EUR 288.03 For Business Accounts Only

4Q18 Macro-Economic & Fixed Income Report

EXECUTIVE SUMMARY
 
In this report, we review Kenya’s macro-economic environment in 3Q18 which was salient with fiscal policy risks. We also provide our 4Q18 outlook of key macro-economic variables. Please see the highlights below.

Inflationary pressures on the horizon: We expect a build-up in inflationary pressures in the final quarter of the year issuing from first-round and second-round shocks on elevated fuel pump prices at the domestic front. This has been triggered by the twin rising global oil prices and the VAT on petroleum products that kicked in early September.

Rate normalization shock to weigh down on KES: The expected continued rate normalization program in the US will have a dent on the home currency, more so capital outflows from broad emerging and frontier markets as has been the recent trend. Diaspora remittances have also eased slightly (USD 215.60Mn in August –vs- record high inflow of USD 266.20Mn in June) augmenting the emerging attractive opportunities in the developed markets attendant to the rate hike. We anticipate that the home currency will remain range bound between 101.0 and 103.0 levels.

A neutral stance in November MPC Meeting: The last CBK Monetary Policy Committee (MPC) meeting in the year will be held on Tuesday 27^th November. We expect the Central Bank Rate to be held steady at 9.00% attributed to i). softer demand pressure in the economy and ii). inflation remaining within CBK target range in the near-term horizon despite anticipated uptick in the near-term horizon. This leads credence to the slack in the economy partly attributed to the lagged effect of slow government spending.

4Q18 Fixed Income Outlook: We expect demand in the secondary market to remain elevated on the short-to-intermediate end of the yield curve. This has been as a result of investors reducing their duration appetite in an uncertain macro-economic environment. Thus, we still anticipate the long end of the yield curve to exhibit relative flatness, more so with the retention of the upper ceiling of the interest rate cap in the Finance Act 2018.