Kenyan government to extend maize subsidy to September Whilst the bond market drops

Kenya mulls extending maize subsidy plan to September on account of harvest delays from the South Rift, Uasin Gishu and Trans Nzoia counties. The KES 6.0Bn government subsidy has helped clip retail prices for maize flour at KES 90 for a 2-kilogramme packet which had been hoisted to high of KES 153.

As the price for 90-kilogramme bag remains elevated above KES 4,000 level, importers are selling the grain at KES 2,300 to millers while the government subsidy is reimbursed back to importers. In our view, the subsidy extension which coupled with the earlier extension of duty-free importation of maize grain will help steady the retail price of maize flour.

This will also support the downtrend in food inflation which declined to 14.80% y/y in June 2017 from recent high of 20.00% y/y in May 2017 as the average price of sifted maize flour retreating 8.10% m/m in June.

The Fixed Market.

The results for the auction came in within expected bounds at an accepted yield of 12.966%. We estimate the cut-off to be within a 15bps of the average yield.

However, the subscription fell short by 36.52% with bids worth KES 19.043Bn being received and the CBK accepting KES 5.19Bn; an indication of the aggressive nature of a majority of the bids.

We do not foresee a tap sale as the current environment is not favourable and the CBK is most likely to keep this paper as a card for later on in the fiscal year. Secondary market turnover fell to the lowest level this week at KES 600Mn but we expect this to bounce back in coming days as the uncertainty around rates direction is cleared and liquidity improves.