Good times ahead if Quarter 1 trend is sustained

By Duncan Lumwamu

Kenya: The past quarter saw the economy remain stable at the macro level, with inflation holding out at an average of 6.78 per cent after marginally declining from 7.21 per cent in January to 6.27 per cent in March.

This was occasioned partly by lower fuel costs and forex adjustment charges, which significantly reduced the cost of electricity.

Notably though, prices of food, electricity and water rose over the same period, mainly due to errant weather conditions.

Another key indicator, the 91-day Treasury Bill, averaged at 9.12 per cent over the period, declining from a high of 9.38 per cent in January 2014 to a low of 8.85 per cent at the close of the quarter. The decline is attributed to increased liquidity of banks and investors from a number of redemptions and maturities of Treasury Bonds, increasing demand that could have led to oversubscription.

On the currencies front, the shilling put up a spirited fight to remain stable against major currencies in the first quarter as the dollar exchanged at an average rate of Sh86.32, oscillating between a high of Sh86.96 and a low of Sh85.46. The gainers from this trend were obviously import and export businesses that enjoyed relative stability over the period.

The stocks market was on a bullish streak as the NSE 20 Index gained 0.4 per cent to close at 4,945.78 points, up from 4,926.98 in December last year. The NSE All Share Index was up 5.3 per cent over the same period.

This may have been a sign of increased investor confidence and the stable macros could be an indication of better things to come. And if this trend continues, the economy is likely to close the year on a positive note.

The banking sector was the most vibrant in the first quarter, going by the announcements of 2013 results. Although the sector experienced a lower growth in loan books, the first quarter of 2014 may have been a turning point as more investors were attracted to bank stocks and rushed to take positions early.

As the year advances, the country is expected to enjoy a stable macroeconomic environment this second quarter, despite security threats and runaway Government spending.

However, we may see little deterioration in several macro factors. Inflation will be of major interest, with our expectations showing a rise in the rate occasioned by higher food prices and high transport costs. However, it is expected to remain in the single digits.

What lies ahead

On interest rates, we expect no major shifts. Thematically, overall interest rates will remain stable over the second quarter. Central Bank has maintained the CBR at 8.5 per cent, and we project that it will remain unchanged in the medium term.

The Eurobond issue will continue to dominate fixed income investors’ expectations this quarter. Proceeds of the Bond will be used to fund the Budget deficit and several infrastructure projects, and consequently support CBK’s foreign exchange reserves and help in exchange rate stability.

Over the second quarter, we expect the shilling to remain stable against major currencies.

A key concern, however, is the Government’s fiscal policy. Public sector spending and the wage bill have created an unsustainable trend. The Government may have to review its tax policies within this quarter.

This may involve more and/or new tax lines to increase revenue collection. The Government has already taken a step in cutting spending, but there is also need for a keen eye on tax collection to seal the loopholes that have previously bled public coffers unabated.

In the equities market, we expect heightened activity towards the mid of the quarter as a majority of companies will be closing their books and declaring dividends. We expect the overall banking sector to register stronger Q1 results year on year.

Security remains a key concern for the overall investment community. With the recent terror threats in major regions, potential investment, especially foreign flows, may be withheld. The existing investments are also at stake, with the retail segment already feeling the heat.

The writer is a research analyst at ABC Capital Ltd.

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