 -3.0 1.58 1.60 1.62 1.64Chile -1.7 5.2 6.0 4.5 -1.5 1.4 3.6 4.0 2.6 1.0 0.4 0.1 470 465 460 460Colombia 0.8 4.1 4.9 4.8 4.2 2.2 3.1 4.0 -2.2 -2.5 -2.6 -2.0 1,735 1,770 1,790 1,800Mexico -6.1 5.5 4.0 3.8 5.3 4.2 3.9 4.1 -0.7 -1.3 -1.5 -2.5 11.70 12.00 11.60 11.80Peru 0.9 8.8 6.0 4.5 2.9 1.7 2.5 3.1 0.2 -1.5 -1.0 -1.7 2.78 2.75 2.72 2.70

2009 20122010 2011Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)

20102009 2012 2010 20112011 Q2-112009 2012 Q1-12FX

Q3-11 Q4-11

Standard Chartered Africa Focus Forecasts – Rates

03 June 2011 24

Forecasts in BLUE (RED) indicate upward (downward) revisions over the past month

Source: Standard Chartered Research

Current Q2-11 Q3-11 Q4-11 Q1-12United States Policy rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

3M LIBOR 0.26 0.30 0.30 0.30 0.4510Y bond yield 3.00 3.30 3.60 3.65 3.95

Euro area Policy rate 1.25 1.25 1.50 1.75 2.00

3M LIBOR 1.43 1.50 1.85 2.15 2.2510Y bond yield 3.01 3.25 3.65 3.75 3.90

United Kingdom Policy rate 0.50 0.50 0.50 0.50 0.75

3M LIBOR 0.83 0.80 0.80 0.90 1.1010Y bond yield 3.28 3.40 3.75 3.80 4.00

Australia Policy rate 4.75 5.00 5.25 5.50 5.50

3M money 4.91 5.15 5.40 5.65 5.7010Y bond yield 5.46 5.65 5.80 5.95 6.05

China Policy rate 6.31 6.56 6.56 6.56 6.56

7D repo rate 3.90 2.90 2.70 2.50 2.5010Y bond yield 3.84 3.90 3.80 3.60 3.70

Hong Kong 3m HIBOR 0.26 0.25 0.25 0.25 0.40

10Y bond yield 2.40 2.60 2.90 3.10 3.40India Policy rate 7.25 7.5 7.75 7.75 7.75

Money market rate 8.10 8.25 8 7.75 7.510Y bond yield 8.34 8.50 8.50 8.25 8.25

Indonesia Policy rate 6.75 6.75 7.25 7.25 7.25

JIBOR 3M 7.13 7.20 7.70 7.60 7.50

10Y bond yield 7.36 7.50 7.75 7.50 7.50Malaysia Policy rate 3.00 3.00 3.50 3.50 3.50

3M KLIBOR 3.05 3.25 3.60 3.60 3.60

10Y bond yield 4.01 4.35 4.50 4.50 4.50Philippines Policy rate 4.50 4.75 4.75 5.25 5.75

3M PHIBOR 2.68 2.75 2.95 3.35 3.65

10Y bond yield 6.27 7.50 7.70 7.90 8.00Singapore 3M SGD SIBOR 0.44 0.44 0.50 0.50 0.50

10Y bond yield 2.36 2.60 2.75 2.75 2.75

South Korea Policy rate 3.00 3.25 3.50 3.50 3.75Money market rate 3.46 3.60 3.80 3.80 4.05

10Y bond yield 4.23 4.65 4.80 4.90 5.00

Taiwan Policy rate 1.75 1.88 2.00 2.13 2.253m TAIBOR 0.81 0.90 1.00 1.10 1.20

10Y bond yield 1.46 1.50 1.70 2.00 2.10

Thailand Policy rate 3.00 3.00 3.50 3.50 3.50BIBOR 3 M 3.13 3.20 3.60 3.65 3.65

10Y bond yield 3.69 3.90 4.00 4.10 4.20

Vietnam Policy rate (Refi rate) 14.00 15.00 16.00 16.00 16.00Overnight VNIBOR 13.15 14.70 15.75 15.75 15.75

2Y bond yield 13.00 13.00 14.00 13.50 13.00

Ghana Policy rate 13.00 13.00 13.00 13.00 14.5091-day T-bill rate 10.49 10.90 10.80 11.00 11.20

3Y bond yield 12.50 12.50 12.80 13.20 13.40

Kenya Policy rate 6.25 6.50 7.00 7.50 8.00

91-day T-bill rate 8.80 9.90 11.20 10.50 10.2010Y bond yield 12.53 13.60 13.40 13.00 12.60

