The Cytonn Review: Currency and Interest Rate Outlook

In our Q1’2020 Kenya Macroeconomic review, we analyzed the 7 macroeconomic factors and we ended up with a negative 2020 economic outlook mainly due to the expected effects of the Coronavirus.

On the interest rates, we gave a negative outlook since we anticipated upward pressure to emanate from the increased government borrowing.

As the business environment becomes more challenging, we expect a dip in tax revenues amidst the Government being in dire need of funding to offer the requisite financial stimulus to the economy.

The currency outlook was negative due to continued pressure on the shilling from the unfavorable balance of payments position, as we expected forex inflows to be impacted by the negative global economic outlook and the disruption of global supply chains.

We maintain the negative outlook on the Kenyan Shilling, with a bias on a 5.5% depreciation by the end of 2020. We expect the performance to be on the back of:

The Balance of Payments Position: Currently, the export sector has continued to suffer significant losses (it is estimated that the floriculture sector will lose Kshs 0 bn by the end of 2020) due to reduced demand for Kenyan exports and the decline of global commodity prices.

Despite the easing of the lockdown measures in Kenya’s trading partners, we expect the business environment to have a sluggish growth towards the end of 2020. The tourism sector, one of the key foreign exchange earners, has suffered significant losses due to the ban on international travel.

On the plus side, however, Kenya could be facing a lower import bill on account of the reduced oil prices as well as the reduction in the imports of goods and services as many firms have scaled down their operations in light of the Coronavirus. The low import bill will however not be able to offset the current account deficit ,

Government debt: In the recently approved Supplementary Budget II Estimates for the fiscal year 2019/20, Kenya is scheduled to pay a total of Kshs 4 bn comprising of Kshs 121.5 bn in external debt redemptions and Kshs 131.9 bn in external debt interest payments.

In the 2018/19 fiscal year, the debt service to export earnings ratio came in at 30.2%, an increase from the 20.0% recorded the previous fiscal year, an indicator of increased pressure on the foreign exchange receipts that are being redirected to service debt.

Given the poor performance in the export sector, we expect the debt service to export earnings ratio to continue rising this year due to the underperformance on the denominator side, which will in the essence put more pressure on the forex reserves as the country meets external debt obligations, and,

Forex Reserves: Despite the Kshs 8 bn credit facility from the IMF that intends to boost our forex reserves, we expect continued pressure due to low exports of goods and lower diaspora remittances amidst increases in demand for dollars to service Kenya debt and as foreign investors flee to safer havens.

We also maintain our negative outlook on the interest rate environment with a bias to a slight upward readjustment on the yield curve, with our sentiments mainly being on the back of:

Fiscal Constraints: In the recently approved Tax Amendment Bill 2020, the government reduced its expenditure by Kshs 9.7 bn and forfeited an estimated Kshs 122.0 bn of the earlier expected revenue, due to the current constrained economic conditions, and as such increasing the fiscal deficit to an estimate of 7.8% of GDP. This has seen saw the domestic borrowing target adjusted upwards to Kshs

404.4 bn from the earlier approved Kshs 300.3 bn to plug in the fiscal deficit. As such we foresee an upward re-adjustment of the yields to incentivize investors thus putting pressure on interest rates.

For more information, please our Currency and Interest Rate Outlook topical.

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