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SUDAN SNAPSHOT 2015 Quarter 1 Inflation – The consumer price index (CPI) inflation rate approached 50% y-o-y during mid-2014, driven by base effects from the fuel subsidy cut the year before. Since then, CPI inflation has eased to average 23.4% y-o-y during the first quarter of this year. Growth – The International Monetary Fund (IMF) projects Sudan’s overall real GDP growth rate to accelerate from 3.1% last year to about 3.4% in 2015 on the back of relatively good agricultural harvests and continued healthy gold production, before increasing further to 3.9% next year. National development plan – The Sudanese authorities embarked on a stabilisation programme in September 2013. According to the IMF, the success of this programme hinges on improvements in the domestic and regional political landscape. The programme, which aims to restore macroeconomic stability, strengthen social safety nets, and lay the foundation for sustainable growth, is also supported by Sudan's 14th IMF Staff Monitored Programme (SMP). OPPORTUNITIES STRENGTHS Peace in South Sudan would boost revenue from transit fees. Oil infrastructure exists (pipelines and harbour). Peace on the border would allow more oil exploration in currently unexplored Huge land and water resources. blocks. Reform and infrastructure development could attract interest in the promising Significant gold resources, with more discoveries possible. gold sector. Vast land with sufficient water presents real opportunities in agriculture. Estimates suggest significant oil reserves. VULNERABILITIES WHAT IS BEING DONE? Very high external debt. As part of secession agreement, Sudan accepted responsibility of entire debt stock – conditional on the country receiving debt relief by early 2015. Sudan still has United States (US) trade sanctions imposed against it. South Sudan has been fairly pro-active in assisting its neighbour in applying for debt relief. However, efforts to date have been unsuccessful. With the secession of South Sudan, Sudan lost approximately 75% of its oil revenue. Needs to find new ways in which to generate foreign revenue. Conflict in South Sudan disrupts oil flows through Sudan and reduces revenue generated through transit fees. Progress is being made in terms of economic diversification, but this is slow. Focus is on gold mining and agriculture. Sudan has so far not made any attempts to intervene, except for proposing a joint force with South Sudan to patrol the border. US sanctions have been in place since 1997 and are renewed annually. MEGA TRENDS Population 35,482,233 (July 2014 est.); Age 15 - 64: 55.9% Population growth rate (%) 1.78% (2014 est.) Life expectancy at birth Total population: 63.32 years; male: 61.27 years; female: 65.46 years (2014 est.) HIV/AIDS Adult prevalence rate: 0.24%; People living with HIV/AIDS: 49,287 (2013 est.) Adult literacy rate (age 15 and over can read Total population: 75.9%; male: 83.3%; female: 68.6% (2015 est.) and write) Urbanisation Urban population: 33.5% of total population (2013); Urban population growth: 2.5% (2013) Population below $1.25 (PPP) poverty line 19.8% (2009 est.) Unemployment rate 20% (2012 est.) Employment (% of total) N/a Labour participation rate (% of total population ages 15+) 53.5 (2013) Business languages Arabic, English Telephone & Internet users Main lines in use: 415,571; Mobile cellular: 27.66 million; Internet users: 8.05 million (2013) Sources: CIA World Factbook, World Bank, ITU, UNAIDS, UNDP & NKC Research 1 Risk environment / Risk outlook Sovereign Risk Ratings S&P Fitch Moody’s N/a N/a N/a Sudan is not currently rated by any of the three major rating agencies, namely Standard and Poor’s (S&P), Fitch Ratings and Moody’s Investors Service. Infrastructure Diversity of the Economy Banking Sector Continuity of Economic Policy GDP Growth Fairly limited Dominated by oil, mining and agriculture Average Stable but poor, risk of sudden change in government Weak Key Balances Foreign Investment Socioeconomic Development Forex Reserves Expected budget and current account deficit Average Average Poor, but improving slowly Stock Market Listed Companies Liquidity Market Cap Dominant Sector Khartoum Stock Exchange (KSE) 63 – Source KSE website Limited N/a Telecoms, finance, insurance Daily Trading Volume $5.3m (April 2014 est.) Capital Market Development Liquidity Maturity range Municipal bonds Corporate bonds Yes Low Limited N/a N/a Yes Macro-economic overview NOTE: The availability of economic indicators subsequent to the secession of South Sudan is improving, but remains insufficient for the purpose of thorough analysis. In addition, the data that is available is too often subject to politically motivated interference. Because of the volatile political situation, many economic indicators are subject to rapid change, including trade indicators which are affected by the relationship between Sudan and South Sudan. As a consequence, this snapshot aims to provide a broad overview on recent events and developments. Apart from Sudan’s political tensions, the country continues to struggle from an economic perspective. There has been some improvement