Kenya Macroeconomic Fundamentals Remained Positive in 2018, With Improved GDP Growth

Global economic growth is expected to come in at 3.7% in 2018 as per data from the International Monetary Fund (IMF).  This will be similar to the 3.7% recorded in 2017, since growth in the US was countered by the negative effects of the trade conflicts between the US, China and Eurozone, as well as a weaker expected growth for some key emerging markets such as China and Brazil. Central Banks’ Policy stance in advanced economies adjusted towards economic tightening, with the US Federal Reserve raising the Federal Funds Rate four times in 2018.
Sub-Saharan Africa economic growth remained relatively strong in 2018 with preliminary data indicating that the region recorded a 2.7% GDP growth in 2018, better than the 2.3% recorded in 2017. Regional currencies depreciated in 2018 underpinned by capital outflows from emerging markets to advanced markets, following a tightening of monetary policy in the United States as well as the strengthening dollar, coupled with events in the global markets, which included the trade war between China and the USA.
“Our outlook for the Sub-Saharan Africa region is POSITIVE, with the growth expected to be supported by increased public spending on infrastructural development owing to the high demand for basic needs. However, the key risks remain difficult business conditions, poor infrastructure, reliance on commodity exports, political tension in some countries and debt sustainability due to high levels of public debt in most economies in the region,” said Caleb Mugendi, Investment Associate at Cytonn.

The country’s Gross Domestic Product (GDP), adjusted for inflation, increased in 2018 having expanded by 5.7% in Q1’2018, 6.3% in Q2’2018 and 6.0% in Q3’2018 to record an average growth of 6.0% for the 3 quarters compared to an average growth of 4.7% over the same period in 2017. The improved growth has been against a backdrop of a stable macroeconomic environment
“Out of the seven metrics that we track, five had a positive effect while two had a neutral effect, compared to the beginning of the year where four had a positive outlook, two had a neutral outlook and one factor had a negative outlook,” said Faith Maina, Senior Investment Analyst at Cytonn. “Generally, macroeconomic fundamentals remained positive during the year because of an improved business environment created through political goodwill and improved security in the country,” added Faith.
Summary of indicators:

  1. Government Borrowing moved from negative at the beginning of 2018 to“positive”. It was expected that the government would come under pressure to borrow as it was well behind both domestic and foreign borrowing targets for FY 2017/18, and KRA was unlikely to meet its collection target due to expected suppressed corporate earnings in 2017. However, the government surpassed its domestic borrowing target for the 2017/18 fiscal year, having borrowed Kshs 390.2 bn against a target of 297.6 bn. The government also managed to borrow 79.1% of its foreign borrowing target, for the fiscal year 2017/18, with the estimate having been revised up to Kshs 323.0 bn as per the 2018 BPS,
  2. Exchange Rate moved from neutral at the beginning of 2018 to “positive.  The Kenya Shilling gained 1.4% against the US Dollar to close at 101.8 in 2018 compared to 103.2 at the end of 2017, and ranging between 100.0 and 103.4. In 2018, the current account deficit narrowed to 5.3% in the 12 months to September 2018, compared to 6.5% in September 2017,
  3. Interest Rates remained “neutral” during the year. The Monetary Policy Committee lowered the Central Bank Rate (CBR) twice, in the 6 meetings held in order to support economic activity.  In their last meeting on 27th  November 2018 they retained the CBR at 9.0% citing that inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential,
  4. Inflation remained “positive” for 2018 with the inflation rate for the month of December 2018 rising to 5.7% from 5.6% recorded in November bringing the 2018 average to 4.7% (in line with the government’s target of 2.5% to 7.5%) compared to the 2017 average of 8.0%,
  5. GDP growth remained “positive” in 2018, with Kenya’s economy expanding in 2018 by 5.7% in Q1’2018, 6.3% in Q2’2018 and 6.0% in Q3’2018 to record an average growth of 6.0% for the 3 quarters compared to an average growth of 4.7% over the same period in 2017,
  6. Investor Sentiment had a “neutral” effect, a change from the positive at the beginning of the year. This can be attributed to the fact that Kenya Eurobond yields have been increasing, with the yields on the 2014 Eurobond issue rising by 220 bps and 230 bps YTD for the 5-year and 10-year Eurobonds, while the yields on the 10-year and 30-year Eurobonds issued in 2018 have risen by 170 bps and 150 bps, respectively, since the issue date. There has also been increased sell-offs by foreign equity investors amid fears of global economic slowdown, coupled with rising US Treasury yields
  7. Security was maintained at “positive” for 2018. The political climate in the country has eased, compared to 2017 with security maintained and business picking up. Kenya now has direct flights to and from the USA, a signal of improving security in the country.


