October in Summary: Performance on the Kenyan Markets

T-Bills

Treasury bill subscriptions remained high during the month of October, with overall subscriptions coming in at 112.6 percent compared to 135.6 percent in September according to Cytonn Investments Report for the Month of October.

Yields on T-bills remained relatively unchanged from the month of September, closing the month at 8.0 percent, 10.3 percent and 10.6 percent, from 7.9 percent, 10.3 percent and 10.6 percent for the 91-day, 182-day and 364-day papers respectively, at the end of September.

During the week, T-bills were oversubscribed with overall subscription increasing to 145.2 percent, compared to 107.0 percent recorded the previous week. Subscription rates on the 91-day, 182-day and 364-day papers increased during the week coming in at 126.1, 170.4 and 132.8 percent respectively from 108.4, 122.6 and 90.4 percent respectively.

The 182-day paper continues to be the most preferred paper as it offers the highest return on a risk-adjusted basis. Yields on the 91-day, 182-day and 364-day T-bills were on an upward trend coming in at 8.1, 10.4 and 10.7 percent from 8.0, 10.3 and 10.6 percent respectively, the previous week.

The 91-day T-bill is currently trading below its 5-year average of 10.4 percent. The downward trend on the 91-day paper is mainly attributed to the expected low interest rate environment following:

• The operationalization of the Banking Act Amendment 2015, which has led to more liquidity in the market.
• Reduced pressure from the government borrowing program as they are currently ahead of the pro-rated domestic borrowing target of 83.9 billion shillings, having borrowed 116.1 billion shillings, which is 138.4 percent of the pro-rated target.

During the month, the money market witnessed increased liquidity, which saw the interbank rate normalize to 4.4 percent, from 6.2 percent at the end of September. The market experienced a net liquidity injection of 20.3 billion shillings during the month attributed to government payments of 101.7 billion as well as increased Treasury Bills redemption of 81.4 billion shillings.

Eurobonds

According to Bloomberg, yields on the 5-year and 10-year Eurobonds decreased by 0.1 and 0.2 percent respectively from 4.5 and 7.1 percent the previous month to 4.4 and 6.9 respectively. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.4 and 2.7 percent respectively, for the 5-year and 10-year Eurobonds, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.

The Kenyan Shilling

The Kenya Shilling depreciated against the dollar by 0.2 percent during the month of October to close at 101.6 compared to 101.3 the previous month. This was mainly driven by dollar demand from oil importers and manufactures which outweighed the inflows from exporters, mostly from the horticultural industry.

Inflation Rate

The inflation rate for the month of October increased by 20 bps to 6.5 percent from 6.3 percent in September. The increase was driven by increasing food prices and power bills due to the foreign exchange levy expense incurred by energy producers. The food situation in the country has taken a hit following an audit report that indicated that over 754,000 bags of maize valued at 1.8 billion stored at the National Cereals and Produce Board (NCPB) depots is unfit for consumption which may push the inflation even further.

15-Year Infrastructure Bond

During the month, the Kenyan Government offered a 15-year infrastructure bond to raise 30 billion shillings from the domestic market for partial funding of infrastructure projects in the following sectors:

• Roads
• Energy
• Water

Yields for the bond came in at 13.2 percent with the government accepting 30.6 billion shillings from the auction. This, according to Cytonn Investments, the government accepted expensive money, having accepted a yield of 13.2 percent on a tax-free infrastructure bond, which equates to a 15.5 percent yield on an equivalent taxable bond, for a tenor of 11.3 years, when adjusting for the 15.0 percent tax rate.

After the successful offer, the government offered an extra 10.0 billion shillings tap sale towards the end of the month of October. It is hard to see why a banking institution would lend to an individual at 14.0 percent as opposed to the government at 15.5 percent. This might lead to less credit to the private sector as the government is a safer investment.

World Bank Economic Report

World Bank released its 13^th edition of Kenya’s Economic Update with a focus on the economic performance in the current environment of changing global economic trends.

World Bank projected Kenya’s economy to grow at 5.9 percent in 2016 largely driven by investments in infrastructure. The World Bank expects that with a stable monetary policy aimed at controlling exchange rates and stable inflation, the country will experience increased private sector credit uptake and investments.

This comes at a time when the International Monetary Fund (IMF) projected the growth in Sub-Saharan Africa (SSA) to decline to 1.4 percent in 2016 from 3.5 percent in 2015. However, the Eastern Africa region is vibrant and has been outdoing much of its counterparts in SSA, and hence is expected to withstand headwinds affecting other SSA economies.

The report highlighted several downsides to the sustainability of this growth, which include:

• Security threats,
• Re-balancing of the Chinese economy,
• Subdued prices of coffee and tea,
• The 2017 elections which if turns chaotic could slow down foreign direct and private investments.