Global Insight Perspective
Significance	Kenya has set the date for its largest ever initial public offering (IPO), with the privatisation of state-owned mobile telephone company Safaricom set for 28 March 2008.
Implications	The government is selling 25% of its 60% stake in Safaricom (10 billion shares), priced at 5 Kenyan shillings (US$7.9 cents) per share and totalling 50 billion shillings (US$792 million), thus valuing the company at around US$3.1 billion.
Outlook	The landmark IPO will serve as an important step forward in deepening and expanding East African capital markets, but it will put significant pressure on Kenya's stock market and has raised questions over the market's ability to absorb the deal. However, the effects on Kenya's budget for the current fiscal year remain limited and the budget deficit will continue to face negative pressures from increased expenditure pressures and decreased revenues.

The Kenyan government has finally set the date for the much-anticipated privatisation of mobile telephone company Safaricom through an IPO on the Nairobi Stock Exchange. The offering comes at a trying time in the aftermath of the Kenyan post-election crisis, which the country hopes will be relegated to the history books after President Mwai Kibiaki and opposition Orange Democratic Movement (ODM) leader Raila Odinga signed a power-sharing agreement recently . This is greatly anticipated by the markets as the largest East African IPO to be launched and shares in this highly profitable company are set to be affordable to the average East African. Indeed, the launch of the IPO is being seen as an icon of healing and reconstruction—a call that rings true, especially as the government is looking to help support its development agenda with the revenues gained. The IPO, which is estimated to bring in around 50 billion Kenyan shillings (US$792 million) for the government, is set to rock the Nairobi Stock Exchange and has important fiscal impacts for 2008.

One of the Region's Most Profitable Companies

Safaricom was created as the mobile division of Kenya’s phone utility, Telkom Kenya, and has grown in leaps and bounds over the past decade with the rise of mobile telephony in the region. The company was part-privatised in July 2000 when Vodafone Plc purchased a 40% stake for around US$42 million. Safaricom is now Kenya’s largest mobile operator, with nearly 10 million subscribers and above 70% market share. The mobile telephone market in Kenya has a relatively low penetration rate of 32%, but still has one the highest penetration rates in sub-Saharan Africa (excluding South Africa) at below 15%.

The IPO met with significant opposition through the end of 2007 as it became a battleground for both government and opposition parties during the run-up to the general election. In late December 2007, the Kenyan Court of Appeal ruled that the Safaricom IPO could go ahead, according to Business Daily, dismissing the case brought by groups opposed to it. The IPO was originally due to start on 24 December 2007, but the Nairobi Stock Exchange asked the government to postpone the sale until after the festive period and general election, held on 27 December 2007. However, the fallout from the bungled election that brought the country to a standstill derailed subsequent plans for the IPO.

Now in the wake of the post-election crisis, as Kenya's markets settle on the back of the power-sharing deal signed by Kibaki and Odinga, the IPO will now open on 28 March 2008, closing on 23 April 2008 and set to trade in June 2008. The government is selling 25% of its 60% stake in Safaricom (10 billion shares), priced at 5 shillings (US$7.9 cents) per share and totalling 50 billion shillings (US$792 million), which values the company at around US$3.1 billion. According to the Nation newspaper, 65% of these shares will be open to domestic investors and 35% to foreign investors. The amount available to foreign investors will be reduced if the local tranche is oversubscribed by 200% and only institutional foreign investors will be able to buy the shares, the pricing of which will reportedly be subject to a book-building exercise. As the date for the launch was finally announced, the markets began to move to absorb the landmark IPO. Indeed, the week of 14 March 2008 saw large-scale selling on the Nairobi Stock Exchange by retail investors as they prepare to take position—the NSE 20 Index dropped by 7.4% to close the week at 4,959.44. It is widely expected that this trend will continue in the run-up to the open date.

Fiscal Injection at Difficult Time?

Kenya's budget is facing considerable pressure from the post-election crisis on a number of fronts as underlying budget assumptions are tested. The budget was strongly expansive, with expenditures set to increase by 35.7% to 580.4 billion shillings and 28.2% of GDP, up from 427.6 billion shillings (23.4% of GDP). On the back of a strong economic forecast and improving business environment, domestic revenues were projected to come in 14% higher at 428.8 billion shillings, or 73% of total expenditure based on the assumption of 6.5–7.0% growth. The budget deficit was planned to hit 5.3% of GDP (109.8 billion shillings including grants), of which net external financing was to cover 39.8 billion shillings (3.4%GDP), domestic borrowing 34.0 billion shillings (down from 1.8% of GDP to 1.6% of GDP with a medium-term 1.5% of GDP target), and net privatisation to bring in 36.0 billion shillings.

However, the fallout of the post-election crisis has made the 6.5-7% growth target unreachable, thus putting pressure on domestic tax-revenue generation. The budgeted privatisation and one-time injections, of which the Safaricom IPO was the largest, also met with delays. The fiscal and foreign-exchange injection received from the privatisation of Telkom Kenya to France Telecom helped support government coffers and provided a much-needed buffer to Kenya's foreign-exchange reserve after the decline in the country's export revenues, but the country faced considerable negative pressure to its sovereign risk rating—resulting in a Standard & Poor's downgrade—and thus the intended offering of an international bond through the first quarter of 2008 has now been postponed. Despite the sale of a percentage of Safaricom, the fiscal balance remains in jeopardy during the current fiscal year as the funds raised by the IPO will hit government coffers on the cusp of the next financial year and the government will still have to bridge this gap. Despite the current climate, the government also faces burgeoning pressures from increasing spending not only towards reconciliation and redevelopment, but also to support what is expected to be an expanded cabinet in the face of the power-sharing agreement.

Outlook and Implications

As the country gears up for the much-anticipated launch of the Safaricom IPO, a cloud of uncertainty still remains over Kenya, although recent events have thinned it somewhat. With rival parties finally signing a peace and power-sharing agreement, the joint effects of raised domestic confidence and the push from the international community, heralded by the United Kingdom, to financially and politically back the deal should serve to reinvigorate the economy. Much of the international and domestic investment plans were temporarily placed on hold due to the crisis, but now the initial phase of reassessing/slowly opening up investment lines can begin. However, the political environment is still uncertain and the deal still has to be put into practice.

The IPO will serve to be an important step in deepening and expanding East African capital markets, but it will put significant pressure on Kenya's stock market and has raised questions over the market's ability to absorb the deal. Indeed, the Safaricom IPO is expected to push the NSE market capitalisation to over the 1 trillion shilling mark from its current 860 billion shillings. Even so, the effects on Kenya's budget for the current fiscal year remain limited. The budget deficit will continue to face negative pressures from increased expenditure pressures and decreased revenues. All eyes remain fixed on parliament and the hashing out of constitutional amendments, as well as the changes to the cabinet and ministerial make-up over the next few months . The budget and economy is not out of the woods by a long shot and the composition of development and current expenditure will be tested. Nevertheless, the eagerness of the international community to support this coalition government and see it bear fruit should provide important fiscal and development support in Kenya's recovery period.