Africa Market Update - February 2015

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MARKET UPDATE – AFRICA | February 2015 Central Bank will cautiously monitor liquidity trends in the money market with a view to supporting the shilling. Kenya Shilling vs USD Exchange Net Liquidity Injection (USD Mln) Source: Central Bank of Kenya, StratLink Africa Source: Bloomberg, StratLink Africa Short-term measures to prop-up shilling We expect the local unit to remain under pressure in the coming months driven by deterioration of the current account balance. This has principally been brought about by growing merchandise imports against depressed export earnings. Current account deficit as percentage of Gross Domestic Product (GDP) grew by 110.0 bps to 9.9%, year-on-year, as at September 2014. Current Account Deficit (USD Mln) Year to Sep-12 - 4,057.0 Sep-13 - 4,643.0 Sep-14 - 5,293.0 Current Account Deficit Strengthening greenback to undermine shilling’s long-term strength Further to unfavourable balance of trade affecting the shilling and improved macroeconomic environment in the United States the demand for the greenback in local markets with continue to increase. This is bound to keep the shilling on a relative weakening position against the dollar going forward. Our view is that the KES will trade in the 90-93.50 range to the USD in the short term (30 days) and 89-94 in the medium term (180 days) Industries, such as steel manufacturers, that rely heavily on imported inputs will bear the brunt of the waning value of the shilling. Kenya Shillings exchange Rate vs Cost of steel Source: National Treasury, StratLink Africa Central Bank will cautiously monitor liquidity trends in the money market with a view to supporting the shilling. In January 2015, the bank recorded the first net liquidity withdrawal from the market in four months indicative of response to the shilling’s trends against major currencies. Source: National Bureau of Statistics, StratLink Africa 4 | StratLink Africa Ltd. www.stratlinkglobal.com
MARKET UPDATE – AFRICA | February 2015 DEBT MARKET UPDATE In January 2015, the yield curve exhibited marginal up-tick from the preceding month. The short-term end of the curve has trended downwards compared to December 2014, indicative of reduced borrowing appetite by the government. This is in line with the 59.0 bps slash of the Kenya Banks’ Reference Rate (KBRR) to 8.54% that targets keeping commercial bank lending rates on a downtrend. Bloomberg BVAL Yields Index A favourable outlook on inflation given the nose-diving global crude oil prices is also likely to further weigh down yields in the market. Inflation now stands at a sixteen months’ low and 100.0 bps above Central Bank’s lower margin target of 5.0%. Inflation Trend Yields are bound to experience downward pressure in the coming month pegged on the bid to tame government appetite for domestic borrowing. Source: National Bureau of Statistics, StratLink Africa Source: Bloomberg, StratLink Africa Yields are bound to experience downward pressure in the coming month pegged on the bid to tame government appetite for domestic borrowing. We note, however, that the government has faced revenue mobilization challenges in the first half of FY14/15 and this could translate in borrowing above target. High Liquidity in the Money Market The money market has been fairly liquid in January 2015 driven by government payments and repo maturities. The interbank rate has been on a downtrend closing the month at 6.5%, 74.0 bps lower than it did in December 2014. Interbank Rate 91 Day T-Bill Accepted Bids (USD Mln) Source: Central Bank of Kenya, StratLink Africa Source: Central Bank of Kenya, StratLink Africa www.stratlinkglobal.com StratLink Africa Ltd.| 5
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Africa Market Update - February 2015

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