Nigeria Policy rate 8.00 8.00 8.00 8.00 8.50

91-day T-bill rate 8.63 9.70 10.00 10.20 10.4010Y bond yield 12.88 12.40 11.80 11.20 10.80

South Africa Policy rate 5.50 5.50 5.50 6.00 6.50

91-day T-bill rate 5.46 5.56 5.72 6.04 6.6710Y bond yield 8.27 8.2 8.3 8.4 8.2

Brazil Policy rate

3M swap rate12M swap rate

Chile Policy rate

3M swap rate12M swap rate

Mexico Policy rate

3M swap rate12M swap rate

Standard Chartered Africa Focus Forecasts – Commodities

03 June 2011 25

Forecasts in BLUE (RED) indicate upward (downward) revisions over the past month

*Weekly quote; **Monthly average Source: Standard Chartered Research

***10-tonne contract ₁no forward price comparison available ₂cost and freight at China’s Tianjin port, 63.5% iron content, Indian origin.

Market close m/m Change

YTD y/y Q1 - 11 Q2 - 11 vs Fwd Q3 - 11 vs Fwd Q4 - 11 vs Fwd Q1 - 12 vs Fwd 2010 2011 vs Fwd 2012 vs Fwd

1-Jun-11 % % % A F % F % F % F % A F % F %

Crude oil (near future, USD/b)

NYMEX WTI 100 -12.1 +9.1 +36.9 94 106 2.1% 106 4.5% 103 0.7% 98 -4.7% 80 102 1.8% 94 -8.6%

ICE Brent 115 -8.8 +20.5 +54.8 106 118 0.7% 115 1.2% 110 -2.5% 105 -6.3% 80 112 -0.1% 101 -8.7%

Dubai spot₁ 110 -7.4 +24.2 +54.9 100 111 - 111 - 106 - 103 - 78 107 - 99 -

Refined oil products cracks and spreads

Singapore naphtha (USD/b)₁ -23 -276.6 -407.2 -250.9 0.4 -2 - 3 - 2 - 1 - 1.2 1 - 1 -

Singapore jet kerosene (USD/b)₁ 22 -32.7 +38.5 -516.2 20.7 24 - 22 - 23 - 21 - 12.1 22 - 26 -

Singapore gasoil (USD/b)₁ 21 -33.9 +35.3 +2979.2 18.8 20 - 21 - 22 - 19 - 11.4 20 - 23 -

Singapore regrade (USD/b)₁ 1 +11.0 +173.0 -99.2 1.9 4 - 1 - 1 - 2 - 0.6 2 - 3 -

Singapore fuel oil 180 (USD/b)₁ -5 +1541.9 -46.2 -5261.2 -8.1 -6 - -5 - -5 - -6 - -5.7 -6 - -5 -

Coal (USD/t)

API4 118 -3.7 -8.3 +32.2 120 125 3.1% 119 -0.8% 123 0.7% 125 0.5% 92 122 0.6% 127 1.4%

API2 120 -4.7 -7.1 +35.7 121 123 -1.4% 118 -4.0% 124 -1.5% 127 -0.9% 92 122 -2.0% 128 -1.0%

globalCOAL NEWC*₁ 119 -2.3 -7.0 +23.4 128 124 - 127 - 131 - 134 - 99 127 - 136 -

Base metals (LME 3m, USD/t)

Aluminium 2,668 -4.6 +6.9 +33.1 2,530 2,600 -1.4% 2,700 1.2% 2,550 -5.2% 2,500 -7.7% 2,202 2,595 -1.2% 2,400 -12.2%

Copper 9,102 -2.9 -5.7 +35.8 9,628 9,250 1.0% 9,500 4.3% 10,000 9.7% 10,500 15.1% 7,570 9,595 3.7% 10,000 9.9%

Lead 2,500 -0.4 -2.7 +46.2 2,574 2,600 2.5% 2,600 4.0% 2,700 8.5% 2,700 8.7% 2,173 2,619 3.5% 2,650 6.9%

Nickel 23,250 -14.5 -7.2 +16.9 26,894 25,500 4.2% 26,000 11.8% 24,000 3.3% 24,000 3.5% 21,910 25,598 4.7% 23,000 -0.5%

Tin 27,595 -14.5 +1.9 +55.2 29,869 30,000 2.2% 32,000 16.0% 34,000 23.1% 34,000 23.0% 20,448 31,467 10.0% 30,000 8.5%

Zinc 2,258 -0.5 -8.9 +24.0 2,415 2,300 1.9% 2,400 6.2% 2,450 7.7% 2,450 7.1% 2,188 2,391 4.1% 2,400 4.1%

Steel** (CRU assessment, USD/t)

