Alpha Capital Monthly Research Newsletter - June 2024

Dear Mwekezaji,

The month of June marked the end of the fiscal year 2023/24, and thus there is a lot to unpack. Beginning with the national budget and the Finance Act amendments, to annual economic performance. The monetary policy report was published right in the beginning of July, but it is worth discussing as it explains the quarter and guides the near future. The month, similar to the quarter, saw slower capital markets in terms of transactions and price movements, as the action was concentrated on March 2024.

Macroeconomic Development

Economic Growth

Economic growth stood at 5.1% in 2023 as reported by the National Bureau of Statistics (NBS), while the World Bank and African Development Bank project Tanzania’s economic growth to reach 6% as of 2026. Leading sectors include financial sector, mining, technology and tourism. Growth in the financial sector stems from the government’s initiatives to improve the business environment and promote investment opportunities.

Both, Moody’s and Fitch, upgraded their rating of Tanzania, highlighting reasons as macroeconomic prudence, low inflation and debt sustainability among others. The IMF just finished a staff visit and approved two financing programs worth $935.6 million under the Extended Credit Facility (ECF) and Resilience and Sustainability Facility (RSF).

Inflation

Annual headline inflation remained at 3.1% for a third consecutive month as food inflation falls to below 1%. Core inflation stood at 3.6% similar to May 2024, and down from 3.9% in the end of March 2024. Non-core inflation was 30bps down on a monthly basis, settling at 1.8%, but twice the number seen in the end of March.

Energy, Fuel and Utilities went up to 13.5% from 6.6% in March 2024, but the weight of the index lacks enough material impact to lift neither headline inflation nor non-core inflation. Moreover, its movement was offset by the Unprocessed Food Index which saw a deflation of 1.3% from 0.6% in March. Unprocessed Food has a 78% weight in the non-core inflation and 20.4% in the headline inflation while the energy index weighs 22% and 5.7% in the two segments respectively. However, prolonged high energy inflation may risk a spill over into other segments given elevated cost of production and transport expenses. Tanzania remains with the lowest inflation within the region.

Monetary Policy

The central bank maintained the central bank rate (CBR) at 6% in the meeting held on 3rd July 2024, indicating the need to balance between maintaining sufficient liquidity in the banking sector and limit the demand for foreign exchange to improve the balance of payment and support the value of the shilling. The anchor rate, the 7-days interbank rate, remained mostly in the upper side of the target range throughout the month. Moreover, the month of June saw the highest weighted average 7-days interbank rate throughout the quarter, while two sessions during the month saw rates higher than the upper threshold of 8.0%. The monthly weighted average rate stood at 7.50% in June, from 7.36% in May. The weighted average rate for the first week of July was 7.12%, while two sessions have already seen rates higher than 8.0%.

In the Monetary Policy Committee Statement, the central bank stresses that foreign exchange supply saw a boost in the end of June, stemming from tobacco, gold and tourism, and expects further improvement in the near future, particularly from traditional exports, mining and tourism. Improvement in the foreign exchange supply shall allow flexibility of the central bank to focus on economic growth, with limited worry on imported inflation. Foreign exchange stability is further dependent on the U.S monetary policy which has seen an elongated contractionary stance.

The Tanzania Shilling has depreciated by 0.56% in June in the Interbank Foreign Exchange Market (IFEM), and 3.3% since the beginning of the year. Between February and May 2024, the Bank of Tanzania has sold $182 million in the IFEM to support the Shilling. The amount sold represents 89% of the total amount sold in the IFEM during the period.

National Budget 2024/25

The national budget and the Finance Act amendments have highlighted the government’s measures to limit the demand for foreign exchange in domestic transactions, including enforcing the usage of the Tanzania’s legal tender for domestic price quotations and transactions. The government is leading by example, by changing the quotation currency on mountain climbing license fees from USD to TZS, along with lowering the respective fees to promote the tourism sector.

Moreover, the government has put a number of incentives to domesticate refining and sales of minerals, particularly to the central bank. The measure is aimed at boosting foreign reserves and diversifying from the USD which has not only seen global shortage since the U.S adopted a contractionary policy in 2022, but also faces a number of uncertainties from shifting geopolitical patterns.

