Download 2015 Quarter 1

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.
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