Stable Economic Outlook for Kenya

Yields on treasury bills declined for the third straight week, with the 91-day, 182-day, and 364-day T-Bills down to 9.9%, 12.5% and 13.4%, respectively, compared to 10.8%, 13.3% and 13.6%, respectively, last week due to continued high liquidity in the money markets as a result of maturity of government securities of Kshs. 12.1 bn and reverse repos of Kshs 9.4 bn during the week. The subscription rate increased to 312.2% compared to 281.9% last week with investor preference still on the 182-day paper, which had a subscription rate of 468.5%, with investor expectation of a potential rate increase in the second half of the year.

Liquidity in the money market remained high as evidenced by the interbank rate remaining low at 4.7% at the close of the week as compared to 5.2% at the close of last week. Despite the improved liquidity the shilling remained stable against the dollar closing the week at an average of 101.8 due to thin volumes and subdued activity in the dollar demand market from corporates and NGOs. The shilling is expected to be stable in the short-term due to (i) a stable dollar in the global markets, with the expectations that the Fed will slow down the rate of raising the Fed rate, and (ii) Central Bank activity to support the shilling, backed by reserves of import cover at 4.5 months, and the extension of the USD 688 mn IMF facility till March 2016.

For the month of February, the government is reopening 5 and 10-year bonds (FXD1/2015/5 and FXD1/2012/10) with a tenor of 4.4 and 6.3 years, respectively, to raise a total of Kshs. 25 bn for budgetary support. Currently, these bonds are trading at yields of 14.5% and 14.9%, respectively. Based on the current trends in yields and the historical premiums that investors usually demand for similar bonds, we expect investors to bid in the ranges of 14.5%-15.0% and 15.0%-15.5% for the 5 and 10-year bonds, respectively.

Credit rating agency Moody’s maintained a stable economic outlook for Kenya, B1, in its latest sovereign rating update. This was based on the back of:

• Strong and stable economic growth prospects: This is based on expectations that (i) Kenya’s growth will remain solid supported by infrastructure spending, growth of services sector and improvement of trade balances, and (ii) the narrowing of the current account deficit to 6.7% from 9.5%, and,
• Fiscal discipline adopted by the Government to control interest rates: The Treasury in its supplementary budget plans to cut domestic borrowing by Kshs 53.3 bn from the earlier Kshs 219 bn and for the next financial year the budget deficit will drop to 6.9%. This will greatly ease the Government’s borrowing pressure as well as grow the private sector through easier access to credit, thus stimulating economic growth.

We believe the stable outlook for Kenya is advantageous for the country as it improves investor confidence and sentiments towards the country.

The government is ahead of schedule with its borrowing programme, having borrowed Kshs. 162.6 billion for the current fiscal year compared to a target of about Kshs. 141.5 billion (assuming a pro-rated borrowing throughout the financial year of Kshs. 219 billion budgeted for the full financial year). Interest rates have dropped during the week due to (i) reduced pressure on government borrowing; and (ii) high liquidity in the market. With Interest rates coming down we advise investors to lock in their funds in short to medium-term paper, as the rates are higher on a risk-adjusted basis.

See full Cytonn Weekly Report here.