Events in the budget speech and Finance Bill that directly affect capital markets include the relief of taxes for aircraft companies, tea processing companies and exemption of withholding tax on interest payable by resident financial institutions to foreign financial institutions meeting some predetermined conditions. Another initiative that blesses the capital market is the government’s plan to establish a venture capital fund. Efficient execution of this initiative shall shift the balance for Tanzania’s capital markets and potentially end the IPO drought facing the bourse. For a detailed Alpha Capital 's Budget and Finance Act review report follow the link.  

Capital Markets

Equity

Given increased activities surrounding the last month of the fiscal year, including the national budget, issuance calendar, and the last long term Treasury auctions for the year, equity turnover for June fell by 65% compared to May 2024. Equity turnover for June amounted to TZS 7.25 billion compared to TZS 20.92 billion in May 2024. Moreover, June saw fewer corporate actions such dividend announcements and annual general meetings, compared to May, particularly for the two most formidable stocks, CRDB and NMB. Turnover on the two counters dropped by 66% and 83% respectively.

Despite the decline in activities, CRDB remained the top mover for the month of June, accounting for 45% of the total equity turnover for the month. CRDB was followed by TCC and NMB which both accounted for 23% and 16% of the total equity turnover. TCC saw block transactions on 274,000 shares, realizing a weighted average price of TZS 6,012/-. Similarly, CRDB was the top mover for Q2-24 and H1-24, accounting for 47% and 52% respectively.

Despite a 65% decline in the total equity turnover, the net foreign outflow dropped by only 29% as outflows persist on a similar path for the last two years. Foreign investors accounted for 29.25% of the total equity divestments and 21.97% of the total equity investments. The net foreign outflow for the month amounted to TZS 527.35 million ($0.19 million), down from TZS 742.76 million ($0.27 million) in May 2024.

While global investors had re-engaged with funds flow into emerging markets since the end of 2023, the delay in U.S rate cuts has seen a reversal of the development since May 2024. Data from the Institute of International Finance (IIF) shows that global investors had begun re-investments into specific emerging markets with recovery stories and implementation of structural reforms such as cutting back subsidies and raising tax collections. However, frontier markets were still suffering from funds outflows.

Despite a drop in equity turnover, and major stocks getting into ex-dividend period, the Tanzania Share Index (TSI) gained 30.40 points to close the month at 4,475.21 points. This follows a 0.68% appreciation of the domestic market capitalization, while eight counters saw price movements, equally distributed between gainers and losers.

The top gainer for the month was AFRIPRISE which went up 10.5% in the last week of the month following a name change from TCCIA Investment Company Ltd (DSE: TICL). Following the name change, the company appeared on the top of the trading board which lists stocks alphabetically, thus raising its visibility and awareness of fundamentals, including a more than 40% profit growth for the year 2023, regional exposure, and a successful one-on-one rights issue in the end of 2023.

DSE was the next top gainer, with a 7.84% price gain during the month, and 22.22% since the beginning of the year. The price of DSE, albeit a delayed reaction, follows a 30% profit growth for the year 2023, and a dividend of TZS 145/- that was just announced in the last week of the month. DSE is already up more than 23% since the beginning of the year following the reported profit growth.

CRDB and NICOL saw slight price gains of 1.96% and 1.27% respectively. The price of CRDB readjusted from the fall of the ex-dividend period while the market awaits half year results to reassess the potential performance of the year 2024. CRDB is up 14% since the beginning of the year, as the price began rising again in June as the economy takes shape with the financial sector leading the grow pack.

NICOL has sustained elevated prices, marking a 60% gain since the beginning of the year, stemming from the company’s 23% profit growth, but also 26% dividend growth of NMB which assures investment income growth for NICOL for the year 2024.

The top loser for the month was TCCL which saw its price drop by 9.47% following retail shareholders growing impatient for a presumably delayed offer from Scancem International D.A. The market expected an offer by the end of Q1-24, and immediately after, the price of TCCL began to tank, having dropped by 18.1% since then.

TATEPA was the next top loser following an 8.33% price decline as the Finance Bill provided a room for tax relief for the company, which might have developed some appetite for investors. However, TTP has been loss making since 2013, and as of September 2022 TTP had an accumulated loss of TZS 20.1 billion and a negative equity of TZS 2.9 billion.

