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2015 Quarter 1 Inflation – Inflation in the Democratic Republic of Congo (DRC) has been remarkably low and stable over the last two years. This is mainly ascribed to a stable exchange rate in addition to the fact that the monetisation of fiscal deficits has certainly become less prevalent than before. According to the Banque Centrale du Congo (BCC), headline inflation remained stable at 1.24% y-o-y in February. Growth – We forecast real GDP growth will decline from 8.9% in 2014 to 8.5% this year. We expect copper prices will decline significantly this year, which will pressure profit margins in the industry. In turn, this could result in a decline in reinvestment and limit expansion in the industry. Furthermore, signs that China’s economic growth is slowing does not bode particularly well for the DRC. National development plan – The government of the DRC is still seeking to increase revenue from the expansion of its mining industry. The ministry of mines finalised a draft mining code in February to be submitted to Parliament for approval. Initial media reports suggested that recent changes to the bill in relation to mining taxes were seemingly more in line with industry expectations. That said, the Chamber of Mines remains highly critical of the proposed new legislation and on March 30, warned it could set the industry back 10 years. OPPORTUNITIES STRENGTHS Vast untapped potential in the minerals sector. The DRC has around half of the Abundance in a number of natural resources, which means that there are good world’s cobalt reserves, and also has massive resources of copper, diamonds, prospects for foreign direct investment, economic growth, and exports over the oil, and gold. medium term. Large population and land area. Large amount of foreign direct investment inflows. More than two thirds of the DRC’s land area is covered in forests. In absolute terms, the DRC’s total forest area is the sixth largest in the world. Enormous hydropower potential; the DRC is home to around 60% of Africa’s total hydropower potential. Following debt relief in 2010, the country’s debt indicators are now much more favourable. Good progress has been made in increasing the level of foreign exchange reserves in the country. VULNERABILITIES WHAT IS BEING DONE? ‘Upper moderate’ political risk. Security risk remains elevated in the east and Opposition and activist organisations are becoming more vocal and President there is growing popular resistance against President Joseph Kabila. Kabila’s strong-arm tactics are not helping. Extremely challenging business environment. Infrastructure is poor, regulatory Reforms are progressing slowly. The DRC continues to rank near the bottom processes uncertain, and the bureaucracy inefficient. of a number of international indices on competitiveness. Economic freedom is extremely limited, while the private sector remains Private sector development will hopefully be boosted by the presence of underdeveloped. foreign skills, investment, and know-how. Exports are dominated by minerals, which exposes the economy to swings in As the economy develops, the share of minerals in total exports will decline international commodity prices and external demand. gradually. But the process will be slow. MEGA TRENDS Population 77,433,744 (July 2014 est.); Age: 15 - 64 years: 54.3% Population growth rate (%) 2.5% (2014 est.) Life expectancy at birth Total population: 56.54 years; male: 55.03 years; female: 58.09 years (2014 est.) HIV/AIDS Adult prevalence rate: 1.08%; People living with HIV/AIDS: 442,652 (2013 est.) Adult literacy rate (age 15 and over can read Total population: 63.8%; male: 78.1%; female: 50.0% (2015 est.) and write) Urbanisation Urban population: 41.5% of total population (2013); Urban population growth: 4.0% (2013) Population below $1.25 (PPP) poverty line 87.7% (2006 est.) Unemployment rate 49.0% (2013 est.) Employment (% of total) N/a Labour participation rate (% of total population ages 15+) 71.9% (2013) Business languages French (official), Lingala (a lingua franca trade language) Telephone & Internet users Main lines in use: 59,534 (2012); Mobile cellular: 28.23 million (2013); Internet users: 1.7 million (2013) Sources: CIA World Factbook, World Bank, ITU, UNAIDS & NKC Research 1 Total Corruption Perceptions Index 2014 (1 least, 175 most corrupt) Doing Business 2015 (1 best, 189 worst) Global Competitiveness 2014-15 (1 most, 144 least competitive) Economic Freedom 2015 (1 most, 178 least free) HDI Ranking 2013 (1 most, 187 least developed) 175 154 189 184 144 N/a 178 187 168 186 0 Source: NKC Research DRC 20 40 60 80 100 120 140 160 180 200 Risk environment / Risk outlook Sovereign Risk Ratings S&P Fitch Moody’s B-/Stable N/R B3/Stable Standard and Poor’s (S&P) affirmed the DRC’s long-term sovereign credit rating on February 13, while also maintaining the ratings outlook. The “B-” rating with a stable outlook continues to be supported by the fact that the country has been able to record strong real GDP growth rates in recent years, and is expected to continue to do so over the medium term. The credit agency noted that the DRC’s rating is further supported by “low external and government debt stocks since recent debt-forgiveness, and small fiscal deficits.” On the other hand, the credit rating is constrained by low income levels, weak institutional quality, potential political instability and large external imbalances. Moody’s assigned the DRC an inaugural long-term local- and foreign-currency issuer rating of “B3” – equivalent to a “B-” rating on the other agencies’ scales – with a stable outlook on 6 September 2013. In its 2015 Global Sovereign Outlook report published on 25 November 2014, Moody’s highlights that certain sub-Saharan Africa resource exporters – with the DRC being amongst the countries listed – may be “vulnerable to a sharper-than-expected slowdown in Chinese demand or further deterioration in commodity prices, given their significant trade linkages to China.” Infrastructure Diversity of the Economy Banking Sector Continuity of Economic Policy GDP Growth Poor Concentrated on minerals Fragile, underdeveloped Regulatory uncertainty Volatile; good medium-term prospects Key Balances Foreign Investment Socioeconomic Development Forex Reserves Twin deficits Strong Extremely low Low, but climbing Stock Market Listed Companies Liquidity Market Cap Dominant Sector Daily Trading Volume N/a N/a N/a N/a N/a N/a Capital Market Development Liquidity Maturity Range Municipal Bonds Corporate Bonds Yes Underdeveloped Limited 7, 28 and 90 days No No Macro-economic overview The agricultural sector fulfils a prominent role in the Democratic Republic of Congo’s (DRC) economy. The sector contributes roughly 21% to GDP and employs more than 60% of the labour force. The industrial sector centres on mining and mining-related construction. The mining sector has been the main driver behind economic growth in the country and should continue to stimulate growth over the medium to long term. Infrastructure development to support mining activities has also promoted industry, and most foreign investment is directed at mining-related infrastructural projects. Copper and cobalt are the two most prominent mining products and comprise the majority of the DRC’s exports. The services sector makes a contribution of around 41% to GDP, and is dominated by wholesale and retail trade, telecommunications, transport, and banking. The retail industry is largely undeveloped, with local supermarkets not providing modern retail facilities. Similarly, the financial sector in the DRC remains underdeveloped, limiting financial intermediation and the transmission mechanism of monetary policy. While the mining sector performed relatively well, based on figures retrieved from the Banque Centrale du Congo’s (BCC) Statistical Bulletin, the agricultural sector performed even better in 2014. In its Monetary Policy report for 2014, the BCC estimates that the economy expanded by 9.5% in 2014. The central bank highlights that economic growth is still primarily driven by the mining sector, with copper’s contribution to GDP being the largest. In a statement released following the conclusion of its mission in the DRC in December, the International Monetary Fund (IMF) estimates that the country recorded real GDP growth in the region of 9% last year. In turn and primarily on account of the strong performance of the agricultural sector, we have revised our estimate of real GDP growth in 2014 higher to 8.9%. Seeing as the DRC