Safaricom
A happy roar from Kenya
A successful IPO brings cheer to Safaricom and to Kenya’s small investors
IT IS something for Kenya to cheer, at last. The flotation of a quarter of Safaricom, Kenya’s leading mobile-phone company, on Monday June 9th was generally reckoned to be a great success. The initial public offering (IPO) carries much weight in East Africa—although it is tiny by the standards of stockmarkets in more affluent parts of the world—and the 10 billion shares on offer were massively oversubscribed. During the course of the first day’s trading they leapt by over 60% above the offer price, giving the firm a value of some $4.5 billion. Safaricom’s impact on Kenya’s stockmarket is impressively vast: its shares alone will make up some 40% of Kenya’s titchy market.
This is a gratifying vote of confidence by investors in a country that has suffered a slew of troubles in recent months. Violence after an election at the end of last year claimed 1,200 lives and the country narrowly avoided a calamitous breakdown. Nonetheless the appetite for risk remains strong: many retail investors reportedly took out loans so that they could grab a slice of the action. Such is the excitement among ordinary Kenyans who have managed to snap up an allocation of shares that the company is considering holding its next annual meeting in a pair of Nairobi’s football stadiums to accommodate the expected crowds.
Kenya’s government is happy too. It has raised 52 billion shillings ($818m) from the sale of a 25% stake in Safaricom. Mwai Kibaki, Kenya’s president, even turned up at the Nairobi Stock Exchange to ring the bell that signalled the start of trading on Monday. He took the opportunity to praise his policy of privatisation which had resulted in the slice of Safaricom going on sale. The government holds another 35% in the firm, with the remainder in the hands of Vodafone, a British mobile-telecoms giant.
Inevitably some controversy surrounds the IPO. Kenyan opposition politicians want an explanation for the 5% of Safaricom that is indirectly held by Mobitelea, a firm with unknown owners registered in the Channel Islands. Some suspect that the stake somehow enriched people close to the previous government. But that lingering doubt has not dampened the IPO’s party atmosphere—hundreds of small investors turned up at the stock exchange to witness the start of trading.
The good cheer is not without justification. When Michael Joseph, the chief executive who is largely responsible for the firm’s good fortunes, arrived at Safaricom in 2000 the company had 20,000 customers. Vodafone’s bosses reckoned that the Kenyan market would top out at 400,000 customers. Now Safaricom has 10.5m and room to grow further. It is the most profitable business in eastern and central Africa, earning profits of $223.7m in the financial year to the end of March, up 16% on the previous year.
Mr Joseph quickly decided to go after “pay as you go” customers, who pay for mobile airtime in advance, and therefore do not pose a credit risk to the operator. He introduced billing by the second—a big deal for those earning pennies. And he revamped the firm’s brand, reasoning that the poorest customers are the most price-sensitive, and that a strong brand can help keep them loyal. His most enduring achievement is likely to be M-PESA, a pioneering service that lets Safaricom’s customers send money to each other by text message.
Safaricom must fend off competition. Not from Celtel, Kenya’s second provider, which seems content to earn dividends in Safaricom’s shadow, but from France Telecom, which recently bought 51% of Telkom, the state fixed-line monopoly, and Econet, a new Indian-owned network.
Investors, especially Kenyans new to playing the stockmarket, will hope that Safaricom can shrug off such rivals. The hefty premium at which shares traded as soon as markets opened might suggest that the government undervalued the stake that it sold—perhaps to ensure a successful debut for Safaricom. Possibly the exuberance of small investors or stock flippers, who purchase shares in a hot IPO and sell them as soon as they start trading, may be playing a part. But even if Safaricom’s shares turn gently back towards earth as profits are taken, they have already shown a winning bet on Africa.
June 10 (Bloomberg) — Japanese machine orders rose in April after falling for two consecutive months as companies replaced aging equipment. Economic and Fiscal Policy Minister Hiroko Ota said demand for machinery is still weak.
Orders, which signal capital spending in the next three to six months, rose 5.5 percent after declining 8.3 percent in March and 12.3 percent in February, the Cabinet Office said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for a 3 percent increase.
Japan’s longest postwar expansion may be over, the government said yesterday, as record crude oil and raw materials costs discourage companies from hiring and investing. Toyota Motor Corp. last month said it will cut spending on research and development for the first time since 2001.