HRC, US₁ 891 -7.5 - +15.6 877 833 - 837 - 860 - 930 - 665 852 - 930 -

HRC, Europe₁ 824 -7.2 - +11.4 818 787 - 795 - 813 - 870 - 685 803 - 870 -

HRC, Japan₁ 927 +1.9 - +14.3 860 796 - 804 - 815 - 941 - 788 819 - 941 -

HRC, China₁ 731 +1.1 - +7.8 730 707 - 721 - 743 - 754 - 633 725 - 754 -

Precious metals (spot, USD/oz)

Gold (spot) 1,540 -0.4 +8.3 +25.8 1,388 1,500 -0.7% 1,525 -1.3% 1,550 0.3% 1,600 3.4% 1,227 1,491 -0.5% 1,650 6.4%

Palladium (spot) 773 -0.1 -3.7 +68.5 791 750 -1.6% 800 2.7% 840 7.6% 860 10.0% 529 795 2.2% 900 15.1%

Platinum (spot) 1,819 -2.2 +2.8 +16.9 1,793 1,800 -0.4% 1,900 4.2% 2,000 9.3% 2,025 10.6% 1,613 1,873 3.3% 2,050 11.9%

Silver (spot) 37 -15.5 +19.7 +101.7 32.0 40 2.0% 38 -0.8% 38 0.7% 38 0.8% 20.2 37 1.0% 38 0.9%

Softs (near future)

NYBOT cocoa, USD/t 2,953 -12.9 -2.7 -1.2 3,302 3,200 5.4% 3,300 11.1% 3,500 16.3% 3,600 17.7% 2,945 3,326 8.0% 3,500 14.6%

LIFFE coffee, USD/t *** 2,562 -12.9 +23.1 +89.9 2,273 2,250 -10.9% 2,000 -22.6% 1,950 -25.4% 1,900 -27.1% 1,553 2,118 -15.3% 1,800 -30.4%

NYBOT coffee, USc/lb 256 -14.5 +6.4 +87.4 256 300 11.0% 275 6.1% 250 -5.3% 220 -17.5% 164 270 3.0% 210 -20.7%

NYBOT sugar, USc/lb 22 -3.9 -30.1 +56.0 30.5 23 -0.9% 21 -6.1% 20 -11.2% 21 -6.2% 22.3 24 -3.9% 26 18.6%

Fibres

NYBOT cotton No.2, Usc/lb 159 -9.5 +9.9 +103.0 180 180 6.1% 165 9.7% 140 3.2% 135 7.7% 94 166 4.6% 125 10.2%

Grains & oilseeds (nr future)

CBOT corn (maize), USc/bushel 759 +3.3 +20.0 +116.6 670 775 4.1% 800 10.6% 650 -4.6% 625 -9.7% 428 724 2.7% 600 -9.4%

CBOT Soybeans, USc/bushel 1,386 -0.2 -0.4 +48.8 1,380 1,450 5.9% 1,550 12.3% 1,550 12.4% 1,475 6.8% 1,049 1,482 7.7% 1,350 -1.1%

CBOT wheat, USc/bushel 759 +0.1 -4.2 +71.9 786.6 780 1.6% 770 -3.8% 700 -23.4% 675 -25.5% 581.5 759 -3.3% 650 -28.9%

CBOT rice, USD/cwt 15 -2.9 +3.9 +31.0 14.3 15 4.5% 13 -15.9% 12 -25.0% 14 -15.2% 12.5 14 -9.7% 14 -15.9%

Thai B rice 100%, USD/tonne*₁ 499 -1.4 -8.9 +4.8 537 530 - 525 - 525 - 530 - 518 529 - 500 -

Edible oils (3m future) - -

Palm oil (MDV,MYR/t) 3,435 +1.9 -9.9 +35.6 3,633 3,650 6.9% 3,700 10.3% 3,700 11.6% 3,900 18.1% 2,721 3,671 6.7% 3,850 17.3%

Soyoil (CBOT, USc/lb) 58 +0.4 +1.2 +56.1 58 57 -1.4% 58 -1.5% 60 0.5% 65 8.3% 43 58 -0.2% 60 0.2%

Energy

Metals

Agricultural products

Standard Chartered Africa Focus

02 June 2011 26

Disclosures Appendix Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Global Disclaimer: Standard Chartered Bank and or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. Users of this document should seek advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realised. Opinions, projections and estimates are subject to change without notice. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the instruments or currencies mentioned in this document. SCB and/or a connected company may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not publicly disclosed unless in line with its policies and procedures and the rules of its regulators. You are advised to make your own independent judgment with respect to any matter contained herein. 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Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1 Madison Avenue, New York, N.Y. 10010, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. 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Document is released at 06:00 GMT 03 June 2011

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