Alpha Capital Monthly Research Newsletter - October 2024

Dear Mwekezaji,

October 2024 was a pivotal month for the equities market, registering the highest monthly equity turnover since February 2020, excluding notable M&A transactions such as NMB in December 2020 and Tanga Cement in November 2023. The cumulative equity turnover for the first ten months of 2024 is already 43% higher than the normalized total equity turnover for the entire year of 2023. This growth in monthly turnover occurred despite net foreign outflows exceeding the total for Q3 2024. Similarly, the bond market experienced a significant surge in activity as primary market yields continued an upward trajectory.

The broader economy remained stable as foreign exchange pressures eased due to seasonal inflows. The Tanzanian Shilling began appreciating at the end of October 2024, supported by increased transaction volumes in the interbank foreign exchange market (IFEM). In October alone, the TZS appreciated by 1.3%, with an additional 1.5% gain since the beginning of November 2024. The value of transactions in the IFEM surged to $50.65 million in October, up from $8.35 million in September. The Bank of Tanzania recently announced a $23 million purchase from the IFEM as part of its foreign exchange interventions, reflecting sufficient foreign exchange liquidity within the banking sector. Increased foreign exchange inflows are anticipated for the remainder of the year, driven by tourism, while the relaxed monetary stance in the U.S. may further catalyze inflows into developing economies. However, emerging U.S. policies emphasizing tax cuts, tariffs, and business competitiveness could prompt the Federal Reserve to reconsider its expansionary measures.

Tanzania's GDP growth averaged 5.6% over the first nine months of 2024, led by robust performance in the financial sector, construction, and technology. Growth in the financial sector is underscored by double-digit private sector credit expansion and strong banking sector earnings reported for Q3 2024.

Inflation for the year ending October remained at the lower end of the central bank's target range. While the Energy, Fuel, and Utilities index recorded the highest annual inflation, its impact on overall inflation remained limited due to its modest 5.7% contribution to the consumer price basket. On a monthly basis, October saw deflation, with the index declining by 0.3%.

Treasury yields continued to trend upward. By the end of October, the 364-day Treasury bill yield rose to 12.13%, up from 10.98% in September and 7.04% in May 2024. Long-term Treasury yields exhibited a similar upward trajectory during the month. The seven-day interbank rate consistently remained above the central bank rate's (CBR) upper corridor of 8.0% throughout October, signaling tighter liquidity conditions within the banking sector. This tightening is evident from the overall banking sector loans-to-deposits ratio, which reached 98.7% at the end of September 2024.

The Bank of Tanzania last issued a reverse repo on October 10, 2024, following undersubscriptions in two prior issuances earlier that month. A total of TZS 1.66 trillion in reverse repos was issued during the first ten days of October. However, given the short tenors, all reverse repos issued in October had matured by October 17, 2024.

Equities

In October 2024, the Dar es Salaam Stock Exchange (DSE) witnessed a substantial surge in equity turnover, driven by significant block transactions involving Tanzania Breweries Limited (TBL) and CRDB Bank Plc (CRDB). Equity turnover spiked 516% month-over-month, escalating from TZS 6.93 billion in September 2024 to TZS 42.70 billion. Approximately 57.4% of the October turnover, or TZS 24.52 billion, occurred in the final week, with six block transactions across four counters.

CRDB Bank Plc dominated trading activities, contributing 48.74% of the total monthly turnover, with 30.83 million shares changing hands. Notably, 16.84 million shares were traded in two block transactions in the last week, with prices ranging from TZS 640 to TZS 670 as CRDB’s share price appreciated following the release of its quarterly results.

Tanzania Breweries Ltd (TBL) followed, accounting for 42.3% of the turnover by moving 3.06 million shares, of which 1.67 million shares were traded in two block transactions during the last week. The block transaction prices ranged between TZS 5,800 and TZS 6,400, with TBL’s weighted average price for October standing at TZS 6,025—a 45% discount compared to its closing price of TZS 10,900.

Foreign Participation

Foreign participation leaned heavily towards divestments, resulting in a net foreign outflow of TZS 18.82 billion ($6.97 million). This outflow is nearly four times the Q3-24 total net foreign outflow and represents 60% of the cumulative net foreign outflow for the first nine months of 2024. This follows a rare net foreign inflow in September 2024, which coincided with the U.S. Federal Reserve’s 50bps rate cut, which had initially raised hopes of renewed foreign portfolio investment (FPI) in the Tanzanian market. The net inflow in September 2024 was the first monthly net inflow since April 2023.

In October, foreign investors accounted for 47.7% of divestments and only 3.63% of investments, with domestic investors covering the balance. Despite elevated foreign divestments, the growing domestic investor base demonstrated resilience, absorbing substantial foreign withdrawals without disrupting equity prices or market capitalization.

