KENYA MACROECONOMIC UPDATE: JULY 2016 18 th July 2016 OUTLOOK: POSITIVE GROWTH EXPECTATIONS DESPITE VOLATILE EXOGENOUS SHOCKS Building on our previous report, Kenya Macroeconomic Outlook: 2016, we maintain our expectation that the macroeconomic environment in 2016 will be better than 2015. Half way through the year, key indicators support our view as demonstrated below; 5.8% 7.5% 6.3% Quarterly GDP Growth 5.9% 5.2% 5.5% 5.9% 6.0% 5.7% 5.9% 5.0% 4.7% RISING GDP GROWTH MOMENTUM Contrary to our expectations, 4Q2015 GDP was higher than 4Q2014 GDP at 5.7% compared to 5.5%. This was driven by growth in key sectors among them agriculture, construction, real estate and financial & insurance. The growth in agriculture was mainly supported by improved weather conditions resulting in a growth of 5.6% compared to 3.5% in 2014. Construction recorded the fastest growth of 13.6% in 2015 compared to 13.1% in 2014 mainly driven by the ongoing public infrastructure projects coupled with private sector s expansion in the real estate sector. The financial and insurance sector grew at 8.7% in 2015 from 8.3% in 2014 backed by a 19.2% increase in the total domestic credit in December 2015. Source:KNBS 3.1% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2013 2014 2015 2016 The economy maintained the growth momentum with all sectors of the economy posting positive growth resulting in an expansion of 5.9% during the first quarter of 2016 which is the highest first quarter growth since 2012. The most notable improvement was in the accommodation and food services sector which expanded by 12.1% in the period under review compared to a contraction of 11.4% during the same quarter in 2015. 1
In March 2016, The International Monetary Fund (IMF) revised Kenya s GDP growth in 2016 down to 6.0% (0.8% below the November 2015 forecast) owing to tight domestic and external financing conditions which would slow down the pace of public and private investments. More recent estimates from Moody s forecasts a lower growth of 5.7% which we believe is more realistic against a backdrop of weaker global economic growth projected at 2.4% (0.5% below the January forecast) compared to 3.1% in 2015 as advanced economies continue to display weak growth and low commodity prices. inflation, within the government target range of 2.5%-7.5% saw CBK ease its monetary policy by lowering the Central Bank Rate (CBR) by 100bps to 10.5%. Inflation for the month of June however rose for the first time in 2016 at 5.8% attributed to increase in prices of food, rent and petroleum. INFLATION RATE Source: KNBS Source: World Bank INFLATION Inflation for the first 5 months of the year was on a downward trend, from 7.7% in January 2016 to 5.0% in May 2016. This was mainly attributed to lower international crude oil prices that saw the Transport Index in particular decline for five months consecutively, with decreasing food prices outweighing increasing prices. A decline in Going forward into 2H2016, we expect inflation to rise due to the expected impact of the additional tax burden on fuel prices. Diesel and super petrol are expected to go up by KES 6.00 per litre while kerosene is expected to increase by KES 13.00 per litre. The ripple effect of this will be marginal increases in inflation basket components like food and transport. Additionally, we expect the situation to be compounded by the rising global oil prices that have seen crude oil rebound to above $50 per barrel. 2
EXCHANGE RATES Year-to-date (YTD), the Kenya shilling has displayed mixed performance against major world currencies. The shilling has appreciated by 1.1% and 10.7% against the U.S dollar and British pound to close at 101.23 and 134.7 respectively as at 13/07/2016. However, it has also depreciated against the Euro and Japanese yen by 0.8% and 14.2% respectively. As shown in the graph below, the shilling has remained stable in the range of KES 100-102 against the US dollar supported by a narrowing current account deficit from a calculated 6.5% of GDP in 1Q2015 to 4.3% of GDP in 1Q2016. on the day after the referendum results were announced from KES 150.0 to 139.4. In reaction to the Brexit Vote, the Yen which is regarded as a safe haven in times of market turmoil, appreciated against the Kenya shilling and other major currencies including the US dollar. In the foreseeable future, we