KENYA MACROECONOMIC OUTLOOK IS NEGATIVE

“KENYA MACROECONOMIC OUTLOOK IS NEGATIVE, CONSIDERING THE ECONOMIC IMPACT CORONAVIRUS HAS HAD IN THE COUNTRY.”

By Vera Shawiza

During the first half of the year the economy contracted by 0.4% due to

the 5.7% contraction in Q2’2020 down from a growth of 5.3% recorded in

a similar period in 2019. The contraction was largely driven by the

83.3% decline in the accommodation and food sector following the

closure of most facilities and also the reduction in tourist arrivals

into the country. Some of the other sectors like agriculture helped

cushion the economy from further decline. This is the first

contraction since the third quarter of 2001 when the country recorded a

2.5% contraction.

Considering the recent easing of some of the restrictions and reopening

of some of the sectors we expect the economy to slightly rebound and

this is already reflected by the improvement in PMI where we’ve seen

readings as high as 59.1 in October 2020, pointing to an improvement in

the Kenya private sector outlook. The IMF October Report: A long and

difficult ascent also expects the Kenyan Economy to grow by 1.0% an

improvement from the June projections of a (1.0%) growth but the

economy should recover to grow at 4.7% in 2021. Notably, H1’2020

average GDP growth now stands at 1.0%. For more information, see our

Q2’2020 GDP Note.

During the year 2020, T-bills auction recorded an oversubscription with

the average subscription rate coming in at 130.3% compared to an

average of 118.7% in 2019. The yields on the 91-day, 182-day and 364-

day T-bills declined to 6.9%, 7.4% and 8.3% in 2020 from 7.2%, 8.2% and

9.8% at the end of 2019, respectively. This is mainly attributed to the

Central Bank of Kenya’s (CBK’s) efforts to keep rates low by rejecting

expensive bids in the auction market as well as increased demand as

Banks shied away from lending to the public due to the increased credit

risk. Primary T-bond auctions in 2020 were oversubscribed with the

subscription rate averaging 130.6%, which was higher than 109.7%

average subscription rate in 2019. The market maintained a bias towards

the medium-term bonds mainly driven by the perception that risks may

not be adequately priced on the longer end of the yield curve.

Rates in the fixed income market have remained relatively stable due to

the high liquidity in the money markets, coupled with the discipline by

the Central Bank as they reject expensive bids. The government is 11.1%

ahead of its prorated borrowing target of Kshs 243.1 bn having borrowed

Kshs 270.1 bn. In our view, due to the current subdued economic

performance brought about by the effects of the COVID-19 pandemic, the

government will record a shortfall in revenue collection with the

target having been set at Kshs 1.9 tn for FY’2020/2021 thus leading to

a larger budget deficit than the projected 7.5% of GDP, ultimately

creating uncertainty in the interest rate environment as additional

borrowing from the domestic market may be required to plug the deficit.

Owing to this uncertain environment, our view is that investors should

be biased towards short-term to medium-term fixed income securities to

reduce duration risk.

During the year, the Kenyan equities market was on a downward

trajectory, with NASI, NSE 25, and NSE 20 declining by 8.6%, 16.7%, and

29.6%, respectively. Large-cap decliners during the year included

Bamburi, Equity Group, Diamond Trust Bank, KCB Group, and Standard

Chartered which declined by 52.7%, 31.7%, 31.2%, 29.4%, and 28.8%,

respectively. Key to note, Safaricom recorded gains of 8.7% YTD as they

benefited from the working from home environment and increased

digitization trends. Safaricom continues to be a key part of Kenyan

equities portfolios, accounting for 59.6% of Nairobi Stock Exchange

(NSE’s) market capitalization and has dominated on both the market

turnover and in determining the direction of the market given its

weight and liquidity in the Nairobi Securities Exchange.

“We are “Neutral” on the Equities markets in the short term but

“Bullish” in the medium to long term. We expect the recent discovery of

a new strain of COVID-19 coupled with the introduction of strict

lockdown measures in major economies to continue dampening the economic

outlook. However, we believe there exist pockets of value in the

market, with a bias on financial services stocks given the resilience

exhibited in the sector. The sector is currently trading at

historically cheaper valuations and as such, presents attractive

opportunities for investors.” said Ann Wacera, Investment Analyst at

Cytonn.

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.

Cytonn Real Estate is Cytonn’s development affiliate, which is focused

on developing institutional grade real estate targeted at specific

institutional, high net-worth and Diaspora investors. Collective,

Cytonn Investments and Cytonn Real Estate manage over Kshs. 82 billion

of real estate projects.