South Sudan

Excerpt from Africa Housing Finance Yearbook 2015

Overview

South Sudan, the world newest economy, born in July 2011, after 40 years of war[i] with North Sudan, descended into internal conflict towards the end of 2013, over political differences[ii] within the ruling party – the South People’s Liberation Movement (SPLM). The conflict threatened to reverse progress made towards achieving social cohesion, particularly, among the two main ethnic groups – the Dinka and the Nuer.

The conflict, which led to a shutdown of key oil fields in the north of the country, reducing oil output by about a half[iii], highlighted the need to diversify from 98 percent dependence on petroleum for revenue, with which to develop a country of about 11 million people, half of which is illiterate and dependent on subsistence farming as the main source of income. Prior to the conflict, the country had initiated a number of reforms in the management of oil revenues. The Petroleum Management Bill (2012) espouses for more credible and transparent management of oil revenues. The above initiatives in management

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Excerpt from Africa Housing Finance Yearbook 2015

Overview

South Sudan, the world newest economy, born in July 2011, after 40 years of war[i] with North Sudan, descended into internal conflict towards the end of 2013, over political differences[ii] within the ruling party – the South People’s Liberation Movement (SPLM). The conflict threatened to reverse progress made towards achieving social cohesion, particularly, among the two main ethnic groups – the Dinka and the Nuer.

The conflict, which led to a shutdown of key oil fields in the north of the country, reducing oil output by about a half[iii], highlighted the need to diversify from 98 percent dependence on petroleum for revenue, with which to develop a country of about 11 million people, half of which is illiterate and dependent on subsistence farming as the main source of income. Prior to the conflict, the country had initiated a number of reforms in the management of oil revenues. The Petroleum Management Bill (2012) espouses for more credible and transparent management of oil revenues. The above initiatives in management of public financing are critical to macroeconomic stability, and socio-economic development and transformation of country, including the development of a vibrant housing industry.

The economic growth outlook is, however, still uncertain, and largely dependent on the evolution of political peace[iv] prospects to end the civil war. The IMF estimated a 15 percent reduction in real GDP, in 2014, as a result of the conflict, and yet, the country was expected to achieve an average growth rate of about 30.7 percent in that year, after a sharp decline of -26.7 percent in 2013[v]. According to the African Economic Outlook (2015), GDP will contract by -7.5 percent in 2015, because of the impact of the conflict on the economy, and the falling international oil price. GDP growth, in 2015, is expected to continue to benefit from the low production of oil.

A contraction in GDP growth rates; clearly indicates that the Government will not have enough money to cover its operational expenses, a significant portion (over 50 percent) of which have been allocated to the military. The recent civil war (end of 2013 through 2014) “literally” halted government’s agenda on private sector development. Several commitments made by the government to the growth of a strong, competitive and equitable private sector driven economy are pending. Military spending had to be prioritized, stifling resources to other ministries, and therefore rendering them partially ineffective (both financially and technically) to adequately implement their mandates.[vi]

In 2014/15, the Government’s budget was US$5.6 billion. Oil revenue funded about 50 percent of the budget (US$2.5 billion in oil revenues was realized, from transit fees to North Sudan). The revenues would have been higher; however, they were affected by lower oil prices[vii], on the international market, and reduced output. In order for the Government to meet its target for budgeted revenues, it borrowed over US$ 1 billion from oil companies. However, this was not enough to cover the budget deficit. The Government was therefore forced it to tap into its reserve funds. At the beginning of 2013, reserve funds stood at close to US$ 1 billion; however, by the February 2015, they were estimated at US$309.7 million.

Fiscal management is a challenge in South Sudan. The budget planning and preparation system tends to only focus on preparing expenditure projections, with minimal attention paid on the feasibility of the specific budget proposals, from a macroeconomic and microeconomic perspective.

Access to Finance

South Sudan’s financial sector is unsophisticated, shallow and its contribution to economic growth and poverty reduction is still inadequate. Only one percent of household population[viii] has a bank account, despite entry of new commercial banks – the number of commercial banks[ix] increased from eight in March 2012 to 28 in March 2015. The balance of the households instead rely on a narrow range of often risky and expensive, informal financial services. This constrains their ability to participate fully in the financial markets, to increase their incomes and to contribute to economic growth.

