Daily Market Report – 11th June 2020

Market Commentary:

• The All Share Index gained for the 2^nd consecutive day this week (+2.6% week to date) to close the day at 142.78. Safaricom gained 1.7% to close the day at KES 30.45 (+3.9% week to date) on foreign investor demand. NSE 20 Index gained marginally by 0.4% to close the day at 1,995.0. Notable gainers for the day were Sameer (+9.1%) and Britam (+9.1% on foreign demand).Foreign investors emerged net sellers for the day’s trading session; foreign sells stood at 63.7% against foreign buys at 61.0%.

 

News Highlights:

 The Treasury CS Tables KES 2.8 Tn Budget for FY2020/2021 in Parliament

 The National Treasury and Planning Cabinet Secretary has proposed
a KES 2.8 tn budget for FY2020/2021 with the following spending
priorities (not exhaustive):
1. KES 128.3 bn for the “Big Four” Agenda
i. KES 111.7 bn to the health sector
ii. KES 15.5 bn to the housing, urban development and
public works sector
iii. KES 18.3 bn to manufacturing
iv. KES 52.8 bn for food and nutrition security
2. KES 172.2 bn for construction of a robust network of highquality roads
3. KES 18.1 bn for SGR Phase II (Nairobi – Naivasha)
4. KES 6.0 bn for the LAPSSET Project;
5. KES 5.0 bn for the Mombasa Port Development Project and
6. KES 328.0 mn for insurance of ferries for the Likoni channel.
7. KES 63.3 bn (excluding allocations for the “Big Four”
Agenda) to support generation of adequate and
affordable energy
8. KES 167.9 bn for security agencies
9. KES 497.7 bn for the education sector
10. KES 17.6 bn for cash transfers to the elderly persons
11. Ksh 14.9 bn to fund initiatives in ICT sector

 The budget proposal was tabled amidst global and domestic
shocks:
o global outbreak and rapid spread of COVID-19 & ensuing
containment measures (which have disrupted the business
environment and lowered the global economic outlook)

o invasion of desert locusts (damaged crops)
o floods (that have resulted in deaths, displacement and loss of
livelihoods)

 The budget was prepared in view of the impact of the foregoing
shocks on the domestic economy (whose growth projection for 2020
now stands at 2.5%) and includes a Rapid Economic Stimulus Program
and a Post COVID-19 Economic Recovery Strategy aimed at
stimulating GDP growth to 5.8% in 2021 and 6.5% by 2024.

 The Rapid Economic Stimulus Program (specifically aimed at
cushioning vulnerable citizens and business affected by the
aforementioned shocks) includes the following themes:

1. Infrastructure and rehabilitation of road networks
 KES 5.0 bn for damaged roads and foot bridges
 KES 10.0 bn for “Kazi Mtaani’ Program to address
youth unemployment

2. Education
 KES 7.4 bn for improving school infrastructure,
capitation & hiring educators

3. Support for MSMEs
 KES 3.0 bn for credit guarantee scheme
 KES 10.0 bn for fast tracking of pending bills

4. Healthcare (to enhance COVID-19 response)
 KES 1.2 bn for the recruitment of additional
healthcare workers
 KES 500.0 mn for locally made beds and beddings to
public hospitals
 KES 25.0 mn to support establishment of 50 modern
walkthrough sanitizers

5. Agriculture and food security
 KES 3.0 bn to subsidize supply of famine foods
 KES 3.5 bn for irrigation
 KES 1.5 bn for flower and horticulture farmers to
access global markets

6. Tourism
 KES 3.0 bn to support renovation activities and
restructuring of business operations
 KES 2.0 bn for grants to community conservancies
and support to KWS
 Waived parking and landing fees to stimulate
movement of cargo
 Support for aggressive marketing post COVID-19
 Grants to community conservancies and support to
KWS

7. Environment, water, sanitation and flood control
 KES 1.0 bn to support flood control
 KES 850.0 mn to cater for rehabilitation of wells, water
pans and underground tanks
 KES 540.0 mn to enhance tree planting program

8. Manufacturing
 An initial investment of KES 600.0 mn to purchase
locally assembled vehicles
 KES 712.0 mn to provide credit targeted to MSMEs in
the manufacturing sector.
 The CS expects the COVID-19 pandemic to reduce revenues for the
FY2019/2020 and FY2020/2021 due to lower import taxes (due to lower
imports and reduced trade among countries) and domestic taxes
(due to lower incomes and depressed consumption)
 Therefore, the revenue collection targets for FY2020/2021 stand at KES
1.9 tn (similar to FY2019/2020 estimates) of which ordinary revenues
stand at KES 1.6 tn

 Key tax measures included in the budget are:
1. 10.0% monthly rental income tax for individuals earning
annual rental income of Ksh 15.0 mn and below (previously
KES 10.0 mn)
2. A minimum tax of 1.0% on gross turnover for all companies
3. A digital service tax on the value of transactions at the rate
of 1.5%
4. A tax exemption on maize or corn seeds
5. A tax exemption on ambulance services,
6. Collection of road tolls on roads constructed and managed
under Public Private Partnership agreements

 As mentioned earlier, total expenditures are projected at KES 2.8:
 KES 1.8 tn for recurrent expenditures
 KES 633.1 bn for development expenditures
 The fiscal deficit (including grants) is estimated to decline to KES 840.6
bn (7.5 % of GDP) from KES 842.7 bn (8.3% of GDP) in the FY2019/20.

 According to the CS, the level of public debt remains sustainable
even with the deterioration in public debt indicators (due to the
COVID-19 crisis) and expects the debt to decline in the medium term.

 Furthermore, going forward, through the 2020 Medium Term Debt
Strategy, the government plans to shift towards concessional external
borrowing and lengthening of maturity structure of the domestic
debt.

 

Commentary

 The proposed budget successfully takes into account the negative
impact of the COVID-19 pandemic and aptly allocates funds to the
hardest hit sectors in order to spur economic growth in the medium
term.

 We are however uncertain on the government’s ability to mobilize the
projected revenues due to reduced economic activity (employment,
imports and consumption) and the fact that government has
historically failed to hit revenue targets.

 Furthermore, we note with concern on the elevated levels of recurrent
expenditure.

 In reference to proposed tax measures, we are wary on the
implementation of the 1.5% digital service tax as the digital services
sector lacks a clear structure.

 We note with concern on the proposal of the 1.0% on gross turnover
for all companies. We fear this may exacerbate an already
challenging operating environment — making it more expensive for
companies to operate, while also being contradictory to the stimulus
package.

 Whilst we commend the shift towards external concessional debt
(helps to reduce crowding out of the private sector through
overreliance on domestic borrowing) and lengthening of maturity
structure of the domestic debt, we still remained concerned about
the current elevated debt levels.

 The government plans to issue the first sovereign bond to finance
major green infrastructure projects in financial year 2020/2021. Given
the over-subscription of green bonds globally, we see this boosting
investor confidence in the local bond market.

 

Recommendations:

Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA

Hold- Safaricom

Sell- Stanchart, Bamburi, HF