Kenya Macroeconomic Outlook Remains Positive, With Expectations For Strong Economic Growth, A Stable Currency and Stable Interest Rates

Kenya’s economy expanded by 5.6 percent in Q2’2019, similar to the 5.6 percent recorded in Q1’2019, but lower than 6.4 percent recorded in Q2’2018.

The economic growth was driven by a recovery in the financial and insurance sector and increased output in the education, transport and storage, and construction sectors despite the agricultural sector recording a slower growth of 4.1 percent, compared to 6.5 percent seen in Q2’2018.

“Out of the seven metrics that we track, three have a positive outlook, three have a neutral outlook and one has a negative outlook, compared to the beginning of the year where four had a positive outlook, two had a neutral outlook and one factor had a negative outlook,” said David Gitau, Investment Analyst at Cytonn.

“Generally, macroeconomic fundamentals remained positive during the year because of an improved business environment created through political goodwill and improved security in the country,” added David.

The average GDP growth, including Cytonn’s 2019 growth estimate of 5.8 percent, came in at 5.9 percent, unchanged from average projections released in Q2’2019. The common view is that GDP growth will slow in 2019 from a growth of 6.3 percent in 2018, the fastest economic growth since the 8.4 percent recorded in 2010.

Summary of indicators:

1. Government Borrowing remains “negative”. In the National Treasury’s budgetary review for the 2018/2019 financial year, revenues collected had increased by 9.2 percent to Kshs 1.7 trillion from Kshs 1.5 trillion collected during the 2017/2018 financial year. The revenue collected was 93.1 percent of the budgetary target for the year. The negative outlook was also upheld by the ballooning public debt, as well as the maturity profile of the newly acquired foreign debt as it is relatively short, which raises maturity concentration risk as the country will be in a continuous state of maturing obligations between 2024 and 2028,
2. Exchange Rate Outlook for 2019 remains “neutral”, driven by continued support from the CBK in the short term through its sufficient reserves currently at USD 9.0 billion (equivalent to 5.6-months of import cover),
3. Interest Rates remain “neutral”, with the Central Bank Rate having been retained at 9.0 percent in the 2 MPC meetings held in Q3’2019. We expect slight upward pressure on interest rates going forward, as the government tries to meet its domestic borrowing targets for the 2019/2020 fiscal year,
4. Inflation remains “positive”, with the rate falling within the government target range of 2.5 percent – 7.5 percent. Risks are however abound in the near-term, arising from the late onset of the traditionally long rains season which has disrupted food supply leading to a flare in food inflation, coupled with the continued rise in global fuel prices,
5. GDP growth remains “positive”, with GDP growth projected to range between 5.7 percent-5.9 percent in 2019, lower than the 6.3 percent growth in 2018, but higher than the 5-year historical average of 5.4 percent,
6. Investor Sentiment has a “neutral” outlook, the same as the beginning of the year, as evidenced by the decline in Eurobond yields. An improvement was also recorded in foreign inflows in the capital market to a net buying position of USD 1.2  million in Q3’2019 from a net selling position of USD 93.4  million in Q4’2018, an indication of improved investor sentiments. We expect improved foreign inflows from the negative position in 2018, mainly supported by long term investors who enter the market looking to take advantage of the current cheap valuations in select sections of the market,
7. Security was maintained at “positive” for 2018. The political climate in the country has eased. Despite the terror attack experienced during the first half of 2019, Kenya was spared from travel advisories, evidence of the international community’s confidence in the country’s security position

ASSET CLASSES REVIEW

FIXED INCOME REVIEW: T-bill’s remained oversubscribed in Q3’2019, with the average subscription rate coming in at 106.8 percent, a decline compared to 125.5 percent in Q2’2019.

Average subscription rates for the 91-day, 182-day, and 364-day papers in Q3’2019 came in at 121.9 percent, 44.4 percent and 163.0 percent, respectively, from 100.6 percent, 49.6 percent and 248.1 percent in Q2’2019.

Yields on the 91-day and 182-day T-bills decreased by 0.4 percent points and 0.3 percent points, while that of the 364-day T-bill gained by 1.0 percent points in Q3’2019, closing at 6.3 percent, 7.2 percent, and 9.8 percent, from 6.7 percent, 7.5 percent, and 8.8 percent for the 91, 182, and 364-day papers, respectively, mainly due to the Central Bank of Kenya’s (CBK’s) efforts to keep rates low by rejecting expensive bids in the auction market.

“Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The Government failed to meet its FY’2018/2019 domestic target narrowly by 1.3 percent, having borrowed Kshs 317.0 billion against a target of Kshs 321.0  billion.

A budget deficit is likely to result from depressed revenue collection with the revenue target for FY’2019/2020 at Kshs 2.1 trillion, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit. Despite this, we do not expect upward pressure on interest rates due to increased demand for government securities, driven by improved liquidity in the market owing to the relatively high debt maturities.” said David Gitau, Investment Analyst at Cytonn.

“Our view is that investors should be biased towards medium-term fixed income instruments to reduce duration risk associated with long-term debt, coupled with the relatively flat yield curve on the long-end due to saturation of long-term bonds,” added David.

EQUITIES REVIEW: In Q3’2019, the equities market was on a downward trend, with the NASI, NSE 20 and NSE 25 indices declining by 3.0 percent, 7.6 percent, and 3.1 percent, respectively, taking their YTD performance as at the end of September to gains of 3.6 percent for NASI and losses of 14.2 percent and 2.2 percent for NSE 20 and NSE 25 indices, respectively.

The equities market performance during the quarter was shaped by declines in large caps such as Bamburi, Equity Group, and Safaricom.

“We are POSITIVE on equities for investors as the sustained price declines has seen the market P/E decline to below its historical average,” said Ascar Sudi, Investment Analyst at Cytonn. “We expect increased market activity, and possibly increased inflows from foreign investors, as they take advantage of the attractive valuations, to support the positive performance,” added Ascar.

PRIVATE EQUITY REVIEW: During Q3’2019, we witnessed high levels of private equity activity across the sectors we cover, including financial services, FinTech, and Education, evidenced by increased deal activity by global investors, among them Helios and Actis. The financial services and FinTech sectors witnessed the most activity, with some of the notable transactions being the capital raises by Branch and Tala, and the acquisition of a stake in Credit Bank by Oiko Credit, among others.

“Our outlook on private equity investments remains POSITIVE, evidenced by the increasing investor interest,” said Gichuru Muchane, Alternative Investment Analyst at Cytonn. “Going forward, the increasing investor interest, stable macro-economic and political environment will continue to boost deal flow into African markets,” added Gichuru.