does not publish detailed national accounts, we will refrain from aligning our estimate to that of the BCC until such time as the data has been verified by the IMF. On March 3, Reuters reported that authorities were again targeting double-digit real GDP growth in 2015, similar to their ambitions a year earlier. We are less optimistic and forecast real GDP growth will decline to 8.5% this year. We expect copper prices will decline significantly this year, which will pressure profit margins in the industry. In turn, this could result in a decline in reinvestment and limit expansion in the industry. Furthermore, signs that China’s economic growth is slowing does not bode particularly well for the DRC. An economic slowdown in China could adversely affect economic growth in the DRC, through a decline in Chinese demand for DRC exports as well as decreased investment inflows originating from the Asian giant. 2 Economic Structure as % of GDP, 2014 Estimate Source: NKC Research Service/GDP 41.0% Agriculture/ GDP 20.9% Industry/GDP 38.2% The mining sector has been the DRC’s main foreign direct investment (FDI) draw card in recent years owing to the country’s vast mineral wealth and untapped natural resources. Despite this, significant impediments to increased foreign investment remain. Firstly, the country still represents one of the most difficult environments in which to do business, as evidenced by the DRC’s poor ranking in the World Bank’s latest Doing Business publication. Secondly, as a fragile post-conflict country, the DRC has huge reconstruction needs and infrastructure, limped by a lack of maintenance, has been left severely damaged due to past conflict. Net FDI has been on a steady upwards trajectory from 2009 onwards. Net FDI increased from roughly $1bn in 2009 to $2.3bn in 2014. The outlook in this regard remains encouraging. We forecast net FDI will increase to $2.4bn in 2015. Real GDP Growth & Net FDI/GDP 10.0 8.5 Source: NKC Research 9.0 8.0 8.0 7.5 7.0 7.0 6.0 6.5 5.0 6.0 4.0 5.5 3.0 5.0 2.0 4.5 2009 2010 2011 2012 2013 2014E 2015F 2016F GDP Growth (y-o-y, %) (lhs) Net FDI/GDP (rhs) The DRC’s external balances are highly dependent on the extractive sector, seeing as the vast majority of the country’s exports are mining commodities. In this regard, copper and cobalt account for the largest share of total export earnings. More specifically, we estimate that copper and cobalt accounted for roughly 59% and 21% of the DRC’s total export earnings last year, respectively. Crude oil represented a further 8% of total exports last year, with the remainder mostly made up of other mineral and agricultural exports. Copper production increased by roughly 12% in 2014. That said, increased output would have been partly offset by a sharp decline in the price of the red metal. International copper prices declined from an average of $7,328/tonne in 2013 to an average of $6,866/tonne in 2014. The exact opposite applies to the case for cobalt. Cobalt output declined by 1.25% y-o-y in 2014, while the price for the metal trended higher last year. Total exports are estimated to have reached $11bn in 2014, up from $10bn in 2013. Meanwhile, we estimate that imports remained fairly flat at $10.1bn in 2014. As a result, we believe the trade balance would have moved back into positive territory and recorded a surplus of $0.9bn in 2014. Exports ($ bn) Imports ($ bn) 2014E 2015F Main Imports: % share of total 2016F Machinery & boilers Vehicles other than railway, tramway 2014E 2015F 2016F Machinery & boilers 12.86 14.42 16.14 Vehicles other than railway, tramway 6.20 6.95 7.78 Articles of iron or steel 5.29 5.93 6.64 Electrical, electronic equipment 5.13 5.70 6.38 Articles of iron or steel Electrical, electronic equipment Copper Main Exports: % share of total Cobalt 2014E 2015F 2016F Copper 59.16 60.30 61.86 Cobalt 20.71 21.41 20.56 Crude petroleum oils 7.61 5.13 5.36 Diamonds, not mounted or set 1.97 1.87 1.78 Crude petroleum oils Diamonds, not mounted or set Source: NKC Research 0.0 2.0 4.0 6.0 8.0 Looking ahead to this year, our baseline scenario predicts an increase in both copper and cobalt production. That said, an anticipated decline in international copper prices – we forecast international copper prices will decline to roughly $6,400/tonne