EUR 288.03 For Business Accounts Only

3Q18 MACRO-ECONOMIC & FIXED INCOME REPORT

EXECUTIVE SUMMARY
In this report, we review Kenya's macro economic environment in 2Q18 which has been broadly stable. We also provide our 3Q18 outlook of key macro economic variables. Please see below highlights.
 
Kenya Economic Growth: We maintain our 2018 Kenya real GDP growth at  5.25% - 5.75% driven by recovery in the Agricultural sector and continued performance in the Service sectors.

Inflation: We expect a slight uptick in inflation from the average 6.25% in 2H17 to 6.50% in 2H18 propelled by fuel inflation. On a production basis, Producer Price Index (PPI) inflation which narrowed in 1Q18 suggests cooling off of core inflation in the near-term horizon.

USDKES: Rate normalization is in top gear in the US, a stimulus to greenback strength. Closer home, there exists adequate foreign reserves to cushion the local unit. We foresee an oscillation between 100.0 – 102.00 levels.  

Monetary Policy: Our baseline scenario is that the benchmark rate will be retained in 3Q18 at 9.50% although with a downward bias.

Affordable Housing: Currently, there is a housing shortage of 200,000 units per year with a supply of 50,000 units against a demand of 250,000 units. The Government aims to deliver 500,000 affordable and decent housing units by 2022 in major cities across Kenya under the Big Four Agenda. The government plans to establish the National Social Housing Development Fund (NHDF) which will act as the primary off-taker for the Affordable Housing program.  Availability of cheap long-term loans is also key in the overall success of the agenda. In that regard, the Kenya Mortgage Refinance Company (KMRC) was established in April 2018. The main aim of KMRC is to issue bonds in the local capital markets for onward long-term refinancing to financial institutions secured against mortgages.

Fixed Income 3Q18 Outlook: The relative flatness on the long-end of the yield curve has dented investor appetite towards longer term issues. Nonetheless, we anticipate short-end papers to feature prominently in the quarter as the government ups its borrowing campaign. Overall, we expect the yield curve to remain relatively flat on the long end. An emergent issue is the proposed private placement of government bonds to target qualified institutional investors.