Price Movement

The Tanzania Share Index (TSI) edged up by 0.87% in October, lifting domestic market capitalization to TZS 12.3 trillion. Seven counters appreciated in price, counterbalancing losses in four others. Swissport Tanzania (SWISS) led with a 10.9% price increase following its new agreement to provide ground and cargo handling services to Air France KLM Group at both Julius Nyerere International Airport (JNIA) and Kilimanjaro International Airport (KIA). Despite competitive pressures in recent years, SWISS has maintained a market share above 90% and is now pursuing growth by expanding into airport lounge services under its Aspire brand. The airport lounge was established in 2022, costing the company approximately TZS 520 million in capital expenditure. The lounge turned profitable in 2023, albeit with a tight profit margin of less than 4%.

CRDB and NMB Bank followed, gaining 6.25% and 1.89%, respectively. Their gains were attributed to robust quarterly financials showing double-digit profit growth—CRDB at 45% and NMB at 19%. Both banks reported strong credit demand, outpacing deposit mobilization and leading to rising interest expenses relative to interest income.

Afriprise Investment Company Ltd (AFRIPRISE) gained 4.35% in anticipation of its annual general meeting and dividend payout scheduled for November 2024. DCB Commercial Bank (DCB) and TOL Gases Ltd (TOL) also saw gains, rising by 3.13% and 3.08%, respectively. DCB has experienced price volatility throughout the year, recording a year-to-date appreciation of 26.92%, while TOL’s Q2-24 results reflected a 3.6% increase in H1-24 net profit due to improved accessory sales.

Tanga Cement Plc (TCCL) saw a modest 1.04% price increase, supported by ongoing expectations of a retail shareholder offer from Scancem International D.A., with a speculated offer price of TZS 2,273 guided by the settlement between Scancem and Afrisam. However, Twiga Cement Plc (TPCC) was the month’s biggest loser, dropping 7.81% due to reduced profitability in Q1-24 and limited production capacity. TPCC expects a production boost from TCCL’s acquisition, which could expand capacity by 1.3 million tonnes and drive top-line growth.

Other decliners included Mkombozi Bank (MKCB, -3.57%), National Investment Company Ltd (NICOL, -2.67%), and Dar es Salaam Stock Exchange (DSE, -1.63%). MKCB's drop, despite 49% growth in pre-tax profits, may be attributed to a non-performing loan (NPL) ratio of 5% and a cost-to-income ratio of 55%, both at the regulatory limit impacting dividend payouts.

Fixed Income Securities

Primary Market

In October 2024, the Bank of Tanzania issued TZS 640.70 billion worth of Treasury securities through five auctions of bonds and bills. Treasury bonds accounted for 61.5% of the total issuance, with three bond auctions contributing to this share. The overall subscription rate stood at 71.5%, with 69% of the targeted offer amount successfully raised.

Among the auctions, the 20-year Treasury bond was oversubscribed by 18.9%, with the central bank accepting 78.9% of the total subscriptions. In contrast, the 15-year and 5-year Treasury bond auctions were both undersubscribed by approximately 35%. Notably, the 5-year bond recorded the highest yield of 17%.

Secondary Market

The secondary market for fixed income securities in October 2024 registered a turnover of TZS 324.44 billion, reflecting a 57% increase compared to September 2024. Approximately 66% of this turnover was attributed to the 25-year tenor, while the 20-year tenor contributed 23%. Together, these two tenors accounted for an impressive 89% of the total bonds turnover. Meanwhile, corporate bonds made up a marginal 0.04% of the monthly turnover.

Outlook and Lookout

In early November 2024, the Federal Reserve implemented an additional 25-basis-point cut to the federal funds rate, continuing the expansionary monetary policy initiated in September 2024. Around the same time, the U.S. elected Donald Trump as the 47th president, with the new administration expected to prioritize policies such as tax cuts and initiatives to attract businesses back to the U.S.

While tax cuts have the potential to be inflationary, they could prompt the Federal Reserve to revert to tighter monetary policies. Similarly, measures to attract businesses back to the U.S., such as deregulation and tariffs, may reduce the global supply of USD as funds flow back to U.S domestic markets. These dynamics are likely to perpetuate the foreign exchange pressures that have persisted since 2022.

To counterbalance the inflationary effects of tax cuts, the incoming administration plans to reduce government operational expenses. A notable initiative includes establishing the Department of Government Efficiency (DOGE), tasked with optimizing government expenditures and enhancing operational efficiency.

Despite increased foreign exchange liquidity and tightening conditions in the Tanzania banking sector, Treasury yields are expected to remain elevated for the remainder of the year. This outlook is supported by recent cutoff prices for 20-year and 25-year issuances, as well as ongoing government budgetary operations. Additionally, the capital markets are anticipated to expand with the introduction of new products, including corporate bonds and collective investment schemes.

Imani Muhingo

Head, Research & Financial Analytics

Alpha Capital