Performance of Kenya’s money markets and economy for the week ending 25th March, 2017

T-bill were oversubscribed for the 8th week running, with overall subscription coming in at 145.6 percent, compared to 135 percent recorded the previous week. This is despite the withdrawal of the 182-day paper from the auction market for the 3rd week in a row, a move aimed at the management of maturities by spreading the concentration risk evenly across the three papers. Subscription rates for the 91 and 364-day papers came in at 88.1 percent and 203.1 percent, compared to 75 percent and 195 percent the previous week, respectively.

The continued under subscription of the 91-day T-bill could be attributed to a lower real return – given that with the current inflation rate of 9 percent, and the 91-day T-bill yielding 8.7 percent, investors are getting a negative real return of 0.3 percent. Yields on the 91-day and 364-day papers during the week remained unchanged, closing at 8.7 percent and 10.9 percent, respectively.

In the recent T-Bill auctions, there has been upward pressure on interest rates as investors demand higher yields, given the high inflation rate at 9 percent. This pressure has been more on the 91-day paper, as it currently offers a negative real return of 0.3 percent. However, the government has continued to remain disciplined and reject bids above market, as indicated by:

  1. The lower acceptance rate for the 91-day paper at 61.8 percent as compared to the 364-day paper at 85.2 percent
  2. The high variance between the market average yield and the accepted average yield for the 91-day T-bill at 0.3 percent, compared to 0.0 percent for the 364-day papers, respectively

The table below highlights this trend:

Treasury Bills Yields and Variance

 

91-Day

364-Day
Market Weighted Average Yield*

9.0%

10.9%

Weighted Average Accepted Yield*

8.7%

10.9%

Variance

0.3%

0.0%

Acceptance Rate

61.8%

85.2%

Average Real Return

(0.3%)

1.9%

*Average yield for the last 3 Auctions

The Kenya Shilling appreciated by 0.1 percent against the dollar to close the week at Ksh.102.9 compared to Ksh.103 recorded the previous week, supported by dollar inflows from tea exporters. On a year to date basis, the shilling has depreciated against the dollar by 0.4 percent.

Last week, we saw the forex reserves move up to $7.8 billion (equivalent to 5.1 months of import cover) as a result of the $800 million syndicated loan signed that week, which will provide an adequate buffer and aid in the Central Bank’s efforts to stabilize the shilling. This is a significant rise from the previous week where reserves stood at $7 billion (equivalent to 4.6 months of import cover).

As stated above, last week, Kenya’s National Treasury signed an $800 million syndicated loan, in a bid to plug the budget deficit which is estimated at 9.7 percent of GDP for the fiscal year 2016/17, with four banks, namely:

  1. Standard Chartered Bank
  2. Standard Bank
  3. Citi Bank
  4. Merchant Bank

In January, the government borrowed $750 million through syndicated loans to support the budget and boost foreign reserves, which now brings the total amount borrowed from the foreign market to $1.6 billion since the turn of the year, and may serve to relieve some of the pressure on government to borrow heavily in the domestic market, given it has reduced its foreign borrowing deficit, which currently stands at 55.5 percent of the foreign borrowing target of Ksh.462.3 billion, from 73.3 percent previously.

Despite this, the current levels of government debt are a potential threat to economic stability, with debt levels currently at 52.3 percent of GDP. With the global strengthening of the dollar, dollar denominated debt repayments are likely to be more expensive thus exerting adverse effects on economic growth.

Kenya’s 5-year Eurobond matures in the fiscal year 2018/19, which will see the government make a huge repayment despite a persistent expansionary fiscal policy and budget deficit. The trend in Kenya’s debt position is concerning and will only add to the country’s rising debt burden, which has grown to 52.3 percent, from about 40 percent 3-years ago, already above the IMF recommendation of 50 percent of debt to GDP for frontier and emerging markets.

The Monetary Policy Committee (MPC) is set to meet today, Monday 27th March, 2017, to review the prevailing macroeconomic conditions and give the direction of the Central Bank Rate (CBR). In their previous meeting, held in January 2017, the MPC maintained the CBR at 10.0 percent. We expect the MPC to maintain the CBR at 10.0 percent, given:

  • The currency has appreciated by 1 percent since the last meeting, supported by high forex reserve levels at 5.1 months of import cover and the stand-by credit facility from the IMF
  • The resilience of the Central Bank of Kenya (CBK) in stabilizing interest rates at low levels, supported by reduced credit to the private sector, which may make it easier for government to bridge the foreign borrowing deficit through local domestic borrowing

During last week, the equities market was on an upward trend with NASI, NSE 20 and NSE 25 gaining 3.2 percent, 3.2 percent and 3.4 percent, respectively, taking their YTD performances to (2.0 percent), (3.4 percent) and (2.7 percent), respectively. Last week’s performance was supported by gains in select large cap stocks such as Safaricom, Equity Group and KCB Group, which gained 2.8 percent, 5.2 percent and 5 percent, respectively. Since the February 2015 peak, the market has lost 44 percent and 26.4 percent for NSE 20 and NASI, respectively.

Equities turnover decreased by 42.4 percent to close the week at $24.5 million from $42.5 million the previous week. Foreign investors turned net sellers with net outflows of $2.5 million, compared to a net inflow of $1.5 million recorded the previous week, with foreign investor participation decreasing to 65.1 percent, from 84.5 percent recorded the previous week.

Safaricom remained the top mover for the week, accounting for 38.3 percent of market activity. We expect the Kenyan equities market to be flat in 2017, driven by slower growth in corporate earnings, neutral investor sentiment mainly due to the forthcoming general elections and the aggressive rate hike cycle in the US, which may reduce the level of foreign investors’ participation in the local equities market.

The market is currently trading at a price to earnings ratio of 10.8x, versus a historical average of 13.5x, with a dividend yield of 6.6 percent versus a historical average of 3.6 percent. The current 10.8x valuation is 30.1 percent above the most recent trough valuation of 8.3x experienced in December of 2011.

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Mr. Felix
A Math Nerd and a Computer Geek. Currently a Windows 10 Insider. Interested in AI, big data and AR/VR. Takes a keen interest in developments in the tech, business and social media spheres.