Treasury Collects Ksh 87.79Bn in Revenues in October: Is the Economy Still Sound?

Secondary market turnover narrowed 30.66 percent in the week to close at 5.91 billion shillings.

The dip in market activity was also reflected by a straitened money market. Trading was mostly on the long-term papers coupled with the five-year papers; the latter activity driven by banks.

The week marked a second consecutive week of accelerated activity in a longer-dated infrastructure bond paper. The trades, mainly exits, was occasioned by investors eyeing this month’s bond issue, IFB1/2017/7Yr, which was announced early in the week.

Treasury announced tax revenue receipts for October stood at 87.79 billion shillings, bringing the total tax revenue in the first four months of FY17/18 to 405.21 billion shillings. The cumulative amount fetched in the first quarter equates to 27.02 percent of the initial budget estimates and marks a 94.60 billion shillings deficit against a pro-rated 499.82 billion shillings. This is a great concern from the prism of economic growth slowdown and although the tax income revenue has been revised downwards to KES 1.44Tn (from initial KES 1.499Tn), this has dialed up financing needs as seen in the increments of 64.76 billion shillings and 50 billion shillings in net domestic borrowing and commercial loan, respectively.

USD/KES:

The shilling showed heightened volatility in the week, opening the week at 103.60 before rising to a high of 103.80 and ending the week at 103.25. The focus of the coming week will be the CBK Monetary Policy Committee meeting on Thursday, the last policy meeting this year.

Economic analysts expect the CBR to be retained at 10.0 percent as the shilling has been relatively stable and latest inflation data tracing a downtrend. Weekly central bank data showed that forex reserves remained static at USD 7.11Bn; equivalent to 4.72 months of import cover.

Money Market:

The average interbank rate increased by 65bps to 9.46 percent in the week, touching a high of 14.0 percent on Tuesday’s session as the prior CRR cycle came to a close. On the other hand, interbank volumes declined 27.38 percent w/w to 94.33 billion shillings. Albeit the liquidity constraints, the CBK kept at bay from supporting the market due to the shilling weakness. We saw the regulator, however, come in to mop up despite the stained environment offering 10 billion in Repos but only receiving bids worth KES 650Mn in Friday’s session. Commercial banks’ excess reserves held at the central bank jumped to 4.4 billion shillings in the week.
This Week’s Outlook: IFB1/2017/7

Central Bank announced an infrastructure bond as this month’s issue. The 12.50 percent coupon bond has a seven-year and a total amount of 30 billion shillings.

The purpose of the infrastructure bond is to fund partially projects on roads (KES 10Bn), energy (KES 15 billion) and water (KES 5Bn) sectors. In the current financial year, KES 134.9Bn, KES 46.17Bn and KES 37.2 billion have been allocated towards roads, energy and water sectors, respectively.

So far, the net domestic borrowing is behind target at KES 69.88Bn against a pro-rated KES 175Bn (KES 466.68Bn in the initial FY17/18 budget). Absorption of development expenditure in the first four months of the year has also been slow with only KES 60.24Bn (15.51 percent of total development funds allocation). Against this background, it’s sensible an infrastructure bond is being floated at this juncture which will help narrow the infrastructural development gap.

The yield for a seven-year paper has averaged 13.48 percent in the last two years. However, infrastructure bonds tend to trade on their own curve due to their amortization characteristic, the current 7-year IFB is trading at an average of 11.70 percent and has an average yield of 12.25 percent YTD. Our initial estimate for the average acceptance rate is between 12.00 percent and 12.25 percent.