Competition among the commercial banks is still limited, as evidenced by the high profit margins. For example, by June 2014, the South Sudan branch of Kenya Commercial Bank contributed a profit of 7.1 percent to the Bank’s regional business, more than Tanzania, Uganda, Burundi and Rwanda combined[x]. This profit was registered, in spite of a 30 percent reduction in business volumes, particularly NPLs[xi], which increased to US$11.6 million in 2014, from US$5.9 million in 2013. It is also worth noting that the Bank was able to make a profit, despite closure of three of the Bank’s branches[xii] (in Bor, Malakal and Bentiu), because of the conflict.

The levels of dynamism and innovation among financial products on the market are still low. Over 90 percent of the loans are short-term (less than a year, at interest rates of between 8 and 10 percent). Medium term loans of one to five years, at interest rates of between 13 and 17 percent, constitute about four percent of the loans. Loans of over 5 years constitute the balance (one percent), and they are offered at interest rates of between 12 and 17 percent.

Since 2013, the Government had planned to establish a Housing Finance Bank to help with the availability of longer-term loans (5 to 15 years). However, because of the conflict, the country still lacks a large scale mortgage lender, and the law for establishing of the Housing Finance Bank is still pending.

Commercial bank loan portfolio has grown almost two-fold, over the last three years, increasing from SSP3.6 billion by December 2012, to SSP6.7 billion by December 2013, and SSP7.4 billion, by December 2014. By March 2015, the loan portfolio stood at SSP2 billion, and expected to exceed SSP8 billion at the end of the year.

Loans for domestic trade comprise the largest share of banks’ total lending. In 2013, they constituted 35 percent of the total loans, but receded to 28 percent in 2014. Loans to the household sector comprise the second largest share of banks’ total lending. In 2013, they constituted 16.5 percent of the total loans, but reduced to 11.6 percent in 2014. Loans to building and construction constitute the third largest share of banks’ total lending. In 2013, they constituted 13 percent of the total loans, but receded to 12.8 percent in 2014. Loans to the real estate sector comprise the fourth largest share of banks’ total lending. In 2013, they constituted 10.3 percent of the total loans in 2013, increasing to 11.6 percent in 2014.

During the last three years (2012 to 2014), commercial banks have shown a higher preference for government securities, than lending to the private sector. A 15-month oil production shutdown between January 2012 and April 2013 and the civil conflict that erupted in December 2013 reduced fiscal revenues and depleted previously accumulated foreign exchange reserves, forcing the Government to control spending and incur domestic debt, by selling short-term securities[xiii]. Commercial banks’ portfolio in government securities increased from SSP3.5 billion in 2012, to SSP12.9 billion (the same amount for 2013 and 2014).

Investing in government securities is less risky than lending to the private sector, particularly in view of lack of collateral acceptable to banks and the insecurity in the country. Land titles are not available and property rights[xiv] not established. Banks are reluctant to lend against leased land because if the land is leased to an investor, there is no clarity about asset ownership and assets cannot be ceased for foreclosure because the land owner (who is not typically the borrower) is the ultimate owner of the asset. This stifles economic activity and banking intermediation, as entrepreneurs and businesses have to either postpone capital purchases or finance them slowly out of their own savings.

In January 2015, the Bank of South Sudan and the World Bank launched the Credit Reference Bureau (CRB), after three years of piloting. The CRB will contribute to the development of credit risk management procedures within banks and financial institutions, hence, supporting lending activity, increasing availability of financial products such as credit cards and debit cards, while at the same time, ensuring availability of a secure, reliable and efficient service to lenders. The CRB will be implemented by Credit Info Solutions; Prague Czech Republic, for a given period of time, until designated staff at the Bank of South Sudan are equipped with the fundamental skills needed to implement it efficiently and effectively.

Affordability

Since the majority of housing (over 98 percent) in the country is provided by individuals, this section on affordability analyzes the individuals’ abilities, to afford construction of a house and/or rental for a house.

