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6 January, 2020
Press Release

The Kenyan economy recorded slower levels of economic growth, averaging 5.4% for the first three quarters of 2019, compared to an average of 6.0% in a similar period in 2018, which was driven by;

  1. A slowdown in agricultural activities, which saw the sector recorded an average growth of 4.2% for the first 3 quarters of 2019, representing a 1.1% points decline from the 5.3% recorded in the same period of review in 2018, and
  2. Decreased output in transport and electricity activities, which grew on average by 7.0% and 5.5% in the first 3 quarters of 2019, representing declines of 1.6% points and 2.1% points, respectively, compared to the 8.6% and 7.6% recorded in the same period of review in 2018, respectively;

“Out of the seven metrics that we track, five had a positive effect while one had a neutral effect and one had a negative effect, compared to the beginning of the year where three had a positive outlook, three had a neutral look and one had a negative outlook,” said David Gitau, Senior Investment Analyst at Cytonn. ”The macroeconomic fundamentals remained positive during the year because of an improved business environment created through political goodwill and improved security in the country.” He added.

Summary of Indicators:

  1. Government Borrowing remained “negative” for 2019. During the year the government issued Eurobonds to retire the commercial loans that were maturing. The Government also substituted the debt ceiling that was previously pegged at 50.0% of GDP to an absolute figure of Kshs 9.0 tn, indicating the growing appetite of the government for taking on additional debt. The Government also raised its total revenue target by 14.2% to Kshs 2.1 tn for FY’2019/20 which we doubt it will meet, thus exerting slight pressure on the domestic borrowing front to plug in the deficit,
  2. Exchange Rate moved from “neutral” to “positive” The Kenya Shilling gained 0.5% against the US Dollar to close at 101.3 in 2019 compared to 101.8 at the end of 2018, and ranging between 100.0 and 103.4. The current account deficit narrowed to 8.2% in the 9 months to September 2019, compared to 9.3% in September 2018,
  3. Interest Rates remained “neutral” during the year. The Monetary Policy Committee lowered the Central Bank Rate (CBR) once by 50 bps to 8.5% from 9.0%, in the 6 meetings held in 2019, citing that inflation expectations remained well anchored within the target range and that the economy was operating below its potential level,
  4. Inflation remained “positive” during the year. The inflation rate for the month of December 2019 rose to 5.8% from 5.6% recorded in November bringing the 2019 average to 5.2% (in line with the government’s target of 2.5% to 7.5%) compared to the 2018 average of 4.7%,
  5. GDP remained “positive” during the year. Kenya’s economy expanded in 2019 by 5.6% in Q1’2019, 5.2% in Q2’2019 and 5.1% in Q3’2019 to record an average growth of 5.4% for the 3 quarters compared to average growth of 6.0% over the same period in 2018,
  6. Investor Sentiment moved from “neutral” to “positive” during the year. The Government managed to raise USD 2.1 bn in Eurobonds, in an issue that was oversubscribed by 4.5 times. Foreign investors turned net buyers during the year with a net inflow of USD 18.5 mn compared to net outflows of USD 425.6 mn recorded in 2018,
  7. Security was “positive” for the year 2018. The political climate in the country eased during the year. Despite the terror attack experienced during the first half of 2019, Kenya was spared from travel advisories, evidence of the international community’s confidence in the country’s security position


Fixed Income Review: During the year 2019, T-bill auctions remained oversubscribed, with the average subscription rate coming in at 118.7%, a slight decline from 123.2% recorded in 2018. The yield on the 91-day, 182-day and 364-day T-bills declined by 10 bps, 80 bps and 20 bps to close at 7.2%, 8.2% and 9.8% in 2019 from 7.3%, 9.0% and 10.0% at the end of 2018, respectively. This is mainly attributed to the Central Bank of Kenya’s (CBK’s) efforts to keep rates low by rejecting expensive bids in the auction market. Primary T-bond auctions in 2019 were oversubscribed with the subscription rate averaging 109.7%, which is higher than the average subscription rate for 2018, which came in at 75.8%. The yield curve experienced downward pressure for the better part of the year as the Kenyan Government contained rates by rejecting expensive bids in the auction market. The repeal of the rate cap, however, led to the gain of some long-term government securities such as the 20 and 23-year papers, which gained by 0.8% points and 1.4% points in 2019.

Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The government is 3.2% behind its domestic borrowing target, having borrowed Kshs 156.6 bn against a pro-rated target of Kshs 161.7 bn. We expect an improvement in private sector credit growth considering the repeal of the interest rate cap. This will result in increased competition for bank funds from both the private and public sectors, resulting in upward pressure on interest rates. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk;

Equities Review: During the year 2019, the Kenyan equities market recorded mixed performance, with NASI and NSE 25 gaining by 18.5% and 15.5%, respectively, while NSE 20 declined by 6.3%. Large-cap gainers during the year included Equity Group, KCB Group, Safaricom, NCBA, Barclays, Co-operative Bank and EABL which gained by 53.5%, 44.2%, 41.9%, 32.6%, 21.9%, 14.3% and 13.6%, respectively. Listed banks recorded an average increase in core earnings per share of 8.7%, slower compared to an average growth of 16.2% in Q3’2018, while listed insurers recorded an average increase in core earnings per share of 3.2%, an improvement compared to an average decline of 0.6% in H1’2018. This year, 10 companies issued profit warnings to investors compared to 8 companies in 2018, while 2 companies, namely KenolKobil and Atlas Development and Support Services were delisted from trading at the Nairobi Stock Exchange, with Mumias Sugar being suspended from the bourse. The major legislative change that affected the equities market during the year was the repeal of the rate cap law in the last quarter of 2019.

“During the year, Kenya’s operating environment was characterized by challenging macro-economic conditions owing to delayed long rains that led to a decline in agricultural production and consequently, slowed manufacturing activity. However, with the repeal of the rate cap law in November 2019, the financial performance of banks is expected to further improve and consequently spark investor confidence,” said Ascar Sudi, an investments Analyst at Cytonn. ”We remain neutral on equities for investors with a short-term investment horizon, but are positive for investors with a long-term investment horizon.” She concluded.