with regard to economic policies put in place by the Sudanese authorities, but structural weaknesses and imbalances continue to exert pressure on the country. Following the secession of South Sudan in 2011, Sudan was left without the lion’s share of its oil production capacity and a substantial part of its revenue stream was cut off. Moreover, the country was left with the total debt stock. The economy has not been able to bounce back since and although there are positive signs in the gold mining and agricultural sectors, GDP growth is expected to underwhelm over the medium term. According to the IMF, the agricultural sector accounts for only about 26% of GDP, though the sector supports nearly 70% of the population. Before oil rose to prominence in Sudan, the agricultural sector was even more vital, reaching a peak of 47% of GDP in 1996. With South Sudan taking the bulk of the territory’s oil with it, agriculture has been thrust back into the spotlight and, according to the IMF, agricultural produce comprised nearly the same proportion of Sudan’s exports as oil in 2013. The Fund has earmarked agriculture to be one of the key drivers for economic growth in Sudan over the medium term as structural reforms take hold and regional investment in the sector rise. While the consequences from South Sudan’s secession linger, there have been some positive developments leading to a modest economic recovery over the last two years. Improved efficiency in the extraction of gold, combined with expansion of the manufacturing, trade, and services sectors saw Sudan’s non-oil sector record an estimated real growth rate of 2.9% last year. Favourable weather conditions in 2014 also helped the agricultural sector contribute positively to the non-oil economy’s expansion. On the other hand, the oil sector’s expansion slowed considerably from the 15.6% recorded in 2013 to an estimated 6.3% in 2014. Looking ahead, the IMF projects Sudan’s overall real GDP growth rate to accelerate from 3.1% last year to about 3.4% in 2015 on the back of relatively good agricultural harvests and continued healthy gold production, before increasing further to 3.9% next year. Real GDP Growth & Net FDI/GDP 5.0 5.0 4.0 4.5 3.0 4.0 2.0 3.5 1.0 3.0 0.0 2.5 -1.0 2.0 -2.0 1.5 Source: NKC Research -3.0 2012 2013 2014E GDP Growth (y-o-y, %) (lhs) 2015F 1.0 2016F Net FDI/GDP (rhs) 2 With ample proven oil reserves and 47.4% of the country’s surface area categorised as agricultural land, the hydrocarbon and agricultural industries represent significant potential for future expansion. Sudan has especially been a destination of choice for the United Arab Emirates (UAE), as the country could prove to be a vital food basket for the Arab world. On the downside, various factors still serve to deter foreign investment in the country. One of the principal issues in this regard pertains to ongoing United States (US) and European Union (EU) sanctions. The former prohibits companies domiciled in the US from doing business with Sudan, while the EU sanctions are narrower, as they apply specifically to technical assistance related to military activities, or else are directed at certain embargoed individuals. However, companies with strong ties to their US counterparts often refrain from doing business with Sudan out of fear that such actions could hurt dealings with the US. Exports ($ bn) Imports ($ bn) 2014E 2015F 2016F Machinery & transport equipment Main Imports: % share of total 2014E 2015F 2016F Machinery & transport equipment 26.22 27.30 27.89 Foodstuffs Foodstuffs 21.59 19.31 18.28 Petroleum products 18.84 19.74 20.10 Manufactured goods 18.54 19.49 19.97 Main Exports: % share of total 2014E 2015F 2016F Other Exports 36.83 36.40 41.00 Crude oil 36.54 38.00 35.33 Gold 22.73 21.95 20.29 Petroleum products 3.90 3.65 3.39 Petroleum products Manufactured goods Other Exports Crude oil Gold Petroleum products 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Source: NKC Research Sudan’s oil exports fell drastically following the secession of South Sudan, decreasing by almost 77% in 2012, and a further 14.5% in 2013 when political issues saw the Sudanese government close their ports to oil from South Sudan. However, resumption of oil production in South Sudan, as well as the reopening of Sudan’s pipelines, saw oil exports out of Sudan climb by 21.2% last year. In turn, the gold mining sector has grown rapidly over the past decade. Although reliable data on gold production has not been forthcoming, the IMF reports that Sudan may be the 15th largest gold producer in the world and third on the continent. At this stage, gold mining in Sudan is still largely arsenal and significant amounts of yellow metal are suspected to be smuggled out of the country annually. The authorities estimate that close to one million labourers are workers active in the gold mining sector, equating to about 11% of total employment. However, it has not been plain sailing, apart from security concerns, the gold mining industry has also come up against falling international gold prices, which have impacted production significantly. Nevertheless, the government has attracted several foreign companies