«There’s no doubt that business investment is losing momentum,» said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. «The gain represents a reaction to large declines in the preceding few months.»
The yen was unchanged at 106.29 per dollar following the report, then weakened after Federal Reserve Chairman Ben S. Bernanke said the risk of a «substantial downturn» in the U.S. has diminished and inflation remains high. Japan’s currency traded at 106.72 as of 11:54 a.m. in Tokyo.
A month ago, manufacturers forecast orders will slump 10.3 percent in the second quarter. From a year earlier, they climbed 0.5 percent in April, today’s report showed.
Global Headwinds
«The emerging outlook for the manufacturing sector is flat,» said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. «That’s not a great story to tell, but given the substantial headwinds in the global economy it’s not a bad one either.»
Toyota Motor last month said declining U.S. sales, higher commodity prices and a stronger yen will cause profit to fall for the first time in seven years. Fujitsu Ltd., the country’s biggest computer-services company, said it will reduce spending at its semiconductor unit by 47 percent this year.
«I haven’t changed my view that machinery orders are weakening,» Economy Minister Ota said. «Rising oil and raw- material costs are squeezing corporate profits and that’s affecting capital spending.»
Japan and the U.S., the world’s biggest economies, may barely expand this quarter, economists predict. Stalled growth and the fastest inflation in a decade mean the Bank of Japan is likely to keep its key interest rate at 0.5 percent this year.
`Turning Point’
The economy may be reaching a «turning point,» Ota’s Cabinet Office said yesterday after releasing figures that showed an index of current economic activity fell in April. The government hasn’t described the world’s second-largest economy in those terms since the last recession in 2001.
Still, business investment is declining at less than half the rate seen during the nation’s three most recent recessions. While capital spending fell for a fourth quarter in the three months ended March, the average rate of decrease in each quarter was less than 5 percent, compared with more than 10 percent in the three downturns since 1990.
Companies are upgrading equipment after postponing purchases during the 15 years following the bursting of the asset bubble in 1990, economists say. More than half of Japanese businesses said the main reason for capital investment last fiscal year was to replace equipment, according to a government survey released in March.
The government will probably raise its first-quarter gross domestic product estimate to an annualized 3.8 percent from 3.3 percent tomorrow at 8:50 a.m. in Tokyo, according to economists surveyed by Bloomberg News. The revision will be based on last week’s Finance Ministry report, which showed business spending declined a less-than-estimated 5.3 percent in the period.
June 10 (Bloomberg) — The dollar rose to a three-month high against the yen after Federal Reserve Chairman Ben S. Bernanke said the risks of a «substantial downturn» in U.S. economic growth have diminished.
The U.S. currency gained for a second day against the euro after Bernanke also said the central bank will resist a jump in price expectations, signaling the Fed may raise interest rates. U.S. Treasury Secretary Henry Paulson said yesterday in an interview with CNBC that he would «never» rule out currency intervention to prop up the dollar.
«Bernanke’s comments support our view that the dollar is mapping out a path for a more sustained rise,» said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. «There appears some agreement between the US Treasury and the Fed to allow subtle jawboning of the dollar higher.»
The dollar rose to 106.84 yen, the highest since Feb. 27, before trading at 106.66 yen at 10:19 a.m. in Tokyo from 106.31 yen late yesterday in New York. Against the euro, the dollar rose to $1.5602 from $1.5646. Japan’s currency traded at 166.43 per euro from 166.33.
The U.S. dollar climbed to 94.64 cents per Australian dollar, the highest since May 16, before trading at 94.92 cents. Against the New Zealand dollar, the U.S. currency gained to 75.78 cents, near the strongest in more than four months.
Bernanke Comments
«The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,» Bernanke said in a speech at a Boston Fed conference. «The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.»
Paulson told CNBC he hasn’t ruled out any policy option, including intervention in the foreign-exchange market. He declined to say whether the Treasury was currently contemplating such a move.
The dollar rallied on June 3, when Bernanke said the central bank is «attentive» to the currency and will guard against a jump in inflation expectations.
«This seems quite a significant change in U.S. currency policy,» said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. «Officials are drawing a line in the sand now with verbal intervention to prevent the dollar from falling to a level where actual intervention is likely. The tide of dollar- negative sentiment is about to turn.»
