Uhuru’s Relaxation Of Covid-19 Rules Push Up The PMI

Last week Stanbic Bank released the Monthly Purchasing Managers’ Index (PMI) for September 2020, which came in at 56.3, up from the 53.0 seen in August 2020.

NOTE: A reading of above 50 indicates improvements in the business environment, while a reading below 50 indicates a worsening outlook.

The PMI posting was its highest since April 2018, pointing towards strong improvement in the Kenyan private sector.

The rise in the PMI came as the government relaxed Coronavirus disease restrictions during the third quarter of the year. Firms saw expanded demand as foreign and domestic clients returned to the market.

Output levels expanded at a sharp pace and sales grew strongest since January 2016. Consequently, the rising demand increased work backlogs, creating opportunities to hire new workers. This counteracted job cuts at other firms, amid efforts to reduce expenses.

Employment was broadly level during the month, following a six-month run of declines. Input inflation cost softened but remained solid overall due to increased fuel and commodity prices.

Despite the strong upturn and plans to raise investment into new markets, the general sentiment on the 12-month outlook is weak with few expecting continued expansion.

Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.

The government is 51.3 percent ahead of its prorated borrowing target of 130.9 billion shillings having borrowed 198.0 billion shillings.

“In our view, the government will not be able to meet their revenue collection targets of 1.9 trillion shillings for FY’2020/2021 because of the current subdued economic performance in the country brought about by the spread of COVID-19,” said analysts from Cytonn Investments.

The failure by the government to meet the revenue collection targets will lead to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit.

“Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk,” Cytonn added.