Government Revenue Collection

·  Following the release of the Q1’ 2020/2021 fiscal year budget outturn figures, the fiscal measures implemented by the Government to cushion Kenyans against the adverse impact of the pandemic are estimated to cost the exchequer Kshs 41.7 bn in revenue. Total revenue collected in Q1 of FY’ 2020/2021 amounted to Kshs 378.7 bn against a revised target of Kshs 428.9 bn, a 10.1% shortfall. This led the government to reverse some of the tax incentives implemented in April 2020 as part of the COVID-19 economic stimulus relief

· We expect a gradual economic recovery going into 2021 as evidenced by KRA collecting Kshs 121.3 bn in February, a 9.0% improvement from January’s collection of Kshs 111.3 bn, and,

· The reversal of the COVID related tax incentives and the introduction of digital taxes will boost revenue collection

Government Borrowing

· The Government, as of 19^th March 2021, was 9.6% behind its current borrowing target having borrowed Kshs 358.5 bn against a prorated borrowing target of Kshs 396.5 bn against a domestic borrowing target of Kshs 572.7 bn and has domestic maturities worth Kshs 283.6 bn

· There is increased demand for shorter-dated government debt due to increased uncertainty in the current environment,

· The downgrading of Kenya’s credit rating by Standard & Poor’s credit rating agency to ‘B’ with a stable outlook from ‘B+’ with a negative outlook means Kenya will find it harder to borrow from the international market and may have to pay more on interest to borrow money from the foreign lenders due to the perceived higher risk, and,

· The proposed increase of the fiscal deficit to 8.7% from the Budget and Appropriation Committee’s (BAC) recommended fiscal deficit target of 7.5% means the government’s fiscal consolidation targets may not be achieved. The government’s increased appetite for borrowing could also lead to upward pressure on government borrowing rates

Inflation

· Y/Y inflation for February came in at 5.8%, while the m/m inflation came in at 0.7%. This was mainly attributable to a 1.0% increase in the Food and Non-Alcoholic Drinks’ Index coupled with a 2.3% increase in the Transport Index

· Y/Y inflation increased to 5.8% in February from 5.7% in January and we expect it to continue on its upward trajectory, mainly due to increasing fuel prices. We expect an increase in the transport and fuel index which carries a weighting of 8.7% in the total consumer price index (CPI) as a result of the increase in fuel prices. Inflation is however still projected to remain within the government’s target range of 2.5%-7.5% due to the expected rains which are expected to stabilise the Food and Non-Alcoholic Drinks’ Index

Currency

(USD/Kshs)

·  Since the last meeting, the Kenyan Shilling has appreciated by 0.2% against the US Dollar to Kshs 109.9 as of 23^rd March 2021, from Kshs 110.1 on 27^th January 2021, mainly attributable to market participants anticipating a positive economic recovery following the arrival of the Covid-19 vaccines in the country during the month

· Forex Reserves have declined to USD 7.4 bn (equivalent to 4.6 months of import cover) from USD 7.7 bn (equivalent to 4.7 months of import cover) since the last meeting. The Forex reserves have declined but are still 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. Key to note, the week ending 12^th March 2021 saw the forex reserves decline to USD 7.4 bn (equivalent to 4.5 months of import cover), the same level as the EAC criteria of 4.5 months of import cover

· We project the Kenya Shilling to remain stable and trade within the range of between Kshs 107.0 and Kshs 110.0 against the USD in 2021, supported by the improving current account position which narrowed to 4.9% of GDP in the 12 months to October 2020 compared to 5.3% of GDP during a similar period in 2019. However, the dwindling forex reserves may mean the government of Kenya will struggle to support the local currency when it depreciates

GDP Growth

· Kenya’s economy contracted by 1.1% in Q3’2020, a decline compared to the 5.8% growth recorded in Q3’2019, which was mainly due to:

i.  A 57.9% contraction in the accommodation and food services sector, compared to an expansion of 9.8% in Q3’2019. This sector was the worst hit by the COVID -19 pandemic as businesses in the sector either operated under minimum capacity or completely closed down, and,

ii. This contraction was mitigated by the 6.3% growth in the agriculture and forestry sector, compared to 4.3% growth recorded in Q3’2019, supported by favourable weather conditions

· We expect a gradual recovery in 2021 following   improved  business activity in the  fourth quarter with the average PMI coming in at  53.9 in Q4’2020

· The IMF and World Bank project the Kenyan economy to register a 4.7% GDP growth in 2021 supported by favourable weather conditions and the reopening of schools during the year. The third wave of COVID-19 globally however constrains the growth of the tourism, accommodation and food services sector which is yet to recover since the onset of the pandemic in March 2020

Private Sector Credit Growth

· The latest data from CBK indicates that private sector credit growth recorded an 8.4% growth in the 12 months to December 2020 as demand recovered as a result of improved economic activity. The operationalisation of the Credit Guarantee Scheme for the vulnerable Micro Small and Medium-sized Enterprises (MSMEs), will de-risk lending by commercial banks to the sector and is critical to increasing credit to the MSME sector

· The tough economic conditions brought about by the pandemic have increased cash constraints by businesses as well as households with most businesses struggling to keep afloat due to subdued revenues. Consequently, this led to an increase in the banking sector’s Gross Non-Performing Loans to 14.1% as of December 2020 compared to 12.5% in December 2019, and,

· Total loans amounting to Kshs 1.63 trillion were restructured (54.2% of the total banking sector loan book of Kshs 3.0 trillion) by the end of December, in line with the emergency measures announced by CBK on March 18 2020 to provide relief to borrowers. The one-year restructuring period however expired on 2^nd March 2021, with the Central Bank revealing that since March 2020, loans amounting to Kshs 1.7 tn were restructured (57.0% of the banking sector’s loan book) by end of February 2021

Liquidity

· Liquidity levels in the money markets improved, with the average interbank rate on 22^nd March 2021 coming in at 5.7%, an increase from the 5.6% recorded during the last meeting on 27^th January 2021, supported by government payments

· Liquidity is expected to remain favorable due to:

i.  High domestic debt maturities that currently stand at Kshs 283.6 bn worth of T-bill maturities and Kshs 19.5 bn worth of T-bond maturities, and

ii. Low Cash Reserve Ratio (CRR) currently at 4.25% from 5.25% previously. Despite the reduction of the CRR,  lending to the private sector has remained muted