Forecast Change
The dollar has fallen 11 percent against the euro and 9 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent. UBS AG, the second- biggest currency trader, yesterday cut its one- and three-month dollar forecasts against the euro to $1.60 and $1.53, from $1.50 and $1.47, previously.
Finance ministers of the Group of Eight industrialized countries may consider joint action to deflate the price of oil and prop up the dollar at their meeting June 13-14 in Japan, said DBS Group Holdings Ltd. in a report to clients.
«The market has linked a weaker U.S. dollar to higher oil prices, and vice versa,» the firm said. «That’s why a lot is riding on the weekend meeting.»
The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.
ECB Rate
The greenback dropped 1.4 percent against the euro last week, the most since March, after European Central Bank President Jean-Claude Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation and the U.S. Labor Department reported the next day that the jobless rate increased the most in May in more than two decades.
Trichet reiterated in a speech in Paris yesterday that policy makers may raise the benchmark interest rate next month to ensure price stability.
Interest-rate futures trading shows the ECB will lift the main refinancing rate twice this year as inflation exceeds the central bank’s target, taking it to 4.5 percent by year-end. The implied yield on the December Euribor futures contract rose yesterday to 5.47 percent, from 5.39 percent on June 6. European policy makers last week kept their main refinancing rate at a six-year high of 4 percent, unchanged since last June.
`Job Even Harder’
«The ECB, led by Trichet, might be doing things that the U.S. might not be doing,» Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut, said in an interview on Bloomberg Radio. «All the talk of the ECB rate hike pushes the dollar down. That, in turn, pushes up the oil price. That might make the job even harder for the ECB.»
The dollar may weaken beyond $1.60 per euro, he said.
The yield advantage of a two-year German bund over a comparable Treasury fell to 1.76 percentage points from 2.26 percentage points on June 6, making dollar-denominated assets more attractive. The price of oil fell to $134.59 per barrel in New York from a record $139.12 reached June 6.
June 9 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the economic outlook has improved from a month ago, and central bankers will combat any increase in inflation expectations.
«The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,» Bernanke said today in remarks to a Boston Fed conference in Massachusetts. «The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.»
Bernanke’s remarks may reinforce investors’ expectations the central bank will begin raising interest rates by year-end to contain increases in consumer prices. While the Fed chief said that risks to growth were still to the «downside,» he added that federal tax rebates, past rate cuts and record exports should underpin growth.
Two-year Treasuries slid after the remarks, sending yields to their highest level since January. The notes yielded 2.92 percent at 10:55 a.m. in Tokyo, from 2.71 percent at the close in New York. Traders anticipate the FOMC will keep its benchmark rate at 2 percent this month and raise it as soon as September, futures prices indicate.
Bernanke indicated that policy makers now have a «balanced risk assessment,» with dangers of both faster inflation and slower growth, Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, said in an interview with Bloomberg Television. «There are significant upside risks for inflation through commodities. There are significant downside growth risks through the asset-related pressures on consumers.»
Fed’s Geithner
The Fed faces a «complicated balance» of lowering interest rates to avert a recession «without taking too much risk that underlying inflation is going to accelerate over time,» New York Fed Bank President Timothy Geithner said today after a speech in New York.
Fed officials have cut the benchmark lending rate from 5.25 percent in September. They next meet June 24-25.
The consumer price index rose 3.9 percent for the year ending in April, and expectations of inflation five years from now rose to 3.4 percent in May versus 3 percent in January, according to the Reuters/University of Michigan Survey. Crude oil prices are more than double the level of a year ago, and reached a record $139.12 on June 6.
Unemployment Rate
The unemployment rate rose to 5.5 percent in May, the most in more than two decades, as the U.S. lost jobs for a fifth month. Bernanke called the unemployment figures «unwelcome,» though he added that recent economic data had «only modestly» affected the outlook for growth and employment.
«Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities,» Bernanke said. Though «the pass through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited,» officials will need to monitor for any change in the situation, he said.
The «poor recent record» of commodity futures markets in predicting the course of future prices «raises the question of whether policy makers should continue to use this source of information,» he also said.
