Weekly Commentary – 14th July 2023

Top Gainers and Losers in the Equities Markets

• The Energy and Petroleum Regulatory Authority (EPRA) released its latest monthly statement on the maximum retail prices of petroleum products, effective from 15th July 2023 to 14th August 2023. Notably, super petrol and kerosene experienced a reduction in pump prices by KES 0.85 and KES 3.96 to KES 194.68 per litre and KES 169.48 per litre respectively. Diesel prices, however, remain unchanged at KES 179.67 per litre.

• The Kenya Revenue Authority (KRA) has achieved consistent growth in revenue collection, with a notable 6.7% increase in the financial year 2022/2023. Over the past five years, revenue collection has steadily risen from KES 1.58 trillion in FY2018/2019 to KES 2.17 trillion in FY2022/23, reflecting a remarkable growth of 37% (KES 586.26 billion). Despite global fiscal challenges impacting the economy, KRA successfully collected KES 2.17 trillion from July 2022 to June 2023, surpassing the previous financial year’s collection of KES 2.03 trillion by KES 135 billion.

• Kenya signed a state-backed agreement with three prominent Gulf oil companies, including Saudi Aramco, Emirates National Oil Corporation (Enoc) and Abu Dhabi National Oil Corporation Global Trading (Adnoc). The objective of this deal is to reduce the cost of fuel supplied on credit, ensuring that consumers benefit from the global decline in fuel prices. By postponing payments for six months and enabling local companies to pay in local currency, this arrangement aims to alleviate foreign exchange pressure and provide support to the struggling Shilling.

• Kenya commenced discussions with potential investors in London as it prepares to issue a bond, aiming to secure the most favorable deal for its $2.0 billion Eurobond maturing in June 2024. The government is exploring various options, including full repayment with multi-tranche bonds, part buy-back and part repayment with multi-tranche Eurobonds and part swap part repayment with multi-tranche Eurobonds. Additionally, the government is considering the possibility of issuing a Sukuk bond, following Egypt’s example in issuing Shariah-compliant bonds on global markets. Another option under consideration is a Samurai bond, denominated in Japanese Yen and subject to Japanese regulations. The exploration of a Samurai bond reflects the government’s efforts to mitigate foreign exchange pressures, as the Shilling has shown relative stability against the Japanese Yen compared to other currencies like the US dollar and the British pound.

• The IMF Executive Board is scheduled to convene next week to approve the extension of its significant credit arrangement with Kenya, encompassing the extended fund and extended credit facilities. Additionally, the board will assess a new 20-month arrangement request under the resilience and sustainability facility. This meeting will involve close monitoring of Kenya’s fiscal and monetary reforms, essential for continued support from the IMF. Previous discussions in December outlined crucial fiscal and monetary policy reforms that Kenya was expected to implement in line with the multi-year arrangement, which primarily relies on access to funding.

• US inflation rate decelerated to 3.0% in June 2023, marking the lowest level since March 2021, and below both May’s 4.0% and market expectations of 3.1%. The slowdown can be attributed in part to a high base effect from the previous year, when surging energy and food prices drove the headline inflation rate to its highest level since 1981 at 9.1%. Notably, energy costs plunged 16.7%, with fuel oil, gasoline and utility gas service prices experiencing significant declines. Additionally, inflation eased for food, shelter, new vehicles, apparel and transportation services. Medical services costs dropped by 0.8% and prices of used cars and trucks declined by 5.2%. The core inflation rate, which excludes volatile food and energy prices, decreased to 4.8%, the lowest since October 2021.

• China’s inflation unexpectedly stagnated in June 2023, falling short of market expectations and May’s modest increase of 0.2%. This marked the lowest reading since February 2021, primarily driven by a decline in non-food prices, particularly in the transportation sector, which experienced a sharper drop of -6.5% compared to -3.9% in May. Additionally, education costs moderated, while health prices remained stable at 1.1%. Housing prices showed no change after a 0.2% decline. In contrast, food prices rose the most in three months, mainly due to higher costs for fresh vegetables and eggs, despite a notable decrease in pork prices. Core inflation, excluding food and energy, increased by 0.4% year-on-year, the smallest gain since March 2021 following a 0.6% rise in May. Furthermore, monthly inflation unexpectedly dropped by 0.2%, marking the fifth consecutive month of declines, contrasting consensus expectations of a flat reading.

• The Chinese economy surpassed expectations, recording a 0.8% seasonally adjusted growth in Q2 2023. However, this marked a significant slowdown from the previous quarter’s 2.2% expansion, indicating a loss of momentum in the recovery. The uneven recovery was attributed to ongoing challenges such as the property downturn, the risk of disinflation, high unemployment among young adults and declining exports. With these concerns, there is growing pressure on policymakers to implement fresh stimulus measures, including potential central bank interest rate cuts and further easing of property controls.

• The British economy experienced a slight contraction of 0.1% in May 2023, following a 0.2% growth in April. This result was better than expected, as forecasts predicted a larger decline of 0.3%. Factors such as an additional bank holiday and strikes weighed on the economy, with production being the biggest under-performer, particularly in electricity, gas, steam and air conditioning supply which saw a 2% slump. Water supply, sewerage, manufacturing, construction and services also experienced declines or remained flat. Over the three months leading to May, the British economy displayed no growth. The Office for National Statistics (ONS) suggested that a better figure than a 0.1% decline for June’s GDP would indicate the economy’s avoidance of a contraction for Q2 as a whole. Currently, the GDP is estimated to be 0.2% higher than its pre-COVID levels.