Debt sustainability has been a critical issue in Sub-Saharan Africa as several countries face a high risk of debt distress. We have seen countries such as Zambia and Ghana having to restructure their debt to avoid a complete default on their loans. Similarly, concerns remain high about Kenya’s debt sustainability as a result of the continued rise in the country’s debt levels, with institutions such as World Bank and the International Monetary Fund (IMF) stressing the need for Kenya to focus on fiscal consolidation.

The Pension industry in Kenya has been negatively impacted by various unprecedented economic occurrences, such as the slow rebound of the financial markets after the adverse effects of COVID-19 as well as uncertainties around the general elections, which slowed down economic activities in the country. Additionally, the high cost of living occasioned by elevated fuel and food prices as a result of sustained supply constraints has weighed down on the adequacy of disposable income available for saving for retirement as well as the sustainability of the pension industry in Kenya.

In Q1’2023, there was a deterioration in the general business environment in the private sector as evidenced by the average Purchasing Managers’ Index (PMI) for the first two months of Q1’2023 coming at 49.3, compared to 51.7 recorded during a similar period in 2022. Despite the deterioration in the business environment, the government collected Kshs 293.4 bn in the first two months of Q1’2023, higher than Kshs 266.5 bn collected in the same period last year. The revenue performance in the first two months of Q1’2023 represented 22.9% of the total revenue collected of Kshs 1,281.3 bn in the first eight months of the FY’2022/2023 and 89.7% of the prorated estimates of Kshs 1,427.7 bn, an indication of the tough macroeconomic environment in the country occasioned by elevated inflationary pressures. Notably, March 2023 inflation rate came at 9.2%, similar to what was recorded in February 2023, and 1.7% points above the CBK target range of 2.5%-7.5%.

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Q1’2023 Markets Review. The report highlights the current state of the Real Estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns. The Real Estate sector recorded notable growth in terms of activity compared to a similar period in 2022, attributable to the continued growth of the Kenyan economy enabling increased Real Estate property transactions. In the Nairobi Metropolitan Area (NMA), the residential sector recorded improved performance with a 0.4% points y/y increase in average total returns to 6.1% from the 5.7% recorded in Q1’2022. The commercial office sector recorded average rental yields of 7.6% in Q1’2023, representing a 0.3% points y/y increase from 7.3% recorded in Q1’2022. The retail sector recorded average rental yields of 8.0% in Q1’2023, representing a 0.1% points y/y increase from 7.9% recorded in Q1’2022. The land sector recorded an average annualized capital appreciation of 5.7% in Q1’2023, with un-serviced land prices in satellite towns realizing the highest capital appreciation at 14.2% y/y.

While the proposed bill is positive, we recommend allowing for sale by direct negotiations where an IPO, public tender and pre-emptive rights all fail to achieve privatization. We also recommend the government embark on measures to improve the operating efficiency of the cash-strapped SOEs to make them more attractive to investors during privatization. As a result, the government will be able to raise a decent amount of revenue from the privatization and use the proceeds to enhance public service delivery. However, in our view, the removal of the parliamentary approval stage in the privatization of SOEs might lead to a lack of transparency due to a lack of enough oversight and, as such, may limit public participation.

Cytonn Investments hosted members of the Parliamentary Committee on Public Petitions to view a portfolio of the real estate projects. The purpose of the visit was to ascertain the investments backing the real estate funds, CHYS and CPN following complaints by a section of investors in the two funds.

The Commercial Office sector realized a 0.3% points increase in average rental yields in 2022 to 7.6%, from 7.3% recorded in 2021 attributable to increased occupancy and rental rates. Average asking rents per SQFT in the Nairobi Metropolitan Area (NMA) increased by 2.1% to Kshs 96 per SQFT from Kshs 94 per SQFT in 2021. Additionally, occupancy rates increased by 1.8% points to 79.4%, which is the highest recorded since the start of the COVID-19 pandemic in 2020, surpassing 77.6% achieved in 2021.

The downgrade comes at a time when the country is struggling with its liquidity position as a result of high debt service obligations and consequently being at high risk of debt distress. Kenya is also facing elevated inflationary pressures with inflation having increased to 9.2% in February 2023 from 9.0% in January 2023 mainly driven by high food and fuel prices. Kenya’s inflation has remained above the Central Bank of Kenya’s target range of 2.5%-7.5% with the 2022 average coming in at 7.6% reflecting the increased cost of living, which has also greatly impacted the business environment.

The performance of Kenya’s Real Estate sector has been on a positive trajectory, with the sector’s contribution to the country’s GDP recording a 5-year Compounded Annual Growth Rate (CAGR) of 6.0% to Kshs 749.7 mn in Q3’2022 from Kshs 560.8 mn in Q3’2017. Additionally, the sector contributed 10.5% to the total GDP in Q3’2022, coming in as the second largest contributor to Kenya’s GDP, only behind the Agricultural sector that contributed 14.8%. This impressive performance of the Kenyan Real Estate sector in Q3’2022, surpassing perennial major contributors to GDP such as transport at 10.3%, both financial and insurance and product taxes at 8.9% each, while both manufacturing and trade contributed 8.5% each, points to the increased significance of Real Estate to the economy and paints a positive outlook.

Over the last 10 years, the Kenyan shilling has depreciated at a 10-year CAGR of 3.7% to an all-time low of Kshs 125.6 in February 2023 from Kshs 87.3 over the same period in 2013, mainly attributable to various factors such as an ever present current account deficit, increasing debt levels and the rising prices of commodities such as crude oil prices as Kenya remains a net importer. The economic disruptions occasioned by the COVID-19 pandemic in 2020 significantly caused volatility of the Kenyan shilling which led to a depreciation of 7.7% in 2020 followed by a further 3.6% in 2021. In 2022, the shilling depreciated for a fifth consecutive year, closing the year at Kshs 123.4 against the dollar as compared to Kshs 113.1 at the beginning of the year, translating to a depreciation of 9.0%. The weakening of the shilling was mainly attributable to increased dollar demand from commodity and energy sector importers as a result of the high global crude oil prices occasioned by supply chain constraints worsened by the geopolitical pressures at a time when the economy was recovering from the impacts of COVID-19 pandemic which had stifled demand in the economy. In 2023, on a YTD basis, the shilling has depreciated by 1.8% against the USD, to close at Kshs 125.6, from Kshs 123.4 recorded on 3rd January 2023. The continued depreciation in 2023 is mainly attributable to sustained dollar demand by importers especially in the oil and energy sector against a low supply of dollar currency leading to shortage of US Dollars in the Kenyan market.