Wide variation in commodity prices implied by options suggests the forecasts «of commodity prices obtained from futures markets, and consequently the forecasts of aggregate price inflation» are «highly uncertain,» the Fed chairman said.
Annual Conference
Bernanke spoke to more than a hundred attendees, including current and former central bankers, professors and Wall Street economists at a resort overlooking Pleasant Bay on Massachusetts’ Cape Cod. The title of the 52nd annual conference is, «Understanding Inflation and the Implications for Monetary Policy.»
The sessions mainly explore the Phillips Curve, a half- century-old economic theory that describes a trade-off between low unemployment and inflation.
«There is scope» for economists to devise better measures of how much slack in labor and production exists in the economy at any given time, Bernanke said. Policy makers also face challenges in determining whether inflation trends are temporary or persistent, he said.
«Getting this distinction right has first-order implications for monetary policy,» Bernanke said. «Policy should be calibrated based on forecasts of medium-term inflation, which may differ from the current inflation rate.»
Monitoring Expectations
The Fed gathers indications about future inflation from surveys and financial-market signals of expected inflation.
«Much evidence suggests that expectations have become better anchored than they were a few decades ago,» Bernanke said. «They nonetheless remain imperfectly anchored.»
Officials also have only limited information on how businesses form expectations about inflation, he said.
The three-day conference closes June 11 with a panel discussion featuring Fed Vice Chairman Donald Kohn, European Central Bank executive board member Juergen Stark, Bank of Israel Governor Stanley Fischer and Lars Svensson, deputy governor of Sweden’s central bank.
Other policy makers attending include Philadelphia Fed President Charles Plosser, Fed Governor Frederic Mishkin and Athanasios Orphanides, a former Fed Board research economist who is now a member of the ECB’s governing council and head of the Central Bank of Cyprus.
Asian Stocks Fall to Two-Month Low; Macquarie, ICBC Tumble
June 10 (Bloomberg) — Asian stocks fell, driving the benchmark index to a two-month low, on speculation earnings will decline as credit-market losses widen and borrowing costs rise.
Macquarie Group Ltd. and Babcock & Brown Ltd. plunged in Sydney after Lehman Brothers Holdings Inc. reported a $2.8 billion loss and Federal Reserve Chairman Ben S. Bernanke said central bankers will focus on combating inflation. Industrial & Commercial Bank of China tumbled after the nation’s central bank ordered lenders to increase reserves for a fifth time this year. All 10 industry groups on the MSCI Asia Pacific Index declined.
«It’s going to take several years before the credit problems work themselves through the system,» said Robert Rountree, Singapore-based investment marketing at Prudential Asset Management, which oversees $55 billion of assets in Asia. «Markets are reacting to the fear factor of rising interest rates.»
MSCI’s Asian Index lost 1.5 percent to 145.15 at 11:56 a.m. in Tokyo, poised for its lowest since April 18. More than three stocks dropped for each that rose. A measure of financial stocks fell the most. Japan’s Nikkei 225 Stock Average was little changed.
Australia’s S&P/ASX 200 Index lost 2.4 percent, set for its biggest decline since March 20. China’s CSI 300 Index dropped 5.7 percent, the most in two months. The nation’s banks must put aside a record 17.5 percent of deposits as reserves from June 25. Hong Kong’s Hang Seng Index slumped 3.2 percent.
Australia, China and Hong Kong were closed yesterday for holidays, when MSCI’s Asian gauge lost 2 percent after crude oil surged more than $10 a barrel on June 6 and U.S. unemployment jumped the most since 1986.
Interest Rates
Most U.S. stocks declined yesterday, led by banks and technology companies, after speculation the Fed will raise interest rates overshadowed improving sales at McDonald’s Corp. and a rally in energy producers. Financial shares fell 2.3 percent to a five-year low. Standard & Poor’s 500 Index futures dropped 0.4 percent recently.
Macquarie Group slumped 7.5 percent to A$51.78, the most since March 13. Babcock & Brown, Australia’s second-largest investment company, tumbled 7.9 percent to A$10.35.
Lehman, the fourth-largest U.S. securities firm, raised $6 billion to help survive the collapse of the mortgage market after reporting a second-quarter loss.
Industrial & Commercial Bank, the country’s largest, tumbled 6.3 percent to 5.50 yuan, the most since Jan. 22.
EL LIBERTARIO 