Household welfare, measured by the percentage change in the Consumer Price Index (CPI), shows that the cost of living in South Sudan is much higher than before, and therefore, less affordable. The annual growth rate in the CPI increased by 23.1 percent in April 2015, compared to -1.0 percent for April 2014. Furnishing, household equipment and routine household maintenance, increased from 5.1 percent in April 2014 to 21.6 percent in April 2015. Housing, water, electricity and gas, increased from -14.2 percent in April 2014 to 65.7 percent in April 2015.

Over the last three years, salaries of both the formally and informally employed have stayed constant. The Government, which employs 10 percent of the population, has maintained salaries of the highest earning civil servants[xv] at between SSP8 000 and 15 000; middle earning civil servants[xvi] at between SSP4 000 and 7 999; lower middle earning civil servants at between SSP2 000 and 4 000 and low earning civil servants at between SSP300 and 1 900.

The significant change in CPI and the depreciation of the South Sudanese Pound against the US Dollar raised the cost of imported cement from SSP65 (for 50kg bag) in 2014 to SSP200 (US$29) in 2015. The cheapest house on the market is estimated at US$10 000, compared to US$3 500, two years ago. This house, however, cannot be afforded by the highest earning civil servant (SSP15 000). Instead, they could afford to buy a house of US$6 300. And yet, three years ago (2012), the highest ranking civil servant could comfortably afford a house of about US$150 000. This discrepancy is a result of the depreciation of the South Sudanese Pound against the US Dollar, which has devalued the salaries of high income earning civil servants to a level so low that they cannot afford the cheapest house on the market. In 2013, the official exchange rate was I US$: SSP 2.68. In 2015 (August), the official exchange rate was 1 US$: SSP 7. The US Dollar, is however, still very scarce.

All civil servants are paid a housing allowance. However, the allowance paid to low earning civil servants (those that earn between SSP300 and 1 900) is not commensurate to the price of rentals on the market. The housing allowance has been constant for the last three years, despite an increase in rentals, from US$150, in 2013 to US$246, in 2014, for a one-bedroom house. The allowance paid to low earning civil servants ranges between SSP630 (US$90) and SSP300 (US$43). Low earning civil servants constitute 54 percent of the public service.

Housing Supply

In the last three years, several investors have expressed interest in developing South Sudan’s housing industry. To date, however, there are very few medium and/or large scale housing development projects that have been completed, in any of the ten states of the country. Notable examples of developers, whose projects have stalled, because of the insecurity in the country and generally less favourable investment climate, include; (i) Abu Malek; (ii) Rock City Development Project; (iii) Buluk Premier Housing Project; and (iv) the housing project between Kenya Commercial Bank and the Government of South Sudan.

In October 2014, the scarcity of hard currency and the depreciation of the South Sudanese Pound against the US Dollar, led to the suspension of a US$517 million housing project in Juba. Works were suspended because of a lack of dollars to buy cement, which is imported from neighbouring countries. The project, which was in advanced stages of construction (about 50 percent completion), had been jointly ventured into by China Jiangsu International, Stamco for Investment, a local company, and the government of Central Equatoria State[xvii]. The project comprised a US$160 million apartment block, a housing estate with villas in Nyakuron at US$ 285 million, and a low cost housing estate in Luri at US$120 million. The project comprises close to 3 000 housing units, each valued at about US$150 000.

Presently, the majority of housing in the country is provided by individuals depending on their ability to afford constructing a house. Although statistics from the latest National Household Survey (2010) indicated that 90 percent of houses are made from mud or sticks (known as Tukul/gottya), five percent are made from straw mats, three percent from wood and only about two percent of houses are made of brick or concrete; a tour of Juba City shows otherwise. In Juba City, it is plausible to argue that about 40 percent of households in Tukul/Gottya have upgraded their houses, with brick or concrete, and roofed them with iron sheets. A 2014 Rapid Shelter Sector Assessment conducted by REACH[xviii], on behalf of the United Nations, to establish the places of origin, and type of housing, among others, of internally displaced people (IDPs), before the conflict broke out, established that 31.4 percent of the IDPs were living in an iron sheet roofed house, 13.8 percent were living in a concrete house, while 13.3 percent were living in a Tukul/Gottya. These findings suggest a gradual shift towards decent, sustainable, healthy and liveable human settlements (See Section on Property Markets for more details).

