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MacroEconomic & Fixed Income August 2017

EXECUTIVE SUMMARY:

Are we in a new normal? On the global scene, there has been growing concerns of developed nations gravitating towards protectionism. i). The ascension of President Donald Trump caused ripples across the globe and ii). United Kingdom is on course to separate from the European Union. On the local front, it seems we are at an inflection point on a macro-economic perspective. First, the Kenya shilling has largely remained stable, declining a slight 1.23% in 2H17. Secondly, the private sector credit growth has been on a downward trajectory, touching a decade-low of 2.10% y/y in the month of May 2017

1Q17 GDP: Growth declined 4.70% y/y growth specifically on the contraction in the Agricultural sector (-1.14% from 3.98% in 1Q16) coupled with a slowed pace of growth in the Construction and Electricity & Water supply sectors. We echo our earlier estimates of 2017 GDP ranging between 4.75% - 5.25%, down from the 5.80% recorded last year.

Headline inflation: The print remained elevated above upper target touching a five-year high of 11.70% y/y in May with average inflation in 2Q17 period jumping to 10.80% from 8.77% recorded in the prior quarter. Food inflation in second quarter paced to perch at 18.10% from 14.74% in the preceding period.  We estimate the cost-push inflation will ease in 3Q17 to average above 7.50%, largely on account of improved weather conditions in the period and the impact of government subsidy program.

KES: The local unit exhibited resilience, weakening 0.77% q/q  in 2Q17 against the US dollar. Usable foreign reserves dipped by USD 345Mn (KES 35.67Bn) from its peak within the second quarter to close at USD 7.96Bn (KES 825.85Bn) in June albeit a huge portion towards settling government external obligations. Overall, we expect the 103.20 - 104.20 range-bound trading of the local unit to continue in the remaining part of the year.

MPC finds itself between a rock and a hard place: Although the CBR was retained at 10.00% in the three Monetary Policy Committee (MPC) meetings held in the first half of 2017, the overall effect has been the cessation of its monetary policy stance signaling power. The apex bank has made public its intention to conduct a review of the spillover effect due to the interest rate cap law on the economy. Overall, we see the MPC retaining the CBR at 10.00% level in its September and November meetings. 

Interbank Rate: Daily average volume thinned 1.83% q/q to close 2Q17 at KES 13.34Bn while average rate narrowed 149bps to 4.71% in the review quarter. Liquidity distribution in the banking sector marginally improved in the second quarter although still characterized by segmentation within the banking sector. In our view, the Central Bank should step up horizontal repo transactions to improve liquidity distribution.

Budget Performance: In FY16/17, total revenue collected showed marked performance at KES 1.306Tn against revised estimate of KES 1.311Tn; with KES 1.25Tn in tax income and the remaining KES 52.85Bn in non-tax income. As for FY17/18, we are doubtful the ambitious revenue collection target of KES 1.549Tn will be attained against the backdrop of expected lower 2017 economic growth.

Fixed Income: Secondary market turnover expanded 26.74% q/q in 2Q17 to perch at KES 132.99Bn.  Our expectations are geared to a downward bias on the short-to-medium term space and stability in the remaining part of the curve. The second half of the year will be dominated by T-Bill maturities totaling KES 446.16Bn which will be rolled into T-Bills and short-term bonds.