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• Weekly Rates: Cytonn Money Market Fund closed the week at a yield of 16.61% p.a. To invest, dial *809# or download the Cytonn App from Google Play store here or from the Appstore here;
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Hospitality Updates:

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Global Economic Growth:

According to the World Bank’s Global Economic Prospects 2024, global economic growth is projected to rise marginally by 0.1% points to 2.7% in 2025, from 2.6% in 2024. The expected economic expansion is driven by the easing global inflation that has in turn necessitated easing of monetary policies in most major economies leading to an ease in credit conditions, normalization of supply and demand dynamics as labor markets stabilize and resilient labor markets. After peaking at 9.4% year over year in Q3’2022, headline inflation rates are now projected to reach 3.5% by the end of 2025, below the average level of 3.6% between 2000 and 2019, mainly attributable to declining commodity prices. Moreover, the growth in the Emerging Markets and Developing Economies (EMDEs) is expected to expand by 3.6% in 2024 from the estimated growth of 3.3% in 2024.

Growth in 2024 shall be shaped by the following four key themes:

1. Easing Inflation and Monetary Policies

In line with inflation-targeting strategies, central banks are expected to continue easing monetary policies in 2025, reducing interest rates to stimulate economic activity as inflationary pressures subside. This shift follows one of the most aggressive monetary tightening cycles in recent history, implemented to curb heightened inflation caused by persistent high fuel and food prices. Since June 2024, major central banks in advanced economies have started to cut their policy rates, moving their policy stance toward neutral. The change in global monetary conditions is easing the pressure on emerging market economies, with their currencies strengthening against the US dollar and financial conditions improving. This will help reduce imported inflation pressures, allowing these countries to pursue more easily their own disinflation path.

In their latest meeting on 18^th December 2024, the USA Federal Reserve cut their policy rates by 25 bps to a range 4.25%-4.50% from a range of 4.50%-4.75%.  The Fed’s decision to lower rates was driven by the need to support a soft landing for the economy, as inflation showed signs of easing but remained above the 2.0% target. As of November 2024, the y/y inflation rate stood at 2.7%, up from 2.6% in October 2024. The Fed noted that while inflation has made progress toward its target, it remains somewhat elevated, and economic growth continues at a solid pace. Additionally, in their most recent sittings, other major economies such as Canada, and the Euro Area also cut their monetary policy rates. While lowering rates could stimulate domestic growth and ease financial conditions, they must balance this with the risk of inflationary pressures, currency devaluation, and capital outflows. In our view, we expect the coming rate cuts to be gradual as economies seek to adopt accommodative policies that will support the economy while avoiding an uptick in inflation rates.

The table below highlights the policy stance adopted by the Central Banks of major economies

Data Source: Cytonn Research

2. Easing Commodity Prices

In 2024, commodity prices were on a downward trajectory and are projected to ease further in 2024. According to the World Bank’s Commodity Markets Outlook report, commodity prices are expected to decrease by 5.1% percent in 2025, after softening 2.7% in 2024. This would lead aggregate commodity prices to their lowest levels since 2020. The projected declines are led by oil prices but tempered by price increases for natural gas and a stable outlook for metals and agricultural raw materials. The table below shows select commodity price indices:

Data Source: World Bank

Oil prices have been under downward pressure declining by 2.6% in 2024, albeit lower than the 16.8% decrease which was recorded in 2023, as the post-pandemic demand recovery stalled, China's economy struggled, and the U.S. and other non-OPEC producers pumped more crude into a well-supplied global market. Oil prices are expected to decline further in 2025 but remain above the pre-pandemic levels as a result of weak demand from China in addition to rising global supplies which are expected to cast a shadow on OPEC+ led efforts to shore up the market. In 2025, fertilizer prices are projected to decline further by 2.0%, building on the 23.4% decrease recorded in 2024. This continued downward trend is attributed to increased global production and lower feedstock prices. Similarly, food prices, which represent the largest component of the World Bank Agriculture Commodity Index, are expected to fall by 4.8% in 2025. This decline is driven by record-high rice and maize production in the 2023-24 season and favorable crop expectations for 2025. These trends are likely to reduce agricultural input costs, easing inflationary pressures in food-dependent economies. However, risks such as unpredictable weather patterns or geopolitical disruptions could still impact price stability and agricultural output.

3. Global Trade

The World Trade Organization (WTO) projects the global trade growth to improve to 3.0% in 2025 from the 2.7% growth rate in 2024 on the back of improved exports of manufactured goods from Asia and strong services trade. However, trade tensions, protectionist policies, and geopolitical uncertainties are significant risks to the outlook. The U.S.-China relationship remains a focal point, with American businesses growing more pessimistic about opportunities in China as its economic growth slows and local competitors, bolstered by state support, dominate key industries. Major U.S. companies are diversifying supply chains to countries such as Vietnam and India, reflecting diminished optimism about the Chinese market. Geopolitical uncertainties further exacerbate these challenges. The ongoing conflicts in the Middle East, for instance, could disrupt recovering global supply chains, thereby slowing down trade. Additionally, the potential for new tariffs and trade barriers, as indicated by recent policy discussions, may lead to increased market volatility and economic instability. In our view, global trade growth will remain constrained in the near term due to persistent structural challenges such as supply chain fragmentation, rising trade barriers, and labor market inefficiencies, despite a gradual easing of inflationary pressures.

4. Public Debt

High debt levels especially in Emerging Markets and developing economies (EMDEs) are expected to persist in 2025 mainly on the back of widened current account deficits and surging debt service costs due to declining global trade and currency depreciation in most economies, coupled with tighter financial conditions undermining economic growth. According to the Global Debt Monitor by (IMF), the global public debt (public and non-financial private debt stocks) came in at 237.2% of the GDP, (USD 250.0 tn) in 2023, translating to 0.2% points decline from 238.0% of the GDP recorded in 2022. Conversely, public debt stock as a percentage of GDP increased by 2.0% points to 93.8% in 2023, from 91.8% recorded in 2022. However, given the perceived interest cuts in 2024, especially in developed economies such as the US, global debt levels may experience mixed impacts. While reduced borrowing costs could ease the debt servicing burden for some nations, the elevated refinancing costs for long-term debt and the persistent structural challenges, including fiscal deficits and weak revenue collection, are likely to counteract these benefits. Additionally, geopolitical risks and inflationary pressures, although moderating, remain key concerns that could strain fiscal positions, particularly in EMDEs. In our view, global debt is projected to remain elevated, with governments and corporations facing continued pressure to manage their liabilities amidst a challenging economic and financial landscape.

Below is a summary of the regional growth rates by country as per the World Bank:

Data Source: World Bank

According to the World Bank’s Global Economic Prospects , growth in the Sub-Saharan Africa region is expected to rebound to 3.9% in 2025, from the estimated growth rate of 3.5% recorded in 2024 mainly attributable to the easing inflationary policies, reduction in prices of key imports such as fertilizers, metal and fuel, improved fiscal support and the expected increase in domestic demand.

However, the projections remain subject to key downward risks such as:

• Persistent global inflationary pressures, which may lead to the deterioration of financial conditions in the region and high cost of living due to the high prices necessitating aggressive policy rate hikes in the region,
• The high debt levels in the region as borrowing persists in the region due to the ever-present fiscal deficits in the region. Additionally, the increased debt servicing costs due to the sustained currency depreciation of the local currencies against the Dollar are expected to put more pressure on the region’s growth as most of the region’s debt is dollar-denominated, and,
• Further rise in global or regional instability, such as the possible escalation of the conflict in the Middle East, which could drive up global energy and food prices which would in turn affect growth in the Sub-Saharan Africa region considering that most of the countries in the region are net importers.

In Nigeria, the region's largest economy, growth is projected to accelerate to 3.5% in 2025 from an estimated 3.3% in 2024. This improvement is attributed to increased non-oil sector activity, particularly in agriculture and services, supported by reforms to address structural economic challenges. Additionally, growth in South Africa is expected to increase slightly to 1.3% in 2025, from the estimated growth of 1.2% in 2024. The growth in South Africa is attributable to the energy sector reforms that are expected to improve energy supply in the medium term coupled with easing inflationary pressures which are expected to continue its gradual decline, easing cost-of-living pressures on households and supporting private consumption. However, growth in the region is expected to be hampered by the high debt levels, stifled demand, persistent depreciation of local currencies as well as the increased cases of corruption in the region as indicated by the Corruption Perceptions Index. Growth in the Eastern African region is expected to remain subdued due to the witnessed political clashes in Sudan, South Sudan and the Democratic Republic of Congo, coupled with persistent unfavourable weather conditions which continue to stifle agricultural production.

The table below highlights the real GDP forecasts of select Sub - Saharan Africa countries;

Data Source: World Bank

1. Economic Growth:

According to the Kenya National Bureau of Statistics (KNBS) Q3’2024 Gross Domestic Product Report, the Kenyan economy recorded a 4.0% growth in Q3’2024, a deterioration from the 6.0% expansion recorded in a similar period in 2023. The performance in Q3’2024 was mainly driven by the 4.2% growth in the agricultural sector due to favorable weather conditions, which led to a steady growth in agricultural output. Consequently, the economy recorded an average growth of 4.5% in the first three quarters of 2024, a decline from the 5.5% average growth recorded in a similar period in 2023. The average GDP growth rate for 2024 is expected to come in at a range of 4.8% - 5.0%, a decline from the 5.6% expansion witnessed in 2023.

