August in Focus: How The Economy Fared On

The Kenyan Shilling

The month of August witnessed mixed trend on the Kenyan economy. It is the month that the Banking Amendment Bill was signed into law by President Uhuru Kenyatta sending some shivers down the spines of Kenyan commercial banks.

During the Month of August, the Kenya Shilling remained stable against the US dollar, closing the month at 101.4 shillings on account of dollar demand from importers, especially from the energy sector being offset by:

1. Dollar inflows from the tourism sector,
2. Inflows from diaspora remittances.

On a year to date basis, the shilling has appreciated by 0.9 percent against the dollar. Going forward, the shilling is likely to come under pressure in the short term as foreign investors exit banking stocks listed on the Nairobi Securities Exchange, following the signing of The Banking Act (Amendment) Bill, 2015, which is likely to affect the banks’ profitability.

Inflation

Inflation for the month of August came in at 6.3%, down from 6.4% recorded in July 2016. This fall was driven by a 0.2% decline in both food and non-alcoholic beverage prices coupled with a higher base effect of last year.

Interest Capping Law

During the month of August too, parliament passed The Banking Act (Amendment) Bill, 2015, which sought to put a cap on interest rates, which was eventually signed by the President on 24th August 2016.

The amendment placed a cap on:

1. Lending rates at 4.0 percent above the base rate,
2. Deposit rates at 70.0 percent of the base rate.

Banks are still seeking clarity on the operationalization of the Act from the CBK given that it is not clear what the “base rate” is and if on implementation, whether the banks will re-price all existing facilities or just the new ones. CBK has given banks an ultimatum on implementing the new law, with a deadline of 14th September.

Read: National Bank Focuses on Small Enterprises Amidst Reduction of Interest Rates

The Parliament also passed a bill that requires Treasury to be consulted by CBK before a bank is placed under receivership. This demonstrates public dissatisfaction with the processes and disclosures leading to the recent bank receivership, hence an attempt to tame the Governor’s powers.

Government Borrowing

The government is ahead of its domestic borrowing target for this fiscal year, 2016/2017, having borrowed 53.2 billion shillings for the current fiscal year against a target of 29.8 billion shillings (assuming a pro-rated borrowing throughout the year of 229.6 billion shillings budgeted for the full fiscal year).

Interest rates, which had reversed trends due to Government borrowing given the new fiscal year, characterized by an uptick in inflation rates and tight liquidity in the money market, are likely to witness downward pressure owing to the signing of The Banking Act (Amendment) Bill, 2015. 

Market Equities

During the month of August, the equities market witnessed significant volatility and ended in a downward trend with NASI, NSE 20 and NSE 25 declining by 5.2, 8.9, and 10.6 percent, respectively, taking their YTD performances to declines of 7.4, 21.3, and 16.1 percent, respectively.

The monthly equities market performance was driven by losses in banking stocks, with all the listed banks declining. The biggest losers in the banking sector were Equity, HF Group, Co-op, and I&M Holdings, which declined by 34.6, 31.5, 30.8 and 28.6 percent respectively.

Analyzing Last Week

During the week, the equities market was on a downward trend with NASI, NSE 20 and NSE 25 declining by 0.7, 0.9, and 1.9 percent respectively.

The top movers for the week were Safaricom, KCB Group, and Equity, cumulatively accounting for 81.3 percent of the market turnover. Since the February 2015 peak, the market has been down 42.2 percent and 24.0 percent for the NSE 20 and NASI, respectively.

Equities turnover increased by 29.6 percent during the month to USD 174 million from USD 134.3 million in July 2016.

Foreign investors were net buyers for the month of August, with net inflows of USD 36.7 mn, compared to net inflows of USD 9.7 million witnessed in July 2016, taking advantage of the relatively lower stock prices during the month.

Key to note, foreigners were net sellers at the beginning of the last week of August following the signing of The Banking Act (Amendment) Bill 2015, but later came back to the market towards the end of the month, taking advantage of the low market prices, particularly in banking stocks. We maintain our expectation of stronger earnings growth in 2016 compared to 2015, with an estimated earnings growth of 12.5%, supported by a favorable macroeconomic environment.

Trading on the Market

The market is currently trading at a price to earnings ratio (PE) of 11.9x, versus a historical average of 13.7x, and a dividend yield of 4.8 percent versus a historical average of 3.4 percent. The charts below indicate the historical PE and dividend yields of the market. The last time the market dividend yield approached 5 percent was in December 2011, and from there we experienced about 3 years of strong market recovery.

For more on how the month was, visit here.