Another counter that saw a price drop was MKCB which just recently graduated to the Main Investment Market (MIM) window. MKCB has been developing some appetite recently after clearing its accumulated losses, and lowering its cost to income ratio to 48%. The bank is currently trading at a PE ratio of 1.85x while at 9% the NPL ratio is higher than the central bank’s threshold of 5%, hence not meeting the minimum requirement for dividend payment eligibility. Uncertainties on the dividend, including a lack of dividend policy, are what’s suppressing MKCB’s price.

NMB also saw its price drop by a slight 1.89% as the bank entered the ex-dividend period during the month, and paid a dividend of TZS 361.18/- per share on 17th June 2024. The drop of NMB price follows an 11.8% price increase in May due to the cum-dividend period. However, NMB was still up 15.6% in the end of June 2024 compared to the beginning of the year. Moreover, the counter has began a fresh rally in the beginning of July as investors anticipate handsome financial results for H1-24.

On a quarterly basis, equity turnover dropped by 32.5% to TZS 38.89 billion in Q2-24, compared to Q1-24. The decline follows a slowdown in foreign sell-off on the CRDB counter. Turnover on the CRDB counter dropped 42% between the two quarters. As a result, foreign sales in Q2-24 fell to TZS 8.54 billion from TZS 26.77 billion in Q1-24, while foreign purchases slightly fell by 6.36% to TZS 4.11 billion. Moreover, equity turnover for H1-24 was 97% higher than a similar period last year, amounting to TZS 96.49 billion.

Fixed Income Securities

The month of June saw a bonds turnover of TZS 340.91 billion which is 14% higher than May 2024. The 20-years 15.49% tenor dominated the secondary market, accounting for 48% of total fixed income transactions in June. However, bonds turnover fell 12.6% in Q2-24 compared to the previous quarter, while the total turnover for H1-24 amounts to TZS 1.84 trillion.

In the primary market, the Bank of Tanzania raised TZS 507.19 billion in June, through three auctions. The central bank conducted a 20-years, 25-years and a Treasury bills auction during the month. The overall subscription on the auctions was 337% as the aggregate tender size for the three auctions amounts to TZS 1.25 trillion, demonstrating ample liquidity in the economy.

Furthermore, June marked the end of both, the fiscal year 2023/24 and the issuance calendar published in February 2024. The government approved for the government to borrow TZS 6.62 trillion from domestic market in the approved national budget. Subsequently, the central bank published a new issuance calendar for H1-2024/25 while maintaining the re-opening program. Treasury bonds were prioritized in the calendar, while re-openings of the 20-years tenor amount to six (6) out of fifteen (15) Treasury bonds auctions. Find the Treasury bonds analysis report that discusses the calendar extensively, along with the bond market for the fiscal year 2023/24, including primary activities, yearly secondary market activities, maturities, and yield movement.

Lookouts and Outlook

According to DSE’s media platforms, the Dar es Salaam Stock Exchange held a workshop with its stakeholders in June, to review the DSE trading rules with the primary objective of enhancing liquidity in the equity section of the trading board. Three counters, TBL, TCC and Vodacom, which accounts for more than 50% of the domestic market capitalization on DSE, have seen prices stagnant for more than five years and counting. This has significantly stressed investors, particularly retail, who find their capital locked in the respective stocks. DSE shareholders have raised the challenge in annual general meetings in the past since it limits transaction fees revenue for the exchange. We wait to see the outcome of the review and its impact on the liquidity in the market.

The collective investment scheme space is also getting more participants from the private sector, challenging the dominance of government fund managers since 2003. This follows the launch of the Timiza Fund by Zan Securities in June 2024, and launching of two schemes by Sanlam Investments East Africa in early July. Timiza Fund is a hybrid fund, focusing majority of investments into fixed income securities while balancing the portfolio with some equity returns. Sanlam has launched two money market funds for residents and non-resident investors. The schemes shall be denominated in TZS and USD respectively. We expect to see more activities in the collective investment schemes before the end of the year as the market opens up and welcomes new products.

Looking forward, the month of July marks the beginning of the fiscal year 2024/25 and the execution of the fiscal budget and the amended Finance Act. Similarly, the month will see the execution of newly enrolled Treasury issuance calendar which maintained focus on the re-opening program. Moreover, we wait for the U.S’s Federal Reserve meeting on 30th July to get guidance on the U.S monetary policy direction, which is imperative on the direction of funds flow into emerging and frontier markets.

Head, Research & Financial Analytics

Alpha Capital