Weekly Commentary – 16th June 2023

Top Gainers and Losers in the Equities Markets

• The 2023/2024 Budget Statement presents significant tax policy proposals to boost revenue generation. Key highlights include a significant increase in VAT on petroleum products to 16% while exempting LPG products. Income tax reforms introduce new rates of 32.5% and 35% for income brackets above KES 500,000. Contributions to the National Housing Development Fund will be mandatory for both employees and employers. Withholding tax will be applicable to digital content monetization and sales-related services. Turnover tax rates will rise, except for businesses with income exceeding KES 25M per annum. The implementation of an electronic tax invoice management system (eTIMS) is required for all businesses, ensuring proper invoice generation. Other changes include adjustments to excise duty, remittance of withholding tax and withholding VAT, tax amnesty, VAT exemptions for exported services, reduced rental income tax rate, import declaration fees, railway development levy and the introduction of an export and investment promotion levy. Interest limitation rules will only be applicable to foreign loans.

• The Energy and Petroleum Regulatory Authority (EPRA) published its monthly statement outlining the maximum retail prices of petroleum products, effective 15th June 2023 to 14th July 2023. Notably, super petrol and diesel experienced a reduction in pump prices by KES 0.66 and KES 1.12 to KES 182.04 per litre and KES 167.28 per litre respectively. Conversely, kerosene observed an increase of KES 0.35 to KES 161.48 per litre.

• The US Federal Reserve, as anticipated, kept the funds rate target steady at 5%-5.25%. However, they signaled a potential increase to 5.6% by year-end if the economic and inflationary pressures persist. This decision marks the first pause in a series of ten consecutive rate hikes that had brought borrowing costs to their highest level since September 2007. Forecasts show an upward revision of the funds rate to 5.6% for this year, exceeding the earlier projection of 5.1% in March. Similar revisions were made for 2024 and 2025. GDP growth is now expected to reach 1% this year, surpassing the previous estimate of 0.4% in March. However, growth forecasts for 2024 and 2025 were slightly revised downwards.

• The European Central Bank (ECB) raised interest rate by 25 basis points during its June meeting, the eighth consecutive rate hike, despite the Eurozone being in a recession and inflation remaining above target. This brings the main refinancing rate to 4%, the highest level since 2008 and the deposit facility rate to 3.5%, a 22-year high. The ECB revised its inflation forecasts upwards and slightly lowered growth projections for the near future. The government emphasized the need for further rate increases, signaling a continuation of the tightening cycle in July. The ECB has implemented an unprecedented 400 basis point rate hike over the past year, representing the fastest tightening pace in its history.

• US inflation rate fell to 4.0% in May 2023, reaching its lowest point since March 2021 and slightly below market expectations. This decline was attributed to a decrease in energy prices. The core inflation rate, which excludes volatile items such as food and energy, also decreased to 5.3%, the lowest since November 2021. These figures support the argument for the Federal Reserve to consider pausing its current monetary tightening cycle. Energy costs experienced a significant slump, while food inflation slowed down. On a monthly basis, consumer prices rose by 0.1% in May following a 0.4% increase in April.

• The Eurozone inflation stood at 6.1% in May 2023, the lowest since February 2022. Despite this decline, inflation remains significantly above the European Central Bank’s target of 2.0%. The decrease in energy prices contributed to the easing inflationary pressures, along with slower cost increases for food, alcohol, tobacco, non-energy industrial goods and services. The core inflation rate, which excludes volatile components, also decreased to 5.3%, indicating a moderation in underlying price pressures. While inflation has moderated slightly, it remains a concern, highlighting the ongoing need for vigilance in monetary policy to ensure price stability in the Eurozone.

• The UK economy showed a modest growth of 0.1% in Q1 of 2023, matching expectations and maintaining the same pace as the previous quarter. The services sector saw positive growth, particularly in information and communication as well as administrative and support services. Construction and manufacturing also experienced slight expansions. However, sectors like education, health, public administration, defense and transport faced contractions. Household spending remained stagnant due to inflationary pressures, while gross fixed capital formation made a positive contribution, driven by business and government investments. Public expenditure decreased and both exports & imports declined. Despite the growth, the UK economy still lags 0.5% below pre-pandemic levels.

• The Eurozone economy unexpectedly contracted by 0.1% in Q1 of 2023, entering a slight technical recession. This decline was in contrast to earlier expectations of a modest 0.1% growth. Household expenditure decreased due to high inflation and borrowing costs, while governments reduced public spending as they scaled back stimulus measures. However, there were some positive signs as gross fixed capital formation rebounded and there were slight decreases in both exports and imports. Germany and the Netherlands experienced contractions in GDP, while France, Italy and Spain recorded modest expansions.