Government Borrowing

• The Government is currently 42.3% ahead its prorated domestic borrowing target  and  has to borrow on average Kshs 100.5 bn monthly in the current financial year to meet its domestic borrowing target of Kshs 300.3 bn and has domestic maturities worth 355.9 bn

• We are negative on domestic borrowing, due to the levels of domestic debt maturities in FY’2019/20 currently at Kshs 355.9 bn, coupled with the historical underperformance of ordinary revenues, with the Government having met 93.1% of its target as per the FY’2018/2019 budget outturn. Despite the underperformance, the Government raised its total revenue target by 14.2% to Kshs 2.1 tn for FY’2019/20 which we doubt it will meet, thus exert slight pressure on the domestic borrowing front to plug in the deficit.
• The government may also find it hard to access foreign debt due to uncertainity affecting the global markets which might see investors attaching a high risk premium on the country as evidenced by all Eurobond yields having increasing significantly as at last week

Inflation

• Inflation for the month of February increased to 6.4%, from 5.8% recorded in January 2020, Y/Y inflation increased mainly driven by a 10.6% increase in the food and non-alcoholic beverages index. M/M inflation also increased by 0.6% due to a 2.6% increase in the food and non-alcoholic beverages index

• Inflationary pressure is expected to emanate from the effects of the world Pandemic-Coronavirus and the locust invasion which may greatly affect the agricultural sector. The shortage of imports due to lockdowns across the globe has also caused prices to rise in the local market, leading to cost-push inflation

Currency

(USD/Kshs)

• The Kenya Shilling has depreciated by 2.5% against the US Dollar to Kshs 103.4, from Kshs 100.9 during the last meeting, attributable to reduced dollar demand from the merchandise traders. Forex reserves have however declined to USD 8.4 bn (equivalent to 5.2 months of import cover) from USD 8.5 bn (equivalent to 5.2 months of import cover) since the last meeting. This however still meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover and the EAC region’s convergence criteria of 4.5 months of import cover, thus providing an adequate buffer for the Kenyan Shilling from external shocks

• In our view, the shilling should remain relatively stable against the dollar with a bias to a 2.4% depreciation by the end of 2020, with the sentiments being on the back of;

1. Rising uncertainties in the global market due to the Coronavirus outbreak, which has seen the disruption of global supply chains. The shortage of imports from China for instance, which accounts for an estimated 21.0% of the country’s imports, is likely to cause local importers to look for alternative import markets, which may be more expensive and as such higher demand for the dollar from merchandise importers,
2. Subdued diaspora remittances growth following the close of the 10.0% tax amnesty window in July 2019. We also foresee reduced diaspora remittances, owing to the decline in economic activities globally hence a reduction in disposable incomes. This coupled with increased prices of household items abroad might see a reduction in money expatriated into the country

GDP Growth

• Kenya’s economy expanded by 5.1% in Q3’2019, a decline from the 6.4% recorded in Q3’2018, which was due to:

1. A slowdown in the Agricultural sector to 3.2% in Q3’2019 from 6.9% in Q3’2018 attributed to a drop in production of key crops in the country such as tea, vegetable, and fruit exports
2. A slowdown in the manufacturing sector to 3.1% in Q3’2019 compared to a growth of 4.6% in Q3’2018, largely attributed to the decline in agro-processing activities that were also subdued as a result of the reduced production of tea and sugar

• Based on the impact on other economies, we believe that coronavirus may have a 10.0% to 25.0% impact on GDP growth for the year 2020. The 10.0% impact is an optimistic case in the event the outbreak is contained, and a 25.0% impact in the event it is not contained
• As such, the coronavirus could reduce Kenya’s GDP growth to a range of 4.3% to 5.2% for the year 2020 depending on the severity of the outbreak and economic implications for Kenya

Private Sector Credit Growth

• The latest data from CBK indicates that private sector credit growth recorded a growth in the 12 months to December 2019 to 7.1% from 7.0% recorded in September 2019 but below the 5-year average of 11.2%

• The effects of the coronavirus pandemic are expected to negatively affect the financial sector. We expect to see increased caution on lending especially to businesses that rely on imports hence inhibiting private credit sector growth due to the high risk of credit default, with the possibility of heightened Non Performing Loans if the pandemic is to continue

Liquidity

• Liquidity levels in the money markets remained favorable with the average interbank rate to 16^th  March 2020 coming in at 4.3% similar to what was recorded in  27^th January 2020 , supported by government open market activities with the CBK engaging in mopping up activities through repurchase agreements to ease up liquidity, which offset tax payments.

• Liquidity is expected to remain high with the heavy maturities of domestic debt in 2020 that currently stand at Kshs 305.59 bn worth of T-bill maturities and Kshs 50.35 bn worth of T-bond maturities. We also expect the amendment to regulate payment matters and the measure to have all suppliers to Government paid within 60 days to  have a positive impact on the circulation of money in the economy

1

USA

Federal Reserve

1.00% Points

0%-0.25%

2

Australia

Reserve Bank of Australia

0.25% Points

0.5%

3

China

People’s Bank of China

0.10% Points

4.1%

4

Malaysia

Central Bank of Malaysia

0.25% Points

2.75%

5

England

Bank of England

0.50% Points

0.25%