In 2025, we expect the economy to continue its recovery trajectory with the projected GDP growth to come in at a range of 5.0% - 5.4%.

The key factors that shall support growth include: 

1. Continued growth in Services and Agricultural sectors: The steady performance in the agricultural sector witnessed in 2024 is expected to continue into 2025 following continued support by the government through fertilizer and seed subsidy programs, despite a marginal 3.7% cut in budget allocation under the Crop Development and Management Programme in the Supplementary Budget I for the Fiscal Year 2024/25. Additionally, the favorable weather conditions and sufficient rainfall experienced in the country is set to continue supporting the sector. The service sector is expected to register robust performance driven by growth in information and technology as internet connectivity increases, as well as accommodation and food services as a result of increased tourism,
2. Eased Monetary Policy – In 2024, the Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) by a total of 175.0 bps from 13.00% in February to 11.25% in December in a bid to support the economy, noting that its previous measures had successfully reduced overall inflation to below the mid-point of the target range of 2.5% - 7.5%, stabilized the exchange rate, and anchored inflationary pressures. We expect the MPC to continue lowering the rates gradually in the short to medium term therefore lowering borrowing costs, leading to increased spending and an uptick in the business environment. Further, this is expected to support the private sector credit growth, which has recorded record low credit growth rates in the recent months. The low CBR is expected to support economic growth, and,
3. Gradual Increase in Access to Credit: During the first 10 months of 2024, private sector credit growth rate averaged 5.3%, significantly lower than the 12.1% average growth rate recorded over the same period in 2023, mainly on the back of increased borrowing costs. Despite this decline, we anticipate an expansion of credit to the private sector driven by, the expansionary monetary policy stance by the Central Bank of Kenya, policy initiatives such as the MSMEs Credit Guarantee Scheme and the ongoing economic revival. Additionally, we expect the renewed focus on Public-private Partnerships (PPP) to finance commercially viable projects to spur growth in the private sector. Furthermore, the Hustler Fund has continued to inject affordable credit to the private sector having disbursed Kshs 52.9 bn as of December 2024, and is expected to continue to offer specific financial products such as the Hustler Fund by Vikundi. Furthermore, with the expected reduction in credit risk and a decline in yields in the short-term government papers, we expect the banking sector to increase its lending to the private sector in search of better yields following the adoption of risk-based lending. The chart below shows 5-year private sector credit growth;

Source: CBK

However, key risks threaten economic growth including:

1. High Risk of Debt Distress: According to International Monetary Fund and the World Bank, Kenya is currently at risk of high debt distress with the country’s debt to GDP ratio coming in at 71.8% as at June 2024, 21.8% points above the recommended IMF threshold of 50.0% for developing countries. Additionally, Kenya’s debt stood at Kshs 10.8 tn as of September 2024, 1.9% higher than the Kshs 10.6 tn debt recorded over a similar period in 2023. Consequently, the government will face significant pressure to service the existing debt with the debt service to revenue ratio standing at 56.8% as of November 2024, 26.8% points above the 30.0% threshold recommended by the IMF.  Economic growth potential diminishes when debt levels are high because a significant part of the revenue is allocated towards servicing the existing debt, leaving less for developmental spending, and,
2. Rising Inflationary Pressures –The country’s inflation rate averaged 4.5% in 2024, remaining within and falling below the mid-point of the CBK’s target range of 2.5%-7.5%. Despite the improvement recorded in 2024, we expect the inflation rate to remain relatively stable in the short term, but face upward pressure in the medium to long term during 2025, weighing down the business environment.

2. Currency:

The Kenya Shilling appreciated by 17.4% against the US Dollar to close at Kshs 129.3 in 2024, compared to Kshs 156.5 at the end of 2023, a contrast to the 26.8% depreciation recorded in 2023. The gain was majorly driven by the repayment of the USD 2.0 bn Eurobond that matured in June, through a buy-back in February 2024 that reduced credit risk on the country and pressure on the Shilling. Additionally, the cuts in the US Federal interest rates by a total of 100 bps in 2024 to a range of 4.25%-4.50%, from a range of 5.25%-5.50% in the beginning of 2024

Going forward, we expect the shilling to trade against the US dollar within a range of Kshs 120.9 and Kshs 140.5 by the end of 2025.

The Kenyan shilling will be supported by:

1. Improving diaspora remittances standing at a cumulative USD 4,872.0 mn in the 12 months to November 2024, 16.7% higher than the USD 4,175.0 mn recorded over the same period in 2023. In the November 2024 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 53.4% in the period. In 2025, diaspora remittances are set to improve further, mainly driven by the recovery of the global economy, increasing Kenyan population in the diaspora, and advancing technology that has facilitated easier transfer of money,
2. Improving forex reserves currently at USD 9.2 bn (equivalent to 4.7-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover and the EAC region’s convergence criteria of 4.5-months of import cover. Forex reserves improved by a significant 39.1% to USD 9.2 bn (equivalent to 4.7 months of import cover) in December 2024, from USD 3.6 bn (equivalent to 4.0 months of import cover) in a similar period in 2023. The rise is largely attributed to reduced debt service obligations due to the stability of the Kenyan shilling and dollar inflows from concessional financing from International Monetary Fund (IMF) disbursements. Notably, the country successfully redeemed the 10-year USD 2.0 bn Eurobond that matured in June 2024, easing pressure on the country’s forex reserves,
3. Expected dollar inflows from both commercial and concessional financing, boosting the country’s forex reserves. On 30^th May 2024, The World Bank approved a new USD 1.2 bn funding under the Kenya Fiscal Sustainability and Resilient Growth Development Policy Operation (DPO), to be funded through a USD 850.0 mn loan from the International Bank for Reconstruction and Development (IBRD), a USD 300.0 mn credit from the International Development Association (IDA), and a USD 50.0 mn grant from the IDA's Window for Host Communities and Refugees. Additionally, in November 2024, Kenya secured a USD 606.1 mn from the International Monetary Fund (IMF), USD 485.8 mn under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements  following the completion of the seventh and eighth reviews and USD 120.3 mn under the Resilience Sustainability Facility (RSF) arrangements, with the National Treasury expecting more financing from the IMF to fulfill the total financial commitment of USD 3.6 bn, and,
4. The Government measures to stabilize the foreign exchange market which includes the Government-to-Government petroleum supply arrangement, revitalizing inter-bank forex bank trading and the revival and Commercialization of the National Oil Corporation of Kenya (NOCK). According to the Draft 2024 Budget policy, these arrangements are part of a broader strategy to enhance the stability of Kenya's foreign exchange market by addressing both supply and demand factors influencing currency valuation. Additionally, the Central Bank of Kenya (CBK) has been actively engaging in foreign exchange operations to manage the volatility of the Kenyan shilling against the U.S. dollar, shifting its strategy from selling to purchasing U.S. dollars from local banks, aiming to anchor its foreign exchange reserves and maintain the stability of the currency.

The Kenyan shilling will however face the following challenges:   

1. An ever-present current account deficit estimated at 3.9% of GDP in Q3’2024, a deterioration from the 3.5% deficit recorded in a similar period in 2023. The persistent current account deficit reflects the country’s reliance on imports which  has resulted in increased demand for foreign currency which continues to put more strain on the local currency,
2. The low interest rates, with the Monetary Policy Committee reducing the CBR to 11.25% in its last sitting, signalling an expansionary monetary policy stance, noting that its previous measures had successfully reduced overall inflation to below the mid-point of the target range of 2.5% - 7.5% and stabilized the exchange rate. The lower rates pose a challenge to the Kenyan Shilling, increasing pressure on the currency’s stability due to reduced attractiveness for foreign investors, especially in the face of sustained external borrowing needs and global market fluctuations.
3. Elevated risk of increase in global crude oil prices as a result of supply chain constraints following the rising geopolitical tension in the Middle East. Consequently, the possible rise in global oil prices is set to increase demand for the US Dollar by oil and energy importers, as well as manufacturers against a low supply of US Dollar currency, and,
4. The high debt servicing costs which continue to put pressure on forex reserves. Notably, the debt service to revenue ratio stood at 56.8% as of November 2024, 26.8% points above the 30.0% threshold recommended by the IMF, and 67.2% of Kenya’s external debt is US Dollar-denominated as of June 2024.

We expect the shilling to remain within a range of Kshs 120.9 and Kshs 140.5 against the USD by the end of 2025 with a bias towards a 4.6% depreciation by the end of the year.  

3. Inflation:

In 2024, the average inflation rate in the country was 4.5%, marking 3.2% points decrease from the average inflation rate of 7.7% witnessed in 2023. However, the y/y inflation rate increased slightly by 0.2% points to 3.0%, in December 2024 from the 2.8% recorded in November 2024. Key to note, the overall inflation rates throughout 2024, remained within the Central Bank’s target range of 2.5% and 7.5%, hitting its lowest in October 2024 at 2.7%, the lowest since 2010.  Despite the improvement recorded in 2024, we expect the inflation rate to remain relatively stable in the short term, but face upward pressure in the medium to long term during 2025, given that the current fiscal measures do not address the cost-driven inflation, in addition to a ripple effect of the current expansionary monetary stance.