in 2015 – will partly offset the increase in production. Although the outlook for cobalt prices remains uncertain, the global prices for a number of the DRC’s other key export commodities – notably crude oil and gold – are expected to trend significantly lower this year. Taking all of these factors into account, we forecast total exports will decline to $10.8bn in 2015. Imports are forecast to decline slightly to $10bn this year. As a result, we believe the trade surplus will narrow to $0.8bn in 2015. As a result, we forecast the current account deficit will widen from $3.1bn in 2014 to $3.9bn this year. The medium-term outlook in this regard remains somewhat uncertain. Diverging monetary policies between the US on the one side and the EU and Japan on the other are likely to support a stronger greenback moving forward. International commodity prices could trend even lower as a result. The slowdown in China and the associated decline in demand for the DRC’s minerals will also hold implications for the country’s external balances moving forward. 3 Current Account & Budget Balance (% of GDP) 0.0 5.0 -4.0 2.5 -8.0 0.0 -12.0 Source: NKC Research -2.5 2009 2010 2011 2012 2013 2014E 2015F 2016F Current Account/GDP (lhs) Budget Balance/GDP (rhs) The government has succeeded in preventing large fiscal deficits in recent years. In actual fact, the DRC recorded a fairly large fiscal surplus equal to 3.8% of GDP back in 2010. This was followed by a small deficit (1.2% of GDP) in 2011 and an even smaller surplus (0.5% of GDP) the year thereafter. Weaker expenditure controls resulted in a larger fiscal deficit – equal to roughly 1.8% of GDP – in 2013. From a debt perspective, the fact that the country has been able to maintain a fairly tight fiscal policy stance in recent years is certainly positive. That said, we forecast the fiscal deficit will widen from 1% of GDP in 2014 to 1.5% of GDP in 2015. In the statement released following the conclusion of its mission in the DRC in December, the IMF highlighted that reforms aimed at broadening the tax base have stalled to a certain extent. According to the Fund, “fiscal developments are characterised by a slight decline in tax revenues” and value added tax revenue remains “weaker than expected as a result of the lack of controls.” Lower than anticipated fiscal revenues in addition to rising demand for social and infrastructural spending should contribute to a wider fiscal deficit this year. Average CPI (% change, y-o-y) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Source: NKC Research 2009 2010 2011 2012 2013 2014E 2015F 2016F Inflation in the DRC has been remarkably low and stable over the last two years. This is mainly ascribed to a stable exchange rate in addition to the fact that the monetisation of fiscal deficits has certainly become less prevalent than before. Inflation averaged roughly 1.17% in 2013. However, inflation was on an upwards trajectory during the 2014 Q1 - Q3 period, partly ascribed to the effects of the weaker franc still filtering through to higher prices. Inflation increased from 1.17% y-o-y in January to 1.3% y-o-y in September. Since then however, inflationary pressures again started to ease and the headline figure had declined to 1.26% y-o-y by December 2014 and further to 1.24% y-o-y by February 2015. We forecast inflation will average roughly 2.5% in 2015, up from 1.3% in 2014. That said, it must be highlighted that this forecast is, to an extent, dependent on authorities heeding the IMF’s advice and allowing the currency to depreciate with the aim of bolstering foreign reserves. In turn, this will add upwards pressure on inflation via the import channel. Other factors that could push prices higher relate to food price shocks or a marked deterioration in domestic security. In addition, we believe monetary policy will remain accommodative throughout 2015, with a slight uptick in inflation possibly not providing sufficient justification for a significant increase in interest rates. CONTACT DETAILS KPMG NKC NKC Independent Economists CC Jean-Yves Parant – designation is Partner, RD Congo and Congo Tel +243 990010010 Email [email protected] 12 Cecilia Street Paarl, 7646, South Africa P O Box 3020, Paarl, 7620 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. 4