expect the Pound to continue at its low levels but also volatile given the uncertainty on the full impact of Brexit in terms of trade, free movement of people, businesses and general market confidence. We maintain our expectation that the shilling will remain steady against the dollar supported by: (i) the high levels of forex reserves currently at US $7.9 billion, (5.15 months of import cover), (ii) improved diaspora remittances, with cumulative inflows in the 12 months to May 2016 increasing by 11.1% to US $1.6 billion compared to US $1.5 billion in the year to May 2015, (iii) a lower import bill. In addition, the KES 152.3 billion precautionary credit facility with IMF is available to provide an adequate buffer against exogenous shocks. Source: CBK However, Kenya remains vulnerable to global factors such as monetary tightening in the US and the rebalancing of the Chinese economy from exports to domestic consumption which is likely to negatively impact the financing of key flagship projects in the region (Kenya Economic Update, March 2016 World Bank). Furthermore, the uncertainty created by the looming 2017 elections will result in reduced business expansion. The gradual appreciation against the pound was attributed to speculation of the United Kingdom s European Union membership (Brexit) as the leave campaign gained momentum towards voting day. This culminated in a 7.0% drop of the Pound against the Shilling 3
FOREX RESERVES & IMPORT COVER A stable currency against the US dollar has resulted in the accumulation of usable foreign exchange reserves by the CBK, to stand at US $7.9 billion (5.2 months of import cover) in July from US $6.9 billion (4.4 months of import cover) as at end of January. We observed a decline in June by US $431 million to US $7.2 billion from $7.6 billion at the beginning of the month attributed to a slight depreciation of the shilling against the dollar (KES 101.21 from KES 100.90 month-on-month). In light of an expected increase in the import bill as fuel prices increase, we foresee a slight decline in the foreign exchange reserves. Following Britain s decision to leave the European Union (EU), we foresee uncertainty in the export markets (particularly horticulture). As the initial over reaction subsides and economic realities set in, we expect new trade bilateral agreements between Kenya and both the EU and Britain. The Economic Partnership Agreement with EU is set for review in October 2016. With the shilling appreciating against the pound (above 10.7%), we expect lower export earnings. This is informed by the fact that Netherlands and UK combined are Kenya s biggest export destinations (13.5% of domestic exports as of April 2016). We however note that the IMF precautionary facility of US $1.5 billion provides a buffer against temporary volatility shocks. Additionally, the Central Bank of Kenya (CBK) remains ready to intervene in the foreign exchange markets to mitigate the negative impact of any exogenous shocks in the market. CURRENT ACCOUNT DEFICIT The current account balance improved to a deficit of US $4.3 billion (6.8% of GDP) in 2015 from a deficit of US $6.0 billion (9.8% of GDP) in 2014. This was attributed to a lower import bill for petroleum products, improved earnings from tea and horticulture exports, resilient diaspora remittances and the absence of aircraft imports. Source: CBK The stability in forex reserves for most of 1H2016 was supported by a lower import bill as well as inflows from remittances (6.7% increase YTD to $146.7 million). 4 During the 1Q2016, the current account balance improved to a deficit of US $0.3 billion from a deficit of US $1.1 billion in the preceding quarter. This was attributed to a 42.1% improvement in the trade