We expect inflation to average 5.3% in 2025, within the government target range of 2.5% - 7.5%.  Key risks driving inflationary pressure are the high electricity prices, fuel costs, and exchange rate fluctuations on the Kenyan shilling.

4. Interest Rates:

The Central Bank of Kenya (CBK) is expected to continue with the expansionary monetary policy stance in the short-to-medium term attributable to a stronger and stable currency and the eased inflation currently below the mid-point of the CBK’s preferred target of a range of 2.5% - 7.5%. The 11.25% Central Bank Rate (CBR) set in December 2024 marks the lowest level since December 2023. In the short term, we anticipate the Central Bank of Kenya (CBK) will adopt a more cautious approach to rate adjustments as it evaluates the performance of the local currency and inflation trends. However, in the medium term, there is potential for further reductions in the CBR to stimulate private sector credit growth, which experienced a decline in 2024 due to elevated interest rates.

Despite the projected decline in borrowing by 8.7% to Kshs 768.6 bn in FY’2024/25 from Kshs 835.1 bn in FY’2023/24, Kenya still has an ever-present fiscal deficit, projected at 4.3% in FY’2024/25. As such, we expect the government to continue borrowing aggressively from both the domestic and foreign markets, given that the government is already ahead of its total net domestic borrowing target of Kshs 408.4 bn in FY’2024/25. The escalating debt service due to further borrowing will persistently burden the government, compelling it to borrow more to cover the maturing debts. However, the interest rate environment is expected to stabilize in the medium term as the government receives a boost from concessional loans from the IMF and the World Bank, improving the country’s credit outlook. 

The table below summarizes the various macroeconomic factors and the possible impact on the business environment in 2025. With two indicators being negative, three being neutral and two being positive, the general outlook for the macroeconomic environment in 2025 is NEUTRAL.

The change from last year’s outlook is:

1. Interest Rate to Positive from Neutral necessitated by the expansionary monetary policy which is expected to be maintained in the short to medium term of 2025 to support private sector credit given the anchored inflation and stable shilling.
2. Security to Negative from Positive attributable to the political instability and opposition against the current regime.
3. Exchange rate to Neutral from Negative attributable to the stable Kenya shilling. We however expect the Shilling to face fluctuation pressures given the continued rate cuts by the CBK and the ever-present current account deficit and increasing debt service costs which continue to put pressure on the forex reserves.

Out of the seven metrics that we track, three have a neutral outlook, two have a negative outlook and two have a positive outlook; from last year where four had a neutral outlook, two had a negative outlook and one had a positive outlook. Our general outlook for the macroeconomic environment remains NEUTRAL for 2025, unchanged from 2024.

The government is currently 128.3% ahead its prorated domestic borrowing target, having a net borrowing of Kshs 502.2 bn domestically, against the pro-rated target of Kshs 219.9 bn, and 23.0% ahead of the total net domestic borrowing target of Kshs 408.4 bn for FY’2024/25, suggesting aggressive borrowing from the local market mainly on the back of the high debt maturities.  We expect a moderate downward pressure on the interest rates, supported by the Central Bank of Kenya’s accommodative monetary policy stance and general economic improvement. While the international capital markets remain challenging, the reduced inflationary environment, easing global interest rates is expected to alleviate investor demands for high yields, though elevated debt servicing costs could still weigh on fiscal sustainability.

Below is a summary of treasury bills and bond maturities and the expected borrowings over the same period. The government will need to borrow Kshs 110.0 bn on average each month for the rest of the fiscal year to meet the domestic borrowing target of Kshs 408.4 bn for the FY’2024/2025, and cover T-bill and T-bond maturities, as illustrated in the graph below:

Fig: Schedule of Treasury bills and bonds maturities and the expected target borrowings in the 2024-2025 fiscal year to cater for the maturities and additional government borrowing.

Weekly Market Performance;

Money Markets, T-Bills Primary Auction:

During the week, T-bills were oversubscribed for the first time in five weeks, with the overall oversubscription rate coming in at 138.1%, higher than the undersubscription rate of 65.4% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 13.3 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 333.1%, significantly higher than the oversubscription rate of 199.7% recorded the previous week. The subscription rates for the 182-day and 364-day papers increased to 97.1% and 101.1% respectively from 60.8% and 16.3% respectively recorded the previous week. The government accepted a total of Kshs 24.5 bn worth of bids out of Kshs 33.1 bn bids received, translating to an acceptance rate of 73.8%. The yields on the government papers were on a downward trajectory, with the yields on the 91-day papers declining the most by 23.2 bps to 9.6% from 9.8%, while the yields on the 182-day paper declined by 0.1 bps to remain relatively unchanged at 10.0% % and the yields on the 364-day paper declined by 3.7 bps to 11.3% from the 11.4% recorded the previous week. The chart below shows the yield growth rate for the 91-day paper over the period:

The chart below compares the overall average T-bill subscription rates obtained in 2022, 2023, 2024 and 2025 Year-to-date (YTD);

Money Market Performance:

In the money markets, 3-month bank placements ended the week at 11.5% (based on what we have been offered by various banks), and yields on the government papers decreased, with the yields on the 364-day and 91-day papers decreasing by 3.7 bps and 23.2 bps to 11.3% and 9.6% respectively, from 11.4% and 9.8% respectively recorded the previous week. The yield on the Cytonn Money Market Fund declined by 23.0 bps to 16.6% from the 16.8% recorded the previous week, while the average yields on the Top 5 Money Market Funds decreased by 11.0 bps to close the week at 16.1%, from 16.2% recorded the previous week.

The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 10^th January 2025:

Source: Business Daily

Liquidity:

During the week, liquidity in the money markets marginally tightened, with the average interbank rate increasing by 3.9 bps remaining relatively unchanged at 11.1% recorded the previous week, partly attributable to the tax remittances that offset government payments. The average interbank volumes traded increased by 52.3% to Kshs 34.6 bn from Kshs 22.7 bn recorded the previous week. The chart below shows the interbank rates in the market over the years:

Kenya Eurobonds:  

During the week, the yields on Eurobonds were on a downward trajectory, with the yields on the 13-year Eurobond issued in 2021 decreasing the most by 32.6 bps, to 9.8% from 10.1% recorded the previous week. The table below shows the summary of the performance of the Kenyan Eurobonds as of 9^th January 2025:

Source: Central Bank of Kenya (CBK)

Debt sustainability concerns continue to persist in the Sub-Saharan Africa (SSA) region in 2025 amid a slow post-pandemic recovery and elevated inflationary pressures. In 2024, several Sub-Saharan African (SSA) countries re-entered the Eurobond market after a period of inactivity. In January 2024, Côte d'Ivoire issued Eurobonds totaling USD 2.6 bn with maturities of nine and thirteen years, offering a coupon rate of 8.5%.  In February 2024, Benin entered the market with a 14-year, dollar-denominated Eurobond worth USD 750.0 mn at a coupon rate of 8.375%. This marked Benin's first dollar-denominated bond issuance and Kenya issued a seven-year Eurobond, raising USD 1.5 bn at a rate of 10.375%.  Lastly, in June 2024, Senegal became the fourth SSA nation to issue a Eurobond, raising USD 750.0 mn with a maturity in 2031 at a coupon rate of 7.75%. These issuances highlight a cautious reopening of international capital markets to SSA countries, despite prevailing global financial challenges. In 2025, Sub-Saharan Africa's Eurobond market is projected to experience a cautious yet optimistic outlook. The region's economic recovery is expected to continue, with growth IMF projections reaching 4.0% in 2025. Several countries are anticipated to re-enter the Eurobond market to address fiscal deficits and refinance maturing debts. The table below shows the SSA countries that have issued Eurobonds and their respective risk of debt distress;

Sources: International Monetary Fund (IMF) 2023 economic outlook & Joint Debt Sustainability Analysis (DSA), World Bank

Key take-outs in the table include

1. Three countries already defaulted on their debt: Ghana, Zambia and Ethiopia are already in debt distress, and have already initiated different forms of debt restructuring, especially at the G20,
2. The average debt servicing consumes above 41.4% of the total revenue collected, translating to less allocation for development purposes, and,
3. Although Kenya’s debt to GDP ratio is projected to increase to 70.1% in 2023 from 66.7% in 2022, the government’s debt appetite might push the ratio higher, having recorded a debt to GDP ratio of 71.8% as of June 2024, despite the current administration’s initiatives towards fiscal consolidation

Kenya Shilling:

During the week, the Kenya Shilling depreciated marginally against the US Dollar by 15.2 bps, to close the week at Kshs 129.5, from the Kshs 129.3 recorded the previous week. On a year-to-date basis, the shilling has depreciated marginally by 0.1% against the dollar, compared to the 17.4% appreciation recorded in 2024.