into the sector in recent years and the sector is set to improve over the medium term. 0.0 Current Account & Budget Balance (% of GDP) 0.0 -3.0 -1.0 -6.0 -2.0 -9.0 -3.0 Source: NKC Research -12.0 -4.0 2012 2013 2014E Current Account/GDP (lhs) 2015F 2016F Budget Balance/GDP (rhs) One of the biggest remnants of South Sudan’s secession is Sudan’s loss of government revenues. The problem is even more pronounced given Sudan’s substantial debt burden. To make matters worse, in the months following the split, Khartoum and Juba could not reach an agreement in relation to oil transit fees, which ultimately proved detrimental for both economies. Since then, some form of agreement has been reached where South Sudan will repay its northern neighbour $3bn as compensation following its breakaway. In January 2015, South Sudan indicated that the fees payable to Sudan, currently $25/bbl, amounted to $844m during 2014, which made up a considerable portion of South Sudan’s oil revenues. In fact, after paying its debt obligations and paying Sudan’s transit fees, South Sudan was left with only $1.71bn from its oil revenue after selling around 36.6 million barrels. Given the sizable cut that Sudan takes from South Sudan’s oil earnings, about 45% at current oil prices, the Southern neighbour approached Sudan to negotiate lowering the transfer fees charges on shipping oil through Sudan. As of writing, these negotiations are ongoing. During the IMF’s recent Article IV Consultation with Sudan, the Fund highlighted the need for fiscal consolidation. The IMF called for reinvigorated revenue mobilisation and belt-tightening of current spending, including a gradual phasing-out of fuel subsidies. Moreover, the country needs to increase public investment and social spending, according to the IMF. Measures set to kick in from this year onward include the reduction of tax exemptions, reforms of the taxation of gold-related activities, and improvements in tax administration, according to the multilateral organisation. According to IMF data, Sudan’s total revenue and grants amounted to 11.4% of GDP last year and are expected to tick up to 12% of GDP this year and further to 12.4% of GDP next year. Increased revenue will primarily stem from rising oil revenues. Total expenditure is anticipated to tick up to 13.3% of GDP this year from 12.4% of GDP during 2014, before starting to slowly moderate over the medium term due to slowing current expenditure. As such, the budget deficit is expected to stretch to about 1.2% of GDP this year, from 1% of GDP last year, before narrowing steadily over the medium term. 3 Average CPI (% change, y-o-y) 60.0 Source: NKC Research 50.0 40.0 30.0 20.0 10.0 0.0 Sudan’s central bank operates according to Sharia principles, as such; conventional monetary policy instruments – such as interest rates – are not available to implement policy decisions. Instead, proxies such as Islamic bonds, open market operations, and deposits in commercial banks are used to achieve similar effects. In the latest Article IV Consultation with Sudan, the IMF implored the country to tighten monetary policy and further lower central bank financing of the government’s fiscal outlays in order to curb inflation, which during the middle of last year was trending just below 50% y-o-y. The Fund added that Sudanese authorities should scale down on unsterilised gold purchases (and refrain from using the parallel exchange rate to conduct these purchases) and mop up the large excess reserves. Sudan’s CPI inflation averaged 37.5% during 2014, up marginally from an average of 37.1% seen during 2013, which in turn, was up from an average of 35.1% the previous year. Before the secession of South Sudan, Sudan was accustomed to more moderate levels of inflationary pressures, with inflation averaging 9.1% during 2000-10. However, the economy has not quite recovered from the shock of South Sudan’s breakaway and money growth, along with reduced subsidies, has resulted in a surge in headline CPI inflation. In late 2013, the government decided to cut fuel subsidies, which caused prices of gasoline and diesel to increase by almost 100%. This created a surge in inflationary pressures, though the IMF noted the easing of price pressures during the latter half of 2014 as the once-off effects of the energy price increases started to wane. In fact, CPI inflation eased from 46.8% y-o-y in July to 25.7% y-o-y during December. According to the Central Statistics Office, CPI inflation eased further to average 23.4% y-o-y during the first quarter of this year. Slowing price pressures stemmed primarily from food-related items, which constitute 52.9% of the CPI basket. CONTACT DETAILS KPMG NKC NKC Independent Economists CC Mohammed Yehia– designation is Partner 12 Cecilia Street Paarl, 7646, South Africa P O Box 3020, Paarl, 7620 Tel +20 23 536 2200 Email [email protected] Tel: +27(0)21 863-6200 Fax: +27(0)21 863-2728 Email: [email protected] GPS coordinates S33°45.379' E018°58.015' The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon such information or opinions. © 2015 KPMG Africa Limited, a Cayman Islands company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 4