FREE

2018 MACRO-ECONOMIC & FIXED INCOME REPORT

Global Economic Growth; Global growth in 2018 is forecasted at 3.90% driven by uptick in activity and accommodative financial conditions. Headwinds to growth include protectionism, geopolitical tension and an accelerated pace of core inflation in advanced economies. In addition, we expect more global central banks to enter into a tightening monetary stance. Sub-Saharan growth is expected to hit 3.30% in the year propelled by a few one-off drivers such as the recovery in Nigeria oil production. On the flipside, delays in implementing policy adjustments pose a major risk on the sub-continent.

Kenya GDP Growth; We forecast Kenya real GDP growth between 5.25% - 5.75% this year. Focus will be on delivery of Jubilee Party’s second-term economic plan dubbed the Big Four which consists of food security, affordable housing, value addition in the manufacturing sector and universal affordable healthcare. Overall, growth will be bolstered by rebound in both private and public investment, positive performance in agricultural sector and continued rebound in service sectors. Risks to growth include protracted low private sector credit growth and public finance skewed to recurrent expenditure.

Kenya’s Inflation Outlook: Our outlook is mild inflationary pressure in first half period due to the base effect before ticking upwards in the latter half. Fuel inflation is expected to remain elevated with the oil production trim deal extended throughout 2018. Additionally, the expiry of the government maize subsidy program may exert some upward price pressure on the cereal which will feed through into food inflation. We expect demand pressure, seen in increased consumption and production, to remain elevated in the year. We thus expect core inflation (currently subdued below mid-target 5.00%) and Purchasing Managers Index to trend upward.

USDKES Outlook; On the local currency front, we expect diaspora remittances, tourism earnings and the rebound in exports to support the shilling between 102.00 -104.00 level in the year although the broad dollar strength will pressure the local unit.

Fixed Income Market: On the fixed income front, the government will be under pressure to plug the net domestic borrowing quota; having fallen off in the first half period. We are of the view that secondary market turnover will trend higher with the cautious approach adopted in the previous year easing with reduced political noise although the corporate bond segment will remain lull. As a recommendation, we propose longer-term bond issuance in the year in order to smoothen out refinancing risks. For an improved liquidity management, we expect the setting up of a central depository for government securities that will provide collateral for horizontal repo transactions will improve credit line arrangements among banks.