We expect the shilling to be supported by:

1. Diaspora remittances standing at a cumulative USD 4,872.0 mn in the 12 months to November 2024, 16.7% higher than the USD 4,175.0 mn recorded over the same period in 2023. In the November 2024 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 53.4% in the period, and,
2. The tourism inflow receipts which came in at USD 352.5 bn in 2023, a 31.5% increase from USD 268.1 bn inflow receipts recorded in 2022, and owing to tourist arrivals that improved by 14.9% in the 12 months to October 2024, compared to a similar period in 2023.
3. Improved forex reserves currently at USD 9.2 bn (equivalent to 4.7-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover and the EAC region’s convergence criteria of 4.5-months of import cover.

The shilling is however expected to remain under pressure in 2025 as a result of:     

1. An ever-present current account deficit which came at 3.5% of GDP in Q3’2024 from 3.9% recorded in Q3’2023, and,
2. The need for government debt servicing, continues to put pressure on forex reserves given that 67.2% of Kenya’s external debt is US Dollar-denominated as of June 2024.

Key to note, Kenya’s forex reserves decreased marginally by 0.2% during the week, to remain relatively unchanged at USD 9.2 bn recorded in the previous week, equivalent to 4.7 months of import cover, unchanged from last week, and above the statutory requirement of maintaining at least 4.0-months of import cover. The chart below summarizes the evolution of Kenya's m`15678uionths of import cover over the years:

Weekly Highlights:

1. Kenya Q3’2024 GDP Growth

The Kenya National Bureau of Statistics (KNBS) released the Q3’2024 Quarterly Gross Domestic Product Report, highlighting that the Kenyan economy recorded a 4.0% growth in Q3’2024, slower than the 6.0% growth recorded in Q3’2023. The main contributor to Kenyan GDP remains to be the Agriculture, fishing and forestry sector which grew by 4.2% in Q3’2024, lower than the 5.1% expansion recorded in Q3’2023. All sectors in Q3’2024, except Mining and Quarrying and Construction recorded positive growths, with varying magnitudes across activities. Most sectors recorded declining growth rates compared to Q3’2023 with Accommodation and Food Services, Mining & Quarrying and Financial & Insurance Sectors recording the highest declines of 20.8%, 11.9% and 10.8% points, respectively. Other sectors that recorded a contraction in growth rate, from what was recorded in Q3’2023 were Construction, Electricity and Water Supply and Real Estate of 6.0%, 2.4% and 2.2% points respectively.

The key take-outs from the report include;

• Sectoral Contribution to Growth - The biggest gainer in terms of sectoral contribution to GDP was the Real Estate sector, increasing by 0.2% points to 10.8% in Q3’2024 from 10.6% in Q3’2023, while the Construction was the biggest loser, declining by 0.4% points to 5.7% in Q3’2024, from 6.1% in Q3’2023. Real Estate was the second largest contributor to GDP at 10.8% in Q3’2024, up from 10.6% recorded in Q3’2023, indicating sustained growth. The Accommodation and Food Services sector recorded the highest growth rate in Q3’2024 growing by 13.7%, albeit slower than the 34.5% growth recorded in Q3’2023.

       The chart below shows the top contributors to GDP by sector in Q3’2023 and Q3’2024:

Source: KNBS Q3’2023 and Q3’2024 GDP Report

• Slowed growth in the Agricultural Sector – Agriculture and Forestry recorded a growth of 4.2% in Q3’2024. The performance was a decrease of 0.9% points, from the expansion of 5.1% recorded in Q3’2023. Additionally, the sector remains the major contributor to GDP, with the sectoral contribution to GDP marginally increasing by 0.1% to 14.5% in Q3’2024, from 14.4% recorded in Q3’2023.The positive growth recorded during the quarter was mainly attributable to favorable weather conditions that characterized the first three quarters of 2024. Notably, during the quarter, production of key food crops and cash crops increased with a significant increase in the production of sugarcane and volume of milk during the quarter under review. However, the performance was weighed down by decline in the production of tea.
• Reduced growth in the Financial and Insurance Services Sector: The Financial and Insurance sector growth rate slowed down by 10.8% points to 4.7% in Q3’2024 compared to the 15.5% in Q3’2023, attributable to the rise in cost of credit during the period. Additionally, the contribution to GDP increased by 0.07% points to remain relatively unchanged from the 9.9% recorded in Q3’2023. Some of the notable improvements include:

1. 1. Broad money supply (M3) grew by 2.6% to KSh 6.0 trillion as at end of September 2024, from Ksh 5.8 trillion recorded as at the end of September 2023.
   2. The NSE 20 Share Index rose by 17.8% to 1,776.0 points in September 2024 from 1,508.0 points in September 2023, signaling improved performance in the equity market.

However, growth in this sector was weighed down by;

1. 1. The number of shares traded in the Nairobi Securities Exchange decreased by 21.2% to 334.0 mn in September 2024 from 424.0 million in September 2023. Similarly, the total value of traded shares decreased by 3.8% in September 2024 to 5.0 billion from 5.2 billion in September 2023

• Decelerated growth in the electricity supply sector - The Electricity and Water Supply sector recorded a slowed growth of 0.9% in Q3’2024 compared to a 3.3% growth in a similar period of review in 2023, with the sectoral contribution to GDP marginally decreasing to 2.5% points in Q3’2024, from 2.6% recorded in Q3’2023.
• Sustained growth in the Accommodation and Food Service sector: Accommodation and Food Services sector is the only sector that recorded double digit growth in Q3’2024, having expanded by 13.7%, albeit slower than the 34.5% recorded in Q3’2023. Additionally, the contribution to GDP increased by 0.1% points, to 1.4% in Q3’2024, from1.3% recorded in Q3’2023.

The chart below shows the different sectoral GDP growth rates for Q4’2024:

Source: KNBS Q3’2024 GDP Report

In 2025, we expect the economy to grow at a faster pace in the range of 5.2%-5.5% due to the improved business activity on the back of stronger and stable Shilling, reduced borrowing costs and eased inflation rate. We however expect the growth to be subdued by the challenging business environment, driven by increasing taxes and elevated costs of living. However, recent economic developments, including the Central Bank of Kenya's (CBK) decision to lower the Central Bank Rate (CBR) in its December 2024 meeting by 75.0 bps to 11.25% and the anticipated further reduction in the subsequent meetings, have provided a more accommodative monetary policy stance. This shift, combined with the significant easing of inflation, currently at 3.0% as of December 2024, is expected to alleviate some pressure on the cost of credit, thereby improving access to affordable borrowing.  The lower CBR is likely to support investment spending by both individuals and businesses, contributing positively to economic activity. Inflation remains well within the CBK's target range of 2.5%-7.5%, and while risks of rising fuel prices persist due to global geopolitical tensions, the overall inflation outlook is more favorable. Despite this, consumer purchasing power remains somewhat constrained due to increased taxation and high cost of living, which may limit demand for goods and services, moderating economic growth. On a positive note, the agricultural sector, Kenya's largest contributor to GDP, is expected to continue supporting growth due to favorable rainfall, while easing inflationary pressures and a strengthening Shilling provide further optimism for the economic outlook. 

2. Kenya Q3’2024 Balance of Payments

Kenya’s balance of payment (BoP) position improved significantly by 113.5% in Q3’2024, to a surplus of Kshs 17.8 bn, from a deficit of Kshs 131.5 bn in Q3’2023, and a 78.9% decline from the Kshs 84.1 bn surplus recorded in Q2’2024. The y/y positive performance in BoP was mainly driven by a significant 5,756.4% improvement in the financial account balance to a surplus of Kshs 62.9 bn in Q3’2024, from a deficit of Kshs 1.1 bn in Q3’2023. The performance was however weighed down by a 60.4% deterioration in the capital account balance to a surplus of Kshs 1.4 bn from a surplus of Kshs 3.4 bn in Q3’2023. The table below shows the breakdown of the various balance of payments components, comparing Q3’2023 and Q3’2024:

      All values in Kshs bns

Key take-outs from the table include;

1. The current account deficit (value of goods and services imported exceeds the value of those exported) narrowed by 0.4% to Kshs 139.2 bn from Kshs 139.8 bn in Q3’2023. The y/y narrowing of the current account was brought about by the 37.0% improvement in the services trade balance to a surplus of Kshs 24.4 bn from a surplus of Kshs 17.8 bn in Q3’2023, coupled with a 2.6% increase in secondary income/transfers to Kshs 258.0 bn from Kshs 251.5 bn in Q3’2023,
2. The capital account balance (shows capital transfers receivable and payable between residents and non-residents, including the acquisition and disposal of non-produced non-financial items), which includes foreign direct investments (FDIs), decreased by 60.4% to a surplus of Kshs 1.4 bn in Q3’2024 down from a surplus of Kshs 3.4 bn in Q3’2023,
3. The financial account balance (the difference between the foreign assets purchased by domestic buyers and the domestic assets purchased by foreign buyers) recorded a net inflow of Kshs 62.9 billion in Q3 2024, compared to a net outflow of Kshs 1.1 billion in Q3 2023, attributable to increased inflows of debt securities and other investments, in spite of the reduced loan disbursements to general government.  During the review period, the government did not receive credit and loans from the International Monetary Fund (IMF),
4. Consequently, the Balance of Payments (BoP) position improved to a deficit of Kshs 17.8 bn in Q3’2024, from a deficit of Kshs 131.5 bn recorded in Q3’2023.

