Kenya Shilling Loses 3.9% During the Month of July

Treasury bill auctions witnessed low subscription rates in the month of July, with the overall subscription at 42% due to

(i) corporate tax payments,

(ii) reopening of a 5-year bond, which raised Kshs 12.9 billion amidst no bond maturities in the month, and

(iii) mop-up activities by the Central Bank of Kenya (CBK) in support of the Kenya Shilling.

There was tight liquidity in the market as evidenced by the sharp increase in the interbank rate to 19.2% at the end of the month, from 9.5% at the beginning of the month and 7.0% in January. Treasury bill yields increased significantly across all tenors, with the 91-day recording the highest increase of 3.3% to close the month at 11.5%. The 182-day yield increased by 1.4% to 11.9% and the 364-day yield increased by 2.4% to 13.5%.

In the bond market, the 5-year primary bond yield increased from the previous month’s 13.2% to 14.3% in July, while the secondary bond market registered subdued activity with bonds valued at Kshs 9.5bn transacted. Investors remained inclined towards shorter duration investments as uncertainties in the interest rate environment persisted. Both pension schemes and banks with trading books will register significant losses in their bond portfolios this year due to the huge increase in yields.

Despite aggressive measures by the Monetary Policy Committee (MPC), raising the Central Bank Rate by 300 basis points and introducing a new repo in the market, the shilling lost 3.9% during the month of July against the dollar to close the month at Kshs 102.5, bringing the total year to date decline to 13.0%. The Central Bank also introduced a cap on potential trade volumes to 10% of banks’ core capital to avoid excessive speculation on the currency. The underlying structural challenges affecting the currency and the dollar strength in the international markets are the main reasons why the shilling did not respond to the measures undertaken. In next week’s MPC meeting, we wait to see if there will be another rate increase. However, in our view, any further rate increases will not be good for the economy since GDP growth is already slowing.

We maintain our expectation that yields on government securities will remain high due to a number of factors:

• Increase in the CBR,
• Increased government borrowing in the domestic market to fund the 2015 / 2016 budget, and
• Tight liquidity in the market as CBK maintains its mop up activity.

We continue to be biased towards short duration fixed income instruments.