KENYA MACRO ECONOMIC ENVIRONMENT
The Kenyan economy is projected to grow by 5.8% on average in 2019, according to GDP projections from 16 research houses, global agencies, and government organizations that we tracked during the half-year period, inclusive of Cytonn’s projection of 5.8% as at H1’2019. This will be driven by; (i) growth in the agriculture sector, (ii) implementation of the Big 4 Agenda projects by the Kenyan Government, and (iii) recovery in the business environment evidenced by the Stanbic Bank Monthly Purchasing Manager’s Index (PMI), which rose to 51.3 in May 2019 from 49.3 recorded in April, an indication of improving business conditions.
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Kenya 2019 Annual GDP Growth Outlook |
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No. |
|
Q1'2019 |
Q2'2019 |
|
1. |
Central Bank of Kenya |
6.3% |
6.3% |
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2. |
Citigroup Global Markets |
6.1% |
6.1% |
|
3. |
African Development Bank (AfDB) |
6.0% |
6.0% |
|
4. |
PNB Paribas |
6.0% |
6.0% |
|
5. |
UK HSBC |
6.0% |
6.0% |
|
6. |
Euromonitor International |
5.9% |
5.9% |
|
7. |
International Monetary Fund (IMF) |
6.1% |
5.8% |
|
8. |
Cytonn Investments Management Plc |
5.8% |
5.8% |
|
9. |
FocusEconomics |
5.8% |
5.8% |
|
10. |
World Bank |
5.8% |
5.7% |
|
11. |
JPMorgan |
5.7% |
5.7% |
|
12. |
Euler Hermes |
5.7% |
5.7% |
|
13. |
Oxford Economics |
5.6% |
5.6% |
|
14. |
Standard Chartered |
5.6% |
5.6% |
|
15. |
Capital Economics |
5.5% |
5.5% |
|
16. |
Fitch Solutions |
5.2% |
5.2% |
|
|
Average |
5.8% |
5.8% |
The average inflation rate increased to an average of 5.2% in H1’2019, as compared to 4.3% in H1’2018, with June’s inflation rate rising to 5.7% from 5.5% in May 2019. The Monetary Policy Committee (MPC) met three times in H1’2019, leaving the Central Bank Rate (CBR) unchanged at 9.0%, in line with our expectations, citing that inflation expectations remained well anchored within the target range and that the economy was operating close to its potential as evidenced by (i) inflation remained within the 2.5% - 7.5%, target during the review period, (ii) stability in the foreign exchange market, and (iii) improving private sector credit growth, coming in at 4.9% in the 12-months to April, compared to 4.3% in the 12-months to March.
“The outlook of the 7 indicators that we track remained unchanged from the beginning of the year, with 3 being positive, 3 being neutral and 1 being negative, and thus we maintain our positive outlook on the 2019 macroeconomic environment supported by expectations of a relatively strong economic growth at between 5.7%-5.9%, a stable currency, inflation rates within the government’s target, and stable interest rates in 2019.” Commented Caleb Mugendi, Investment Associate at Cytonn. “The challenges to the growth include; poverty, governance, skills gap between the market requirements and the education curriculum and climate change which could affect the agriculture sector” added Caleb.
Summary of Indicators:
- Government Borrowing has remained “negative”. We still maintain our expectations of KRA not achieving their revenue targets, which has been raised by 14.2% in the FY’2019/2020 budget to Kshs 2.1 tn, from Kshs 1.9 tn previously. As per the Q3’2018/2019 Budget outturn, the Kenya Revenue Authority (KRA) had only managed to raise Kshs 1.2 tn against a target of Kshs 1.3 tn representing 91.5% of the targeted revenue collection and it is doubtful that it will meet its target. This is expected to result in further borrowing from the domestic market to plug in the deficit, which coupled with heavy maturities of government securities, might lead to pressure on domestic borrowing.
- Exchange Rate has remained “neutral” and we expect it to remain so for the rest of the year. We expect the Kenya Shilling to remain stable against the US Dollar in the range Kshs 101.0 - Kshs 104.0 against the USD in 2019, with continued support from the CBK in the short term through its sufficient reserves currently at USD 9.2 bn (equivalent to 5.8-months of import cover).
- We have maintained our outlook on Interest Rates at “neutral”, and expect it to remain so throughout the year. The interest rate environment has remained stable in 2019, with the CBR having been retained at 9.0% in the 3 MPC meetings held in 2019. With the heavy domestic maturities in 2019, we expect slight upward pressure on interest rates going forward, as the government tries to meet its domestic borrowing targets for the 2019/2020 fiscal year.