Current Account Balance

Kenya’s current account deficit narrowed marginally by 0.4% to Kshs 139.2 bn in Q3’2024 from the Kshs 139.8 bn deficit recorded in Q3’2023. The y/y contraction registered was driven by:

1. A 37.0% improvement in the services trade balance to a surplus of Kshs 24.4 bn from a surplus of Kshs 17.8 bn in Q3’2023,
2. Secondary income/transfers surplus (the transactions recorded in the secondary income account pertain to those current transfers between residents and non-residents that directly affect the level of gross national disposable income and thus influence the economy’s ability to consume goods and services) increased marginally by 2.6% to Kshs 258.0 bn from Kshs 251.5 bn in Q3’2023 and,
3. The narrowing of the primary income deficit (the earnings that residents of a country receive from their investments abroad and the compensation they receive for providing labor to foreign entities) by 1.5% to Kshs 80.6 bn in Q3’2024, from Kshs 81.8 bn recorded in Q3’2023.

The table below shows the breakdown of the various current account components on a year-on-year basis, comparing Q3’2024 and Q3’2023:

 All values in Kshs bns

Kenya's balance of payments improved in Q3’2024, mainly on the back of a 5,756.4% improvement in the financial account balance to a surplus of Kshs 62.9 bn in Q3’2024, from a deficit of Kshs 1.1 bn in Q3’2023 reflecting significant inflows of financing to the country, possibly in government securities. The current account deficit (value of goods and services imported exceeds the value of those exported) narrowed by 0.4% to Kshs 139.2 bn from Kshs 139.8 bn in Q3’2023. The y/y narrowing of the current account was brought about by the 37.0% improvement in the services trade balance to a surplus of Kshs 24.4 bn from a surplus of Kshs 17.8 bn in Q3’2023, coupled with a 2.6% increase in secondary income/transfers to Kshs 258.0 bn from Kshs 251.5 bn in Q3’2023, which outpaced the 4.2% deterioration in Merchandise trade deficit to Kshs 341.0 bn in Q3’2024, from Kshs 327.3 bn in Q3’2023. Looking ahead, the outlook for Kenya's current account is optimistic, as continued growth in key export sectors and sustained diaspora remittances are expected to further improve the current account balance. Efforts to diversify exports and enhance value addition in agricultural products, along with prudent fiscal and monetary policies, will be crucial in sustaining this positive trajectory. Furthermore, the ongoing stability of Kenyan Shilling against most trading currencies is expected to lower the import bill hence narrowing the current account deficit. We expect that the current administration’s focus on fiscal consolidation will improve the balance of payments performance by minimizing the costs of servicing external debts. Additionally, the favorable weather conditions and government intervention through subsidy programs are set to boost agricultural production in the country, thereby increasing the export of agricultural products, and supporting the current account. We anticipate that the balance of payments will continue being stable with the help of multiple trade agreements, such as the one between Kenya and the EU and the one among the EAC, SADC and COMESA, as the agreements will boost the amount and variety of exports that are needed and offer more opportunities to sell them. 

1. Stanbic Bank’s December 2024 Purchasing Manager’s Index (PMI)

In December 2024, the Stanbic Bank Kenya PMI showed a marginal improvement in business conditions, with the index registering 50.6, slightly down from November's 50.9. This marked the third consecutive month of private sector growth, albeit at a slower pace. Increased output, new orders, and modest employment gains supported the marginal improvement, while inflationary pressures and muted business expectations posed challenges.

Kenya’s private sector continued to see growth in output, driven by moderate increases in new orders, attributable to the improved purchasing power among customers, successful advertising efforts, and new bookings. Input buying also increased for the fifth consecutive month, reaching its highest pace since September 2022. However, the benefits of this growth were tempered by significant input cost inflation, with firms attributing higher costs to currency weakness, elevated taxes, and greater supplier fees.

Inflationary pressures led to firms raising their selling prices at the fastest rate in 2024, with agriculture and manufacturing sectors experiencing the highest levels of both input and output price inflation. Despite these challenges, businesses managed to reduce backlogs for the second time in three months, reflecting spare capacity within the private sector even as sales improved.

Employment growth remained minimal, with only the agriculture sector reporting a notable increase in staffing. Most firms maintained stable workforce levels, reflecting cautious hiring amid uncertain future growth prospects. Inventory levels also declined for the first time in five months, as businesses opted to reduce stock to avoid wastage.

Business expectations for the year ahead remained subdued, with optimism dropping to its second-lowest level in the survey's history. Only 5.0% of firms expressed confidence in increased activity over the next 12 months, citing planned expansions and new product and service launches as reasons for optimism.

Although the private sector maintained its growth trajectory, rising input costs, cautious employment trends, and weak business confidence highlight the fragile nature of this recovery. Sustained demand and strategic business expansions could provide some support in the short to medium term, but inflationary pressures and a challenging operating environment remain significant concerns.

The chart below summarizes the evolution of PMI over the last 24 months:

Going forward, we anticipate that the business environment will improve in the short to medium term as a result of the improving economic environment driven by lower interest rates following the easing monetary policy, the stability of the Kenyan Shilling against the USD and the low inflation and stable fuel prices. However, we expect businesses to be weighed down by the high cost of living coupled with the high taxation, which are set to increase input costs. Overall the private sector is expected to continue with the recovery albeit with potential headwinds in the coming months.

Rates in the Fixed Income market have been on a downward trend given the continued low demand for cash by the government and the improved liquidity in the money market. The government is 128.3% ahead of its prorated net domestic borrowing target of Kshs 219.9 bn, and 23.0% ahead of the total FY’2024/25 net domestic borrowing target of Kshs 408.4 bn, having a net borrowing position of Kshs 502.2 bn. However, we expect a continued downward readjustment of the yield curve in the short and medium term, with the government looking to increase its external borrowing to maintain the fiscal surplus, hence alleviating pressure in the domestic market. As such, we expect the yield curve to normalize in the medium-term and hence investors are expected to shift towards the long-term papers to lock in the high returns.

We have a BULLISH outlook on the Kenyan Equities market in the short term but “NEUTRAL” in the medium to long term. We expect a continued improvement in the listed sector’s earnings growth in 2025, largely driven by the expected 5.0%-5.4% GDP growth, decreased yields in the fixed income markets and the improvement of the country’s business environment. The business environment showed signs of improvement in the last quarter of 2024, with the Purchasing Manager’s Index (PMI) averaging at 50.6 in Q4’2024, higher than the year’s average of 49.6. Additionally, the Kenyan currency appreciated against the major select currencies, gaining 17.4% against the USD dollar in 2024 indicating a stable economy. The investor flight which has still persisted in the early weeks of the year may, however, inhibit the growth of the equities market in the short-term.

In 2024, the Kenyan equities market was on an upward trajectory, with NSE 10 gaining the most by 42.9%, while NSE 25, NASI and NSE 20 gained by 42.5%,34.3% and 33.3%, respectively. The equities market performance was driven by gains recorded by large-cap stocks such as KCB Group, SCBK, Absa Bank, Diamond Trust Bank Kenya, Bamburi, and EABL of 89.5%, 74.6%, 56.3%, 54.2%, 52.8%, and 51.0% respectively. The performance was, however, weighed down by losses by large-cap stocks such BAT of 11.5%. The performance during the year was mainly attributable to decreased sell offs by foreign investors, ending the year at a net selling position of USD 17.4 mn compared to a net selling position of USD 92.0 mn recorded in 2023. Additionally, interest rate cuts in developed economies such as the United States caused dollar investments to be less appealing and thus increasing investors’ appetite for riskier high-yield investments in emerging markets such as Kenya.

Following the good performance in the equities market in 2024, the market valuation closed the year at a price-to-earnings ratio (P/E) of 5.4x, 5.9% higher than the 5.1x recorded at the end of 2023 and 53.7% below the 15-year historical average of 11.7x. On the other hand, the equities market closed the year at a dividend yield of 6.0%, 1.4% points above the historical average of 4.6%. Additionally, equities turnover increased by 22.0% to USD 0.8 bn, from USD 0.6 bn recorded in FY’2023. Foreign investors remained net sellers, with a net outflow of USD 16.9 mn, compared to net outflows of USD 92.0 mn recorded in 2023. The year also saw 9 companies issuing profit warnings in 2024, as compared to 15 companies in 2023. The decrease in the number of companies that issued profit warnings in 2024 highlights the improving macroeconomic environment occasioned by the continued appreciation of the Kenyan Shilling against other global currencies and eased inflationary pressures which increased the purchasing power of consumers. However, the improved economic conditions were weighed down by increased taxes in addition to disruption of the global supply chain due to the challenging geopolitics resulting in high production costs. Key to note, companies are required to issue profit warnings if they project a more than 25.0% decline in profits year-on-year. For more information, see our Cytonn Annual Markets Review - 2024.

