Market Commentary:
- The All Share Index eased by 1.3% w-o-w while the NSE 20 Share Index rose marginally by 0.2% to close the week at 158.59 and 1,868.76 respectively. Market turnover declined by 35.2% to KES 2.1 billion while volume of shares traded fell by 27.1% to 62.1 million shares.
- Banking counters experienced selling pressure for the most part. Notable price declines in the sector included DTB (-3.7% to KES 65.50), Equity (-3.5% to KES 37.70), I&M (-3.3% to KES 47.40) and KCB (-2.7% to KES 40.00). Safaricom eased by 2.0% to close at KES 36.30.
- In Friday’s trading session, selling pressure abated and demand improved on most of the aforementioned counters, providing some price stability. We expect this trend (improving demand, price stability) to continue in the coming week. As mentioned in the previous report, investors are still cautious of the macroeconomic environment, hence we do not expect very big upward movements in prices. You can read about our recommended investment actions during this period here:
News Highlights:
Should Kenya Borrow More?
- Between December 2015 and December 2020, Kenya’s total public debt (domestic and external) has grown at a CAGR of 18.2% to KES 7.3 trillion. This represents 69.0% of the projected (by IMF) 2020 GDP from 48.1% of GDP in 2015. As at December 2020, 52.0% of the total debt was external debt and 48.0% was domestic debt. This composition has not changed much over the same period (2015: 51.0% external vs 49.0% domestic).
- Most of Kenya’s debt sustainability metrics have either exceeded thresholds or are dangerously close. According to the IMF, in the FY2019/2020, Kenya’s ratio of the present value (PV) of total debt to GDP rose to 62.4% (threshold: 70.0%) from 57.6% in FY2018/2019. However, the ratio of debt service to revenues and grants declined to 52.2% from 53.5% but is still above the threshold of 30.0%. We also note that while majority of the external debt is still on concessional terms, the commercial component (e.g. Eurobonds, syndicated loans) of the external debt has grown – from 7.0% in 2013 to 26.0% in 2020.
- With COVID-19 containment measures suppressing economic activities, government revenues have reduced. The government is likely to increase borrowing (both domestic and external) to support spending in the near term. Recent actions by the government point to this direction. For instance, in the just concluded infrastructure bond (IFB/2021/018) auction (see the fixed income section for more details), the government took up KES 21.9 billion more above the amount offered (KES 60.0 billion) at relatively higher yields (12.667%).
- Externally, according to the IMF, Kenya is expected to borrow USD 12.4 billion by June 2022. This will be in the form of Eurobonds (USD 7.3 billion), concessionary borrowing (USD 4.8 billion) and semi-concessional borrowing (USD 282.0 million). USD 2.3 billion of the new Eurobond proceeds are expected to finance infrastructure projects while USD 5.0 billion will be used to retire a Eurobond maturing in 2024 and syndicated loans. Increasing proportion of debt on concessional terms will also help lower borrowing costs. Kenya is also expected to receive USD 2.34 billion from the IMF to reduce debt vulnerabilities and support the COVID-19 response.
- With the additional borrowing, the aforementioned debt sustainability metrics are expected to deteriorate further. The IMF expects the PV of debt to GDP and the ratio of debt service to revenues and grants declined to deteriorate to 64.2% and 61.9% respectively by FY2021/2022.
- The IMF has raised concerns that Kenya faces a high risk of debt distress and has recommended a number of measures such as more fiscal consolidation to mitigate the risks. Fiscal consolidation entails raising more revenues and reducing expenditures. Increasing revenues could mean mores taxes for Kenyans which couldn’t come at a worse time. One particular recommendation from the IMF that may impact investors at the NSE is reforming some of the state owned enterprises (SOEs) that pose the greatest risk. Some of the NSE listed SOEs identified for reform include Kenya Airways, KenGen and KPLC.
- We agree with the IMF on reforming SOEs as some have become money pits. We are also of the opinion that the government doesn’t have to get involved in every economic activity where it feels needs more “efficiencies”. Government could just enact laws and regulations that create an enabling environment and protect consumers and then work on improving enforcement.
- We also note that some of the government projects end up being a burden to taxpayers without meaningful multiplier effects. Some of the projects have been implemented against recommendations made by policy experts (including from organizations like the World Bank). Solving some these issues could have long term positive impact but we wonder whether there is enough goodwill on part of the government to address some of these issues.
- In conclusion, we don’t see another way out for Kenya that doesn’t involve more borrowing. In the short term, policies geared towards increasing taxes and spending cuts will likely be done in the context of a COVID-19 hit economy. Therefore, it’s unlikely such actions will be scaled to the full extent possible. In other words, at some point, higher taxes and spending cuts would probably be counterproductive and bring more misery to Kenyans by negatively impacting livelihoods. As such, the government will probably strike a balance between protecting livelihoods and fiscal consolidation.
Recommendations:
EABL – Long-term Buy
Equity – Hold
