At the beginning of the quarter the average growth rate was projected to be 6.0% but due to the novel Coronavirus pandemic, economic growth is expected to decline due to reduced demand by Kenya’s main trading partners and disruptions of supply chains and domestic production.
Based on the impact on other economies, we believe that Coronavirus may have a 10.0% to 25.0% impact on GDP growth for the year 2020.
The 10.0% impact is an optimistic case in the event the outbreak is contained, and a 25.0% impact in the event it is not contained. As such, the Coronavirus could reduce Kenya’s GDP growth to 4.3% for the year 2020 depending on the severity of the outbreak and economic implications for Kenya.
“Out of the seven metrics that we track, 1 is positive, 2 are neutral and 4 are negative with changes in GDP, interest rates, and currency which were neutral at the beginning of the year and now negative and inflation and investor sentiment which were positive and now neutral,” said David Gitau, Investment Analyst at Cytonn. “We have switched our outlook on 2020 macroeconomic environment from positive to negative depending on how fast the Coronavirus is contained. Based on the impact on other economies, we believe that Coronavirus may have a 10.0% to 25.0% impact on GDP growth for the year,”
The average GDP growth, including Cytonn’s 2020 growth estimate of 4.3% came in at 5.2%, 0.7% points lower than the 5.9% average projection released at the beginning of the year. The common view is that GDP growth will slow in 2020 factoring in the economic impact of Coronavirus.
However, we expect this growth rate to be revised downwards as global research houses downgrade their GDP growth estimates for 2020 once they factor in the economic impact of Coronavirus.
Summary of indicators:
1. Government Borrowing remains “negative”. As per the Budget Policy Statement, the fiscal deficit for FY2019/20 was estimated at 6.3% of GDP and although the government continues to pursue the fiscal consolidation policy, risks abound from possible reallocation of funds in a bid to contain the spread of the Coronavirus. This is expected to further widen the fiscal deficit away from the projected decline to 4.9% of GDP in FY 2020/21. On the other hand, the Government raised its total revenue target by 14.2% to Kshs 2.1 tn for FY’2019/20 which it cannot meet In the current market conditions and thus exert pressure on the domestic borrowing front to plug in the deficit,
2. Exchange Rate outlook for 2020 is “negative”, attributable to the rising uncertainties in the global market due to the Coronavirus outbreak, which has seen the disruption of global supply chains. The shortage of imports from China for instance, which accounts for an estimated 21.0% of the country’s imports, is likely to cause local importers to look for alternative import markets, which may be more expensive and as such higher demand for the dollar from merchandise importers,
3. Interest Rates have a “negative” outlook, with the MPC having cut the CBR rate by 125 bps cumulatively to 7.25% in the 2 MPC meetings held so far in 2020. We, however, expect upward pressure on interest rates to emanate from increased pressure on Government borrowing from both the domestic and foreign front,
4. Inflation has a “neutral” outlook, with expectations of inflationary pressure emanating from the effects of the world Pandemic-Coronavirus, driven by supply-side shortages owing to lockdowns across the globe which have disrupted supply chains, further heightening cost-push inflation,
5. GDP growth has a “negative” outlook. We believe that Coronavirus may have a 10.0% to 25.0% impact on GDP growth for the year 2020. The 10.0% impact is an optimistic case in the event the outbreak is contained, and a 25.0% impact in the event it is not contained. As such, the coronavirus could reduce Kenya’s GDP growth to a range of 4.3% to 5.2% for the year 2020 depending on the severity of the outbreak and economic implications for Kenya,
6. Investor Sentiment has a “neutral” outlook, with the Eurobond yields being on a rising trend YTD. The rising yields are an indication that investors are now attaching a higher risk premium on the country due to the anticipation of slower economic growth attributable to the confirmation of the Coronavirus infection within Kenya’s borders and locust invasion,
7. Security was maintained at “positive” for 2020 given that the political climate in the country has eased. Despite the terror attack experienced in Q1’2019, Kenya was spared from travel advisories, evidence of the international community’s confidence in the country’s security position.
ASSET CLASSES REVIEW
FIXED INCOME REVIEW: T-bill’s remained oversubscribed in Q1’2020, with the average subscription rate coming in at 175.6%, up from 77.0% in Q4’2019. The oversubscription was partly attributable to favourable liquidity in the market during the quarter, which saw the average interbank rate declining to 4.4%, from 5.7% in Q4’2019, supported by government payments and debt maturities. Overall subscriptions for the 91, 182, and 364-day papers came in at 79.4%, 67.8% and 295.6% in Q1’2020, from 74.4%, 24.4% and 121.5% in Q4’2019, respectively, with investors’ participation remaining skewed towards the longer 364-day paper.
“Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The government is 11.2% behind of its domestic borrowing target, having borrowed Kshs 210.2 bn against a pro-rated target of Kshs 236.8 bn. The uncertainty brought about by the novel Coronavirus will make it harder for the government to access foreign debt due to uncertainty affecting the global markets, which might see investors attaching a high-risk premium on the country. A budget deficit is likely to result from the depressed revenue collection with the revenue target for FY’2019/2020 at Kshs 2.1 tn, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit.” said Gitau.
“We are NEUTRAL on fixed income. We expect the rates to remain relatively stable on the short end of the yield curve, with a bias to continued upward readjustment on the long end of the yield curve. As such, our view is that investors should be biased towards short-term fixed income securities to reduce duration risk associated with long-term debt,” added David.
EQUITIES REVIEW: In Q1’2020, the equities market was on a downward trend, with NASI, NSE 25 and NSE 20 losing by 20.7%, 24.2% and 25.9%, respectively, taking their YTD performance as at the end of March to losses of 20.7%, 24.2% and 25.9% for NASI, NSE 25 and NSE 20, respectively. The losses recorded by all the three indices breach the threshold of a bear market, which is a condition in which securities prices fall by 20.0% or more. The equities market performance during the quarter was shaped by losses recorded by large caps such as Bamburi, Equity, KCB, BAT Kenya, EABL and ABSA.
“We are POSITIVE on equities for investors as the sustained price declines have seen the market P/E decline to below its historical average,” said Felix Otieno, Investment Analyst at Cytonn. “We expect increased market activity, and possibly increased inflows from foreign investors, as they take advantage of the attractive valuations, to support the positive performance,” added Felix.
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