Kenyan 2025 Equities Outlook

In 2025, we project the following factors to affect the direction of the Kenyan equities market:

1. Corporate Earnings Growth: We expect a slight improvement in the listed sector’s earnings growth in 2025, largely driven by the expected 5.0%-5.4% GDP growth and the improvement of the country’s business environment. The business environment showed signs of improvement in the last quarter of 2024, with the Purchasing Manager’s Index (PMI) averaging at 50.6 in Q4’2024, higher than the year’s average of 49.6. Additionally, the growth in Corporate Earnings is expected to be boosted by the continued expansion of operations into the Ethiopian telecommunication industry by Safaricom, which currently controls 35.5% of the Nairobi Securities Exchange (NSE). Further, we anticipate growth in the banking sector’s earnings following the 24.6% growth in earnings in Q3’2024,
2. Attractive valuations: The market valuations remained below the historical average, with NASI closing the year at a price-to-earnings ratio (P/E) of 5.4x, 53.7% below the 15-year historical average of 11.7x, and a dividend yield of 6.0%, 1.4% points above the historical average of 4.6%. Given these cheap valuations, we expect investors to take advantage of this and buy into the market,
3. Capital Markets Investor Sentiment: We anticipate increased foreign interest in the equities market in 2025, driven by the relatively more stable Kenya’s macroeconomic conditions, particularly the appreciation of the currency against the dollar and eased inflationary pressures. Additionally, there are still opportunities for value in the equities market, given the appealing valuations, with the NASI currently trading below its historical average. However, Kenya's macroeconomic conditions is expected to be challenged by the occasional political instability,
4. Private Capital Inflows: The European Investment Bank (EIB) reports that Kenya ranked second in Africa for private capital investment, following South Africa. The financial services sector received the largest portion of these investments, accounting for 40.0%, alongside contributions to industrials, consumer products, information technology (IT), renewable energy, healthcare, conventional energy, and telecommunications. These investment inflows and Kenya's market appeal are expected to persist in the coming months, provided the Capital Markets Authority (CMA) fulfils its commitment to attracting foreign portfolio investments through initiatives such as corporate and sovereign Shariah-compliant capital market products, green finance, and carbon markets,
5. Diversification of Capital Markets: We anticipate increased activity by the Nairobi Securities Exchange (NSE) in 2025, as the Capital Markets Authority has signalled plans to focus on revitalizing the Over-the-Counter (OTC) trading system to boost market liquidity and,
6. Monetary Policy Direction: In 2024, the Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) by 175.0 bps from 13.00% in February to 11.25% in December, in a bid to support the economy, following anchored inflation rate falling to within the CBK’s target range of 2.5%-7.5%, registering a 4.5% average in 2024  from the 7.7% average in 2023, as well as a stable exchange rate.  The decrease in CBR has driven the yields on short-term government papers downwards, which is expected to make equities more attractive compared to government papers. Additionally, the improved liquidity will help support the equities market. We expect the MPC to continue lowering the CBR rates in the coming meetings in a bid to continue supporting the private sector, while also keeping an eye on the effect on the inflation and exchange rate.

Below, we summarize the metrics used in coming up with our 2025 Equities Outlook;

Out of the four metrics that we track, one has a “neutral” and three a “positive” outlook. Compared to 2024, we have maintained our positive outlook on the valuations of the market. In consideration of the above, we have a ‘’BULLISH” outlook on the Kenyan Equities market in the short term. However, we shift our bias towards a “NEUTRAL” equities market in the medium to long term, with the expectations of improved growth in corporate earnings and the cheap valuations currently in the market.

Weekly Market Performance

During the week, the equities market was on an upward trajectory, with NSE 20 gaining the most by 2.7%, while NASI, NSE 25, and NSE 10 gained by 2.6%, 0.8%, and 0.2% respectively; taking the YTD performance to gains of 4.2%, 3.4%, 1.5% and 0.8% for NSE 20, NASI, NSE 25 and NSE 10, respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Stanbic, DTBK and Safaricom of 8.8%, 4.5%, and 4.3% respectively. The gains were, however, weighed down by loses recorded by large-cap stocks such as Coop Bank, NCBA and Bamburi of 5.9%, 4.5%, and 2.7% respectively.

During the week, equities turnover increased significantly by 406.1% to USD 21.5 mn, from USD 4.2 mn recorded the previous week, taking the YTD total turnover to USD 24.0 mn. Foreign investors remained net sellers for the fourth consecutive week, with a net selling position of USD 5.3 mn, from a net selling position of USD 0.6 mn recorded the previous week, taking the YTD foreign net selling position to USD 5.5 mn.

The market is currently trading at a price-to-earnings ratio (P/E) of 5.9x, 49.0% below the historical average of 11.7x. The dividend yield stands at 5.8%, 1.2% points above the historical average of 4.6%. Key to note, NASI’s PEG ratio currently stands at 0.7x, an indication that the market is undervalued relative to its future growth. A PEG ratio greater than 1.0x indicates the market is overvalued while a PEG ratio less than 1.0x indicates that the market is undervalued. The charts below indicate the historical P/E and dividend yields of the market;

Weekly Highlights

1. Lifting of the suspension in the trading of Kenya Airways Plc Highlight by NSE

During the week, Nairobi Securities Exchange (NSE) announced the lifting of the suspension in the trading of Kenya Airways Plc securities, effective January,5 2025. The suspension on trading Kenya Airways PLC shares was lifted following the company’s recent positive performance, which included posting a profit after tax and the withdrawal of the National Aviation Management Bill 2020.The trading of the group’s shares were suspended in July 2020 mainly due to implementation of the National Aviation Management Bill 2020.

The group posted a significant increase in Profit after tax (PAT) of 102.4% to Kshs 513.0 mn in H1’2024,a reversal from Kshs 21.7 bn loss recorded in H1’2023, recording a positive profit after tax for the first time since 2013. The growth is attributed to the strategic turnaround initiative, Project Kifaru, which focuses on customer-centricity, operational efficiency, financial discipline, innovation, and sustainability.

In 15 June 2020, the National Aviation Management Bill 2020 was introduced to establish the National Aviation Council and the Kenya Aviation Corporation, aiming to oversee entities like Kenya Airways and the Kenya Airports Authority. The bill proposed merging Kenya Airways with the Kenya Airports Authority and the Aviation Investment Corporation to create the Kenya Aviation Corporation. However, the bill faced criticism for potentially creating an overly bureaucratic aviation management structure and for including the President in the National Civil Aviation Council, which some viewed as unnecessary. In March 2021, the Kenyan government withdrew the bill, effectively shelving plans to renationalize Kenya Airways. Following this development and the airline's improved performance, the suspension on trading Kenya Airways PLC shares was lifted. The Capital Markets Authority approved the lifting of the suspension in accordance with Section 11(3)(w) and Section 22A of the Capital Markets Act (Chapter 485A). Following the lifting of Kenya Airways Plc suspension, three companies remain suspended at the Nairobi Securities Exchange, namely, Deacons (East Africa) PLC, ARM Cement PLC and Mumias Sugar Co. Ltd with the number of listed companies on the NSE amounting to 65.

Kenya Airways Plc has a Market Cap of 32.6 bn as of 10 January 2025 and the share price has gained by 49.9% on a year to date basis trading at Kshs 5.7 as of 10 January 2025 from Kshs 3.8 in the beginning of the year ranking number one on the NSE in terms of year to date performance. Going forward, we are positive on the stock price in the short term as the investors are optimistic about Kenya Airways Plc due to implemented policies that has seen the company have a turnaround in terms of its financial performance.

Universe of Coverage:

We are “Bullish” on the Equities markets in the short term due to current cheap valuations, lower yields on short-term government papers and expected global and local economic recovery, and, “Neutral” in the long term due to the adverse operating environment and huge foreign investor outflows.

With the market currently trading at a discount to its future growth (PEG Ratio at 0.7x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors sell-offs to continue weighing down the economic outlook in the short term.

In 2024, the general Real Estate sector continued to witness considerable growth in activity in terms of property transactions and development activities. Consequently, the sector’s activity contribution to Gross Domestic Product (GDP) grew by 5.5 % to Kshs 283.8 bn in Q3’2024, from Kshs 268.9 bn recorded during the same period in 2023. In addition, the sector contributed 10.8% to the country’s GDP, 0.3% points increase from 10.5% recorded in Q3’2023. Cumulatively, the Real Estate and construction sectors contributed 16.5% to GDP, 0.2% points decrease from 16.7% in Q3’2023, contributable to decline in construction contribution to GDP by 0.4% points, to 5.7% in Q3’2024, from 6.1% recorded in Q3’2023. The graph below highlights the Real Estate and Construction sectors’ contribution to GDP from 2020 to Q3’2024;

Source: Kenya National Bureau of Statistics (KNBS)

In terms of performance in the Nairobi Metropolitan Area (NMA), the Residential, Commercial Office, Retail, Hospitality, and Mixed-Use Development sectors realized average rental yields of 5.4%, 7.8%, 8.4%, 7.3%, and 7.5%, respectively in FY’2024. This resulted to an overall rental yield of 7.2%, 0.1% points lower than the 7.3 % recorded in FY’2023. The table below is a summary of thematic performance of average rental yields in FY’2024 compared to FY’2023;

Source: Cytonn Research

We retain a NEUTRAL outlook for the overall Kenyan Real Estate sector whose market performance is expected to be supported by; i) increased and consistently growing demand for Real Estate developments facilitated by the country’s positive demographic profile, ii) government’s continued focus on provision of affordable housing, iii) initiation and implementation of various infrastructural improvements opening up new areas for investment and boosting property prices, iv) renewed investor confidence in the hospitality sector as a result of continuous recovery, as evidenced by increased international arrivals, v) efforts by the government through the Kenya Mortgage Refinance Company (KMRC) to provide affordable home loans to buyers, vi) initiation and implementation of infrastructure projects, vi) aggressive expansion efforts by both local and international retailers, and, vii) continued recognition of Kenya as a regional business hub, attracting foreign investments. However, rising construction costs, existing oversupply of physical space in the commercial office and retail sectors, slow delivery of affordable housing projects, recently issued travel advisories by multiple governments, impacting tourism, the deteriorating business environment and, low investor appetite for REITs is expected to hinder the optimum performance of the sector. For a detailed review of the sector’s performance during 2024, see our Cytonn Annual Markets Review – 2024.