FIXED INCOME REVIEW: During the year, yields on the 91-day, 182-day and 364-day T-bills declined by 80 bps, 160 bps and 120 bps to close at 7.3%, 9.0% and 10.0% in 2018 from 8.1%, 10.6% and 11.2% at the end of 2017, respectively. This is attributed to the low lending rates that have seen banks shy away from lending to the private sector and instead turn to the less risky government securities hence reducing the competition for government securities, coupled with the Central Bank of Kenya’s efforts to keep the rates low by rejecting expensive bids. The average subscription rates came in at 123.2% for T-Bills, and 75.8% for primary T-bond auctions.
“Rates in the fixed income market remained stable in 2018 as the government continued to reject expensive bids, and the MPC lowered the CBR twice, the latest being in July 2018 where it set the CBR at 9.0%, compared to 10.0% at the close of 2017, signalling a relatively stable interest rate environment going forward,” said David Gitau, Investment Analyst at Cytonn for Macros and Fixed Income. “With this expectation, our view is that investors should be biased towards medium-term fixed-income instruments,” added David.

EQUITIES REVIEW: During the year, the Kenyan equities market was on a downward trend, with NASI, NSE 25 and NSE 20 declining by 18.0%, 17.1% and 23.7%, respectively. Since the peak in February 2015, NASI and NSE 20 are down 20.9% and 48.4%, respectively. Foreign investors turned net sellers with a net outflow of USD 425.6 mn compared to net outflows of USD 113.7 mn recorded in FY’2017. The foreign investor outflows during the year can be attributed to negative investor sentiment, as international investors exited the broader emerging markets due to the expectation of rising US interest rates, coupled with the strengthening US Dollar.
“We remain NEUTRAL on equities for investors with short-term investment horizon, but are positive for investors with a long-term investment horizon,” said Cornelius Awuondo, an Investment Analyst at Cytonn for Equities. “However, pockets of value still exist, with a number of undervalued sectors like Financial Services, which provide an attractive entry point for long-term investors, and with expectations of higher corporate earnings this year, we are “POSITIVE” for investors with a long-term investment horizon,” added Cornelius.

PRIVATE EQUITY REVIEW: In 2018, private equity activity was high as evidenced by increased deal activity by local and global investors including Kuramo Capital, AfricInvest, and Goldman Sachs.  In terms of fundraising, Fintech ranked the highest both in deal activity and transaction value, having raised Kshs 27.0 bn of the total value of reported fundraising deals, which came in at Kshs 32.7 bn, with 10 transactions out of a total of 15 in the year. Fintech lending and Microfinance institutions in general have been a major attraction for investors in Kenya and Sub-Saharan Africa.
“Our outlook on private equity investments remains POSITIVE.” said Gichuru Muchane, Alternative Investment Analyst at Cytonn “This is evidenced by increasing investor interest, which can be majorly attributed to; improved economic growth in Africa’s most developed PE markets and attractive valuations in Sub Saharan Africa’s private markets compared to its public markets and global markets.” added Gichuru.

Cytonn Investments is an independent investment management firm, with offices in Nairobi – Kenya and D.C. Metro – U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.

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