- Inflation remains “positive” and is expected to remain within the government target range of 2.5% - 7.5%. Risks are however abound in the near-term, arising from the late onset of the traditionally long rains season which has disrupted food supply leading to a flare in food inflation, coupled with the continued rise in global fuel prices.
- We are still “positive” on GDP growth in 2019, with our outlook remaining unchanged from the beginning of the year. We maintain our GDP growth projection between 5.7% - 5.9% in 2019, lower than the 6.3% growth in 2018, but higher than the 5-year historical average of 5.4%.
- Our outlook on Investor Sentiment remains “neutral” for the rest of the year. We have recorded an improvement in foreign inflows in the capital market to a net buying position of USD 17.7 mn in H1’2019 from a net selling position of USD 93.4 mn in Q4’2018, an indication of improved investor sentiments. We expect improved foreign inflows from the negative position in 2018, mainly supported by long-term investors who enter the market looking to take advantage of the current cheap valuations in select segments of the market.
- Security has been maintained at “positive” for 2019 as security is expected to be upheld, given that the political climate in the country has eased. Despite the recent 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.
ASSET CLASS REVIEW
FIXED INCOME REVIEW: During the first half of 2019, T-bill auctions recorded an oversubscription, with the average subscription rate coming in at 144.6% compared to 142.6% in H1’2018. Overall subscription rates for the 91, 182, and 364-day papers came in at 103.5%, 80.5% and 255.0%, with investors’ participation remaining skewed towards the longer-dated paper, attributable to the scarcity of newer short-term bonds in the primary market. Yields on T-bills declined by 50 bps, 140 bps and 90 bps closing at 6.8%, 7.6%, and 9.1% in H1’2019, from 7.3%, 9.0%, and 10.0% for the 91, 182, and 364-day papers, respectively, recorded as at the end of 2018, mainly due to the Central Bank of Kenya’s (CBK’s) efforts to keep rates low by rejecting expensive bids in the auction market.
Commenting on the report, David Gitau, Investment Analyst at Cytonn stated that, “Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The Government failed to meet its FY’2018/2019 domestic target narrowly by 1.3%, having borrowed Kshs 317.0 bn against a target of Kshs 321.0 bn. A budget deficit is likely to result from depressed revenue collection with the revenue target for FY’2019/2020 at Kshs 2.1 tn, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit. Despite this, we do not expect upward pressure on interest rates due to increased demand for government securities, driven by improved liquidity in the market owing to the relatively high debt maturities. Our view is that investors should be biased towards medium-term fixed income instruments to reduce duration risk associated with long-term debt, coupled with the relatively flat yield curve on the long-end due to saturation of long-term bonds.”
EQUITIES REVIEW: The Kenyan equities market had an upward trend in the first quarter of 2019 gaining by 12.2% and declined in the second quarter of 2019 by 5.9%, bringing the half year gains for NASI and NSE 25 to 5.6% and 0.6%, respectively, and a decline for NSE 20 by 6.5%. Kenyan listed banks released their Q1’2019 financial results, recording earnings growth of 12.2% compared to a growth of 14.4% in Q1’2018.
“We are “positive” on equities for investors as the sustained price declines has seen the market P/E decline to below its historical average.” said, Ian Kagiri, Investment Analyst at Cytonn. “We expect increased market activity, and possible increased inflows from foreign investors, as they take advantage of the attractive valuations, which will support the positive performance,” he added.
PRIVATE EQUITY REVIEW: Private equity investments in Africa remained robust in H1’2019, as evidenced by the increasing investor interest, which is attributed to; (i) rapid urbanization, a resilient and adapting middle class and increased consumerism, (ii) the attractive valuations in Sub Saharan Africa’s private markets compared to its public markets, (iii) the attractive valuations in Sub Saharan Africa’s markets compared to global markets, and (iv) better economic projections in Sub Sahara Africa compared to global markets.
“We remain “positive” on private equity as an asset class in Sub-Sahara Africa. Going forward, the increasing investor interest and stable macro-economic environment will continue to boost deal flow into African markets.” Commented Gichuru Muchane, Private Equity Analyst at Cytonn.
Notes to the Editor:
Cytonn Investments is an independent investment management firm, with offices in Nairobi - Kenya and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to Individual High-Net-Worth Investors, Global and Local Institutional Investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.
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