In 2025, we expect the key drivers of Real Estate to be as follows:

1. Government’s continued Focus on Affordable Housing: The Kenyan government has continued to put its best foot forward towards delivering affordable housing to its citizens. Currently, the AHP pipeline boasts an estimated total of 730,062 housing units under construction by both the government and private sector. This is according to the Architectural Association of Kenya (AAK’s) Status of the Built Environment Report 2024. In addition, the government is developing a pool of resources geared towards the provision of affordable housing through the affordable housing levy, which the Affordable Housing Bill 2023 which was accented into law and took effect in 2024
2. Infrastructural Development: In general, Continuous improvements in infrastructure, such as new roads, bridges, and utilities, have opened up previously inaccessible areas for real estate development. This has led to increased property value and demand in urban and peri-urban areas. The government has continually prioritized infrastructural development in efforts aimed at positioning the country as a regional hub through the implementation of several key projects including, Makupa Bridge, Nairobi Expressway, Nairobi Western and Eastern Bypasses among others. Notable projects delivered in 2024 include phase two of the Dongo Kundu bypass project,
3. Provision of Affordable Mortgage Financing: Kenya Mortgage Refinance Company (KMRC) has continued to drive the availability and affordability of home loans to Kenyans by providing single-digit fixed rate, and long-term finance to Primary Mortgage Lenders (PMLs) such as banks and SACCOs. Recently, KMRC, broadened its refinancing services to include non-shareholders, such as SACCOs and microfinance institutions. This is a strategic move to improve access to affordable mortgages, particularly for low and middle-income earners, a key target of Kenya's affordable housing agenda.
4. Aggressive Expansion pursued by Retailers: The retail landscape has seen a surge in growth, with both domestic and international retailers like Naivas, QuickMart, China Square, and Carrefour aggressively expanding their market presence. These retailers are capitalizing on the opportunities created by the exit of distressed chains like Choppies, Nakumatt, Tuskys, and Uchumi. Furthermore, the influx of global brands such as Adidas, Puma, Aldo, and Michael Kors is poised to further fuel the sector's growth and development,
5. Kenya’s Recognition as a Regional Business Hub: Kenya continues to enjoy recognition as a regional business hub. As a result, foreign entities have continued to open business operations in Kenya, boosting the demand for both commercial and residential Real Estate. Increased business activity has driven up demand for office space, apartments, and housing near business hubs, leading to the development of new projects, increased property values, and job creation in the construction sector,
6. Positive Demographics: With relatively high urbanization and population growth rates of 3.8% p.a and 2.0% p.a, respectively, against the global average of 1.7% p.a and 0.9% p.a, respectively, as at 2023, there is a sustained demand for more housing units in the country,
7. Increasing Investor Confidence: Increase in investor confidence has greatly influenced hospitality sector and this is evident through mergers, acquisitions and expansions of hotels. Furthermore, the number of international arrivals into the country registered a 7.2% year-to-year (y/y) increase to 144,996  persons as of September 2024 from 135,248 arrivals recorded in September 2023. Notably, the Hotel Chain Development Pipelines in Africa 2024 Report ranked Nairobi at 7^th position by planned number of hotels and rooms with 31 hotels and 4,268 rooms in the pipeline, and,
8. Special Built Developments: There has been an increased popularity of purpose-built properties to host Student housing, medical centers, Diplomatic residentials, data centers which offer potential for growth to the Real Estate sector through alternative markets. Due to these assets classes, the industry remains resilient despite the rapidly changing technological and economic environments.
9. Easing Construction Costs: Construction costs decreased by 6.8% in 2024 to an average of Kshs 66,375 per SQM from an average of Kshs 71,200 per SQM recorded in 2023. The decrease is primarily due to the Kenyan Shilling appreciation against the US dollar and low inflation rates, however, the improvement in construction cost remains subdued due to the increase in building materials such as cement which increased by 10.7% in 2024 to Kshs 830 from Kshs 750 recorded in 2023. Land prices increased as well, adding to the high construction costs.

Despite the above drivers, the sector’s optimal performance is expected to be hampered by the following factors in 2025:

1. Existing oversupply of physical space in select sectors: With approximately 5.8 mn SQFT in the NMA commercial office market, approximately 3.0 mn SQFT in the Nairobi Metropolitan Area (NMA) retail market, with the rest of the Kenyan retail market having an oversupply of approximately 1.7 mn SQFT. This has led to prolonged vacancy rates in the respective Real Estate sectoral themes,
2. Subdued REITs Market: The REITs market in Kenya continues to be subdued owing to various challenges such as the large capital requirements of Kshs 100.0 mn for trustees compared to Kshs. 10 mn for pension fund Trustees, which limits the role to banks, prolonged approval process for REITs, only a few legal entities capable of incorporating REITs, high minimum subscription amounts or offer parcels set at Kshs 0.1 mn for D-REITs and 5.0 mn for restricted I-REITs and lack of adequate knowledge of the financial asset class by investors,
3. Constrained financing to developers: Constrained financing to developers as lenders continue to tighten their lending requirements and demand more collateral from developers as a result of the high credit risk in the real estate sector. This is evidenced by an increase in gross non-performing loans in the building and construction sector which increased by 18.0% on a y/y to Kshs 43.8 bn in H1’2024 from Kshs 35.9 bn in H1’2023, and,
4. Underdeveloped capital markets: It is difficult to develop pools of capital focused on projects, particularly in the private markets, to supplement government efforts in providing housing. Banks in Kenya are the primary source of funding for real estate developers, providing nearly 95.0% of funding as opposed to 40.0% in developed countries. This means that capital markets contribute only 5.0% of Real Estate development funding, compared to 60.0% in developed countries as shown below;

Source: World Bank, Capital Markets Authority

The table below summarizes our outlook on the various Real Estate themes and the possible impact on the business environment in 2024;

Thematic Performance Review and Outlook

With 3 themes having a positive outlook and 5 neutral, the general outlook for the sector therefore is NEUTRAL. The sector’s performance will be supported by; i) infrastructural development, ii) government and private sector focus on affordable housing, iii) focus on mortgage financing through the KMRC, iv) improved investor confidence amid recovery of the hospitality sector, v) aggressive expansion by both local and international retailers in a bid to maintain market dominance, and, vi) Kenya's positive demographics driving housing demand. However, factors such as increased construction costs on the back of inflation, constrained financing to developers with increased underdeveloped capital markets, oversupply in select sectors and low of investor appetite in Real Estate Investments Trusts (REITs) are expected to continue impeding performance of the sector.

For the detailed real estate market outlook report, see our Real Estate Sector 2025 Markets Outlook Note.

Key Highlights during the Week:

1. Industry Report

During the week, the Kenya National Bureau of Statistics (KNBS) released the Q3’2024 GDP Report, and below are the key take-outs related to the Real Estate sector:

1. Steady growth in the Real Estate Sector - The Real Estate sector posted steady growth of 5.5% in Q3’2024, which is 2.2% points slower than the 7.7% growth registered in Q3’2023. The steady growth can be attributable to an increasing demand for housing in the country. However, the slowed growth compared to Q3’2023 can be attributable to the sustained increase in the cost of construction materials which remained a significant challenge to developers and investors during the period under review. Additionally, the total value of building plans approved in the Nairobi Metropolitan Area (NMA) decreased y/y basis by 41.3 % to Kshs 9.4 bn in October 2024, from Kshs 16.1 bn recorded in October 2023.On a quarter-on-quarter basis, this represented a 1.0 %-points decrease from the 6.0% growth recorded in Q2’2024. The decrease in performance can be attributable to; i) increased prices of construction materials such as reinforced steel and cement, ii) tough operating environment, which led lenders to tighten lending to the real estate sector due to the rising number of non-performing loans .iii) developers and investors shifting strategies, emphasizing operational efficiency and sustainability rather than embarking on new large-scale developments. The graph below shows the Real Estate sector growth rates from Q1’2020 to Q3’2024.