Available statistics (2010) from the National Bureau of Statistics show that the vast majority of the population (93.3 percent) live in houses they own, 2.7 percent in rented houses, 0.6 percent in houses provided as part of work and 3.4 percent in houses provided free of charge, by the Government. 31 percent of the population live in houses with only one room, 64 percent live in houses with two to four rooms, and five percent of the population live in houses with five to nine rooms. Only 12 percent of South Sudanese population live in serviced housing.

The Government, through the Ministry of Lands, Housing and Physical Planning, is mandated to provide for all, affordable shelter in urban areas and facilitate slum improvement and upgrading. However, for the past three years, the Government’s annual budgets have underfunded development projects. In 2014/15, the annual budget for the Directorate of Housing Policy and Schemes was SSP22.3 million, and was earmarked for; (i) paying wages and salaries; (ii) construction of 50 housing units (for senior civil servants); (iii) training on sustainable cities; (iv) training on new technologies of waste management and (v) research on housing – local building materials. Of this budget, only SSP0.3 million was realized, and it was all used to paid wages and salaries.

Property Markets

The residential property markets, which constitute about 15 percent of the property markets, are still under-developed, unsophisticated and hard to estimate, both in qualitative and quantitative terms.  Nonetheless, there has been gradual development of decent, sustainable, healthy and liveable human settlements, to tap into the readily available rental market (foreigners/expatriates and high income earning civil servants). In the last three years, the number of rental apartments (one bedroom units of 80 m2, built with concrete bricks and roofed with iron sheets) in Juba, has increased by about 50 percent. These apartments are constructed by small firms, 90 percent of which are owned and funded by high ranking government officials/politicians, using fraudulent sources of income. In practice, these firms lease land from households living in Tukul/gottyas, and redevelop it, with semi-detached one-bedroom rental units. The redevelopments are however not cognisant of the preferences of clients, but rather, the urgent need to tap into the huge rental market.

Prior to the civil war (end of 2014) a one-bedroom apartment was rented out at between US$1 500 and US$2 000. However, during the war, several expatriates left the country, consequently scaling down demand. Today, a one-bedroom apartment is rented from US$1 200 to US$1 500.

Policy and Regulation

South Sudan has several policies, strategies and regulatory frameworks that espouse practical and feasible measures on how to adequately and sustainably develop the housing industry and housing finance sector. Notable ones include; (i) the national housing policy; (ii) the legal and regulatory framework for mobilising public and private sector resources to build affordable and decent houses for the population, (iii) the Ministry of Housing and Physical Planning 2013 – 2018 Strategic Plan, which delineates several interventions that will help address the housing shortage in the country; and (iv) a new Land Policy (2013) to address issues pertaining to land acquisition and its management.

However, adequate implementation of policies, strategies and enforcement of regulatory frameworks, has since their formulation proved problematic, because of the generally politically insecure environment. Budgetary allocations to implement them have also been inadequate. Only 30 percent of the budget is allocated towards implementation of development programs, like the ones of the Ministry of Housing and Physical Planning. However, often, the allocations are not realized (budget shortfall).

The technical capacity of the Ministry of Lands, Housing and Physical Planning, and other Government Agencies, to implement their policies and strategies is still inadequate. Several of the policies and strategies are prepared with support from donors (technical assistance, through hiring of consultants), however, it has often been alleged that, technical assistance has not been an efficient way transferring of knowledge to locals. Also, an inherent weakness within the Ministry of Lands, Housing and Physical Planning is to employ locals who are not capable enough (education), to implement the policies and strategies.

Opportunities

South Sudan offers several opportunities for all housing sector players, however, this will hinge on stability of the political economy.  There is a need to institute long-term finance schemes within the banking system if the lending culture of banks is to appreciate.  Clearly, the housing sector offers substantial opportunities, if affordability constraints are understood.

Given the affordability constraints, opportunities to grow the housing microfinance market are also suggested.  There is a need to facilitate and support the establishment of housing co-operatives in which individuals would obtain houses under conditions that suit their incomes.  The insurance, capital markets and social security sectors have not been tapped into.  These sectors are key in the provision of long-term funds to the mortgage industry.