balance (deficit) reflecting a decline in imports and improved earnings from horticulture. As shown in the graph below, total monthly exports increased by 31.6% to KES 52.5 billion in April 2016 compared to KES 39.9 billion in April 2015, which was the lowest within the 12-month period. Earnings from exports of horticulture improved by 30.4% in 1Q2016 reflecting improved supply of cut flowers and fresh vegetables. The value of tea exports however declined by 15.7% reflecting depressed and volatile prices. The average price of tea declined from US$ 3.63/kg in 4Q2015 to US$ 2.90/kg in 1Q2016. oil prices remained relatively low averaging US $32.77 per barrel in 1Q2016 from US $42.20 in 4Q2015. The tourism industry has also picked up with tourist arrivals increasing by 13.1% to 261,404 in the year to April 2016 compared to 231,038 in the year to April 2015. In line with our previous report, we anticipate an improvement in the trade balance to translate to a narrower current account deficit in 2016 (5.5% of GDP according to the CBK). Strong supply from OPEC members and subdued global demand continue to moderate oil price increases and we expect higher revenues from the tourism sector amid a relatively stable security environment. Source: CBK Total monthly imports declined year-on-year by 3.8% to KES 124.9 billion in April 2016 from KES 129.8 billion in April 2015. In particular, the value of imports of oil declined by 32.7% in 1Q2016, reflecting low commodity prices in the international market, especially of oil. Crude 5
The Equities Market The Nairobi Securities Exchange (NSE) has and continues to witness a decline in prices evidenced by the dip in the NASI Index. January saw the aforementioned drop from 146.74 points as at 8/1/16 to 136.92 points at the end of the month. The drop in prices presented good entry points for investors. This was followed by a recovery in the following months, pushing the NASI up to 143.51 points as at 2/06/16. The month of March in particular saw the highest activity YTD with 556.2 million shares traded, valued at KES 13.9 billion. This was boosted by full year 2015 results that saw a lot of speculative activity. wake of banking sector crisis that has seen the collapse of 3 banks in 8 months. Throughout the period under review, Banking and Telecommunication & Technology sectors dominated trading owing to liquidity with Automobile and Accessories sector being least active. The bourse continues on its bearish run with majority of counters facing price declines YTD. Top 5 Gainers 1H2016 Company 4 th January 2016 30 th June 2016 % Gain Longhorn Kenya 4.65 5.70 22.6% KenolKobil Ltd 8.85 10.40 17.5% Standard Group 28.00 31.25 11.6% I&M Bank 100.00 110.00 10.0% Safaricom 16.35 17.75 8.6% Source: Bloomberg The NSE 20 Share Index declined by 12.7% in 1H2016 to close at 3640.61 as at 30 th June. The banking sector has witnessed the biggest hit with investors minimizing their exposure to the sector. This is in the 6
Top 5 Losers 1H2016 Company 4 th January 2016 30 th June 2016 % Loss Uchumi Supermarkets 10.65 2.90-72.8% Kapchorua Tea Co. 200.00 90.00-55.0% Home Afrika 2.50 1.30-48.0% Williamson Tea 401.00 209.00-47.9% Atlas Development 2.30 1.30-43.5% In our opinion, the market is still in a bear run but as alluded to in our previous macroeconomic report, presents an opportunity for investors to jump in on fundamentally strong companies for the long term. We expect local institutional investors to remain cautious in the equities market until global markets uncertainty subsides. We expect to see foreign dominated trading, with investors taking both sides of the trade to manage their positions as selling pressure continues. There remains risk of capital flight from risk averse foreign investors, as they seek refuge in safer investments. We therefore recommend the following investment actions; a) Exposure in specific banking stocks: The banking sector in particular is trading at an average P/B of 1.18x, providing a good entry point for investors. b) Exposure in Energy stocks: Currently KenGen is trading at a P/E of 1.28 (industry P/E 2.28) and a dividend yield of 9.7% vs the industry dividend yield of 5.4%. The 280MW Olkaria Geothermal Plants have contributed significantly to capacity revenue. As at 1H2016, geothermal revenue grew by 51.5% to KES 2.6 billion from KES 1.7 billion in 1H2015. In terms of unit sales, there was an increment of 34.6% to 1,820 GWh (1H2015: 1,352 GWh). 7
Bernard Kiarie Ivy Barongo Dianah Irungu E-mail: bernard.kiarie@fib.co.ke Tel: 020 7606028-30 Email: ivy.barongo@fib.co.ke Tel: 020 7606028-30 Email: dianah.irungu@fib.co.ke Tel: 020 7606028-30 HEAD OFFICE: Crawford Business Park, Ground Floor State House Road Tel: 0207606026-37 P.O Box 45236-00100 Nairobi 8 DISCLAIMER: The information contained herein is obtained from sources, which to the best of our knowledge are deemed reliable. As such, we are not responsible or liable for any factual errors arising