Source: Kenya National Bureau of Statistics (KNBS) 

2. Subdued growth in the construction sector - The construction sector contracted by 2.0% in Q3’2024, which is 6.0% points slower than the 4.0% growth in Q3’ 2023. On a quarter-on-quarter basis, this performance represented a 0.7%-point increase from the 2.7% growth recorded in Q2’2024. The decline in  performance is attributable to; i) the rise in non-performing loans (NPLs) within the Real Estate sector has prompted lenders to demand additional security, which has, in turn, slowed down development projects, ii) construction costs have surged by 17.7%, driven by increased prices for key materials like cement, steel, and, iv) delays in obtaining construction building permits have further hindered construction activities. The graph below illustrates construction sector growth rates from Q1’ 2020 to Q3’ 2024.

Source: Kenya National Bureau of Statistics (KNBS)

3. Sustained Recovery in Accommodation and Restaurant Sector – The accommodation and restaurant services grew by 13.7% during Q3’ 2024, representing a 20.8% points y/y decline from the 34.5% growth recorded in Q3’ 2023. On a q/q basis, this performance represented 12.9% points decrease from the 26.6% in Q2’2024. The slowed growth can be attributed to increasing operational expenses caused by challenging macroeconomic conditions, primarily due to disruptions in the global supply chain from the Russia-Ukraine war and the Israel-Palestine conflict. These conflicts have significantly affected material availability and increased costs, putting pressure on the sector. Despite these challenges, the market shows steady recovery from the impacts of COVID-19, with the lifting of travel restrictions playing a major role in boosting activity within the real estate sector. The sector is however expected to continue benefitting from an increased number of international arrivals; for instance, in Q3’ 2024, the number of visitor arrivals through the two major airports, the Jomo Kenyatta International Airport (JKIA) and Mombasa International Airport (MIA) increased by 0.8% to 489,831 in Q3’2024 from 486,102 in Q3’2023. The graph below shows the accommodation and restaurant sector growth rates from Q1’2020 to Q3’2024;

Source: Kenya National Bureau of Statistics (KNBS)

We anticipate growth in Kenya's Real Estate sector, supported by several key factors such as; i) high urbanization and population growth rates of 3.7% p.a and 2.0% p.a, respectively, against the global average of 1.7% p.a and 0.9% p.a, respectively as at 2023, sustaining demand for housing units and other Real estate developments, ii) increased visitor arrivals through the major points of entry such as the Jomo Kenyatta International Airport (JKIA) and Mombasa International Airport (MIA) by 0.8% to 489,831 in Q3’2024 from 486,102 in Q3’2023, iii)the government continued roll out and support of the affordable housing programme in the country, iv) increased activities by industry players, especially in the residential sector. However, we expect the sectors growth to be weighed down by increasing construction costs and the toughing lending environment for real estate developers.

1. Industrial Sector

During the week, Kenya capped the period for SEZ investors to enjoy tax benefits and incentives at 10 years, reducing the time in which the government loses revenue in order to attract investors. Previously, there was no limit on the tax breaks offered to SEZs. Investors enjoyed a graduated corporate income tax (CIT) rate of 10.0% for the first 10 years, increasing to 15% for the next 15 years. Additionally, they were exempt from value-added tax (VAT), permit and advertisement fees and other duties. The government estimates that these tax breaks cost it Ksh 510.56 bn in revenue as of 2023. SEZs, which have attracted over ksh 71.0bn in investments, are seen as a key route for job creation and export growth with the country boasting of over 25 gazetted SEZs. However, the new 10-year limit aims to balance attracting investment with revenue generation.

We anticipate a potential slowdown in new SEZ development projects due to the reduced investor incentives which could lead to a temporary decline in demand for land and commercial real estate within SEZs. However, in the long term, we expect SEZ developers to adapt by focusing on building more sustainable and profitable projects with greater long-term viability. This could lead to a shift towards higher-quality developments that are less reliant on tax breaks, ultimately enhancing the overall value proposition of SEZs and attracting investors based on other competitive advantages.

Also, during the week, the Kenya Revenue Authority (KRA) granted the Tatu City special economic zone (SEZ) a customs area status. A move which designates Tatu City as a zone where imported or exported goods can be stored before clearance by customs authorities. The SEZ status, already enjoyed by Tatu City, allows for business and trade laws distinct from the rest of Kenya with the main aim being to boost trade, employment, and investment in the region. With both SEZ and customs area designations, Tatu City aims to streamline trade processes and attract businesses seeking a favorable environment for their operations.

We expect that this designation, alongside the existing Special Economic Zone (SEZ) status, will likely attract more foreign investment, particularly from businesses involved in import/export operations. This will in turn position Tatu city as a more attractive business hub, creating jobs and drive demand for both commercial and residential properties within its area.

2. Commercial Office Sector

During the week, global business services provider Tele performance announced plans to expand its Kenyan operations with the launch of a new hub at the Two Rivers International Finance and Innovation Centre (TRIFIC) SEZ. The new location is expected to create an estimated 5,000 new jobs, offering services such as digital business services, customer experience management, and advanced analytics. Tele performance already employs 1,400 staff in Kenya and aims to leverage the country's skilled workforce and strategic location to provide cost-effective solutions to global clients. Centum Investment Company Plc team, the parent company of TRIFIC SEZ, welcomed the move highlighting TRIFIC's infrastructure and capacity to host leading global business outsourcing companies

We expect this move by Tele performance to have a positive impact on Kenya's economy through the creation of 5,000 new jobs which will significantly boost employment opportunities in the country. Additionally, this development is likely to attract further investment from global companies in the business services sector, leading to economic growth and development in the Two Rivers International Finance and Innovation Centre (TRIFIC) SEZ.

3. Retail Sector

During the week, Majid Al Futtaim, the operator of Carrefour in Kenya, launched a new store at Rhapta Promenade Mall in Westland’s, marking its 27^th store in the country. The new store aims to improve convenience and accessibility for customers around Westlands area and has so far created 45 direct jobs contributing to its current workforce of over 2,800 employees the company has in Kenya. The following table outlines the current store counts of major local and international supermarket chains operating in Kenya and international supermarket chains operating in Kenya;

Source: Cytonn research

Going forward into 2025, we expect to witness more retailers rolling out their expansion activities for the year, driven by increased investments from both local and international investors, the availability of retail space, a growing consumer base, and evolving consumer preferences in the country.

4. Real Estate Investments Trusts (REITs)

 REIT Weekly Performance

On the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 25.4 and Kshs 22.2 per unit, respectively, as per the last updated data on 31st October 2024. The performance represented a 27.0% and 11.0% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at Kshs 12.3 mn and Kshs 31.6 mn shares, respectively, with a turnover of Kshs 311.5 mn and Kshs 702.7 mn, respectively, since inception in February 2021. Additionally, ILAM Fahari I-REIT traded at Kshs 11.0 per share as of 31st October 2024, representing a 45.0% loss from the Kshs 20.0 inception price. The volume traded to date came in at 138,600 for the I-REIT, with a turnover of Kshs 1.5 mn since inception in November 2015.

REITs offer various benefits, such as tax exemptions, diversified portfolios, and stable long-term profits. However, the ongoing decline in the performance of Kenyan REITs and the restructuring of their business portfolios are hindering significant previous investments. Additional general challenges include:

1. Insufficient understanding of the investment instrument among investors leading to a slower uptake of REIT products,
2. Lengthy approval processes for REIT creation,
3. High minimum capital requirements of Kshs 100.0 mn for REIT trustees compared to Kshs 10.0 mn for pension funds Trustees, essentially limiting the licensed REIT Trustee to banks only
4. The rigidity of choice between either a D-REIT or and I-REIT forces managers to form two REITs, rather than having one Hybrid REIT that can allocate between development and income earning properties
5. Limiting the type of legal entity that can form a REIT to only a trust company, as opposed to allowing other entities such as partnerships, and companies,
6. We need to give time before REITS are required to list – they would be allowed to stay private for a few years before the requirement to list given that not all companies may be comfortable with listing on day one, and,
7. Minimum subscription amounts or offer parcels set at Kshs 0.1 mn for D-REITs and Kshs 5.0 mn for restricted I-REITs. The significant capital requirements still make REITs relatively inaccessible to smaller retail investors compared to other investment vehicles like unit trusts or government bonds, all of which continue to limit the performance of Kenyan REITs.

We expect Kenya’s Real Estate sector to remain on an upward trajectory, supported by: i) an increase in the number of international arrivals in the hospitality sector, ii) the initiation and completion of major infrastructure projects, opening up areas for development, iii) demand for housing sustained by positive demographics, such as urbanization and population growth rates of 3.7% p.a and 2.0% p.a, respectively, against the global average of 1.7% p.a and 0.9% p.a, respectively, as at 2023, iv) activities by the government under the Affordable Housing Agenda (AHP), v) heightened activities by private players in the residential sector, and, vi) increased investment by local and international investors in the retail sector vii) increasing presence of multinationals and  start-ups driving demand for commercial office spaces. However, challenges such as rising construction costs, strain on infrastructure development, high capital requirements for REITs, and existing oversupply in select Real Estate sectors will continue to hinder the sector’s optimal performance by limiting developments and investments.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.