Other opportunities include domestic manufacturing and supply of building materials (cement, iron, wood) and building urban sanitation services (solid and liquid waste management and sewer network system).

 

Sources

African Development Bank (2015). South Sudan Economic Outlook.

Bank of South Sudan (2015): Statistical Bulletin

International Monetary Fund; South Sudan (2014): Article IV Consultation – Staff Report; Staff Statement and Press Release

South Sudan National Bureau of Statistics (2011)

Government of South Sudan (2011). Statistical Yearbook for Southern Sudan.

South Sudan National Bureau of Statistics (2014).

TradeMark East Africa (2015): Scoping/Mapping of Private Sector and Civil Society Organizations engaged in Trade and Regional Integration in South Sudan

World Bank (2015). Doing Business in Juba.

 

Websites

http://www.newnationsouthsudan.com/business-news/housing-project-suspended-over-dollar-scarcity.html

http://www.southsudannation.com/lack-of-progress-in-peace-talks-will-lead-to-economic-collapse-in-south-sudan/

http://mobile.nation.co.ke/lifestyle/South-Sudan-Violence-Central-Bank-of-Kenya-loans/-/1950774/2422488/-/format/xhtml/-/hdyt51/-/index.html

http://www.newnationsouthsudan.com/business-news/housing-project-suspended-over-dollar-scarcity.html

[i]African Development Bank (2012). A Study on South Sudan’s Competitiveness and an Assessment of the Country’s Cross-border Trade with Neighboring Countries

[ii] President Salva Kiir accused his Deputy; Riek Machar, of plotting to overthrow him

[iii] Oil production has reduced from 350 000 barrels a day in 2011, to an average of 160 000 barrels a day in 2014/15

[iv] The deadline for a new peace proposal by the Intergovernmental Authority on development (IGAD) mediators, aiming at ending the 18-month conflict, is slated for August 17th, 2015.

[v] African Economic Outlook; South Sudan (2015)

[vi] http://www.southsudannation.com/lack-of-progress-in-peace-talks-will-lead-to-economic-collapse-in-south-sudan/

[vii] At the time the budget was passed, a barrel of oil on the world market was US$ 95; however in the course of the year, it reduced to US$ 50

[viii] South Sudan National Bureau of Statistics (2011)

[ix] Major banks include Kenya Commercial Bank, Mountains Trade and Development Bank, Nile Commercial Bank, Buffalo Commercial Bank, Equity Bank, Commercial Bank of Ethiopia, and ECO Bank

[x] http://mobile.nation.co.ke/lifestyle/South-Sudan-Violence-Central-Bank-of-Kenya-loans/-/1950774/2422488/-/format/xhtml/-/hdyt51/-/index.html

[xi] Because of the conflict, borrowers could not honor monthly repayment of loans

[xii] The closure of the three branches had a minimal impact on KCB’s profitability, because the bulk of its business is in Juba, the key financial State. Also, despite closure of the three branches, transactions were done through bank branches in other parts of the country.

[xiii] IMF; South Sudan (2014): Article IV Consultation – Staff Report; Staff Statement and Press Release

[xiv] South Sudan does not have a collateral registry for both incorporated and non-incorporated entities, that is unified geographically and by asset type, with an electronic database indexed by debtor’s name (The World Bank Doing Business Report (2015).

[xv] These include members of parliament, presidential advisors, ministers, the President of the Supreme Court, under-secretaries and legal counsels

[xvi] These include Justice of the Court of Appeal, High Court judges, and the first, second and third legal counsels, first lieutenant generals, lieutenant generals, major generals, brigadiers, assistant legal counsel and public servants in grades one to six

[xvii] http://www.newnationsouthsudan.com/business-news/housing-project-suspended-over-dollar-scarcity.html

[xviii] REACH (www.reach-initiative.org) is a joint initiative of IMPACT, its sister-organisation ACTED, and the United Nations Operational Satellite Applications Programme (UNOSAT). REACH was established in 2010 to facilitate the development of information tools and products that enhance the humanitarian community’s decision-making and planning capacity