Weekly Commentary – 19th May 2023

Top Gainers and Losers in the Equities Markets

• The National Treasury released its quarterly economic and budget analysis for Q3 of the 2022-2023 fiscal year. Current account deficits in March 2023 stood at USD 5,640.9 million, compared to USD 5,537.7 million in March 2022. In March 2023, foreign exchange reserves were at USD 6,961.8 million (3.90 months of import cover), falling short of CBK’s statutory obligation to provide import coverage of at least 4.0 months. However, in March 2022, the foreign reserves stood at USD 8,432.2 million (5.0 months of import cover), well above CBK’s requirement. Revenue collection totalled KES 1,686 billion between July 2022 and March 2023, falling short of the targeted amount of KES 1,773.4 billion by KES 87.4 billion. Total expenditure stood at KES 2,209.2 billion. For the period under review, net foreign and domestic finances were KES 80.1 billion and KES 287.8 billion respectively. Gross domestic debt increased to KES 4,539.6 billion in March 2023 from KES 4,192.4 billion in March 2022 while total external debt stock stood at KES 4,851.1 billion by the end of March 2023.

• Moody’s Investors Service has downgraded Kenya’s long-term foreign-currency and local currency issuer ratings to a B3 rating indicative of financial instability concerns or inadequate cash reserves relative to business needs, debt and other financial obligations. The downgrade stems from the Kenyan government’s elevated liquidity risks, partly as a result of deteriorating domestic debt uptake, particularly long-term bonds. This has resulted in budget deficits and delays in the clearance of government department arrears. The agency has also placed the ratings under review for downgrade as it monitors the country’s ability to channel domestic debt towards a majority of the net financing needs while reserving external financing for pressing external debt repayment obligations. While the country continues to rely on the IMF and other international institutions for funding, its ability to sustain market access for commercial external debt is critical for debt servicing.

• The Central Bank of Kenya (CBK) has published the bank supervision annual report for the fiscal year 2021-2022. CBK, in the report has given a detailed account on the economic and financial developments for the period. The balance of payments deficit in comparison to GDP is estimated to have increased marginally to 5.3% from 5.1% in the previous year. Government revenue in the year stood at KES 2,177.9 billion which translates to 17.2% of GDP in comparison to KES 1,815.1 billion in 2021. Tax revenue accounted for 85.4% of the revenue. Government spending and net lending increased by 7.5% to KES 2,955.0 billion accounting for 23.4% of GDP, and falling short of the projected target.

• The Retirement Benefits Authority has granted Britam regulatory approval to administer Tier II contributions from businesses that choose not to participate in the National Social Security Fund (NSSF). Britam becomes the fourth pension provider after Enwealth, CPF and ICEA Lion Life Assurance to receive this approval. The financial services provider guarantees to support qualified employers and companies with the opt-out process and to protect employees’ retirement savings.

• Central Bank of Kenya (CBK) data indicates a decline in customer deposits in the microfinance industry. Customer deposits in the microfinance business declined 7.8% to KES 46.5 billion in 2022 from KES 50.4 billion in 2021, according to CBK. The observed decrease in deposits is attributable to the shift of funds to alternative attractive investments with the general rise of interest rates. In a rising interest rate environment, government securities such as Treasury bills and bonds provided investors with higher risk-adjusted returns, which served to buffer investors against shocks such as excessive inflation.

• In the United Kingdom(UK), GDP grew by 0.1% in Q1 of 2023 despite the unexpected 0.3% decline in March 2023. The observed growth was consistent with market forecasts for the period. Construction and manufacturing showed solid growth expanding 0.7% and 0.5% respectively in the quarter. The services and production sector experienced a slower growth of 0.1% as services dropped by 0.5% in March due to declines in wholesale and retail trade as well as motor repairs. Household consumption showed no growth in the quarter. The Bank of England also reported that the UK is no longer expected to enter a recession this year.

• Euro Area inflation stood at 7% in April 2023 up from 6.9% in March, and well above the European Central Bank’s target of 2%. Service and energy costs rose by 5.2% and 2.4%, respectively. However, inflation in food, alcohol and tobacco as well as non-energy industrial products eased. Rising service and energy prices more than offset the slowing of food price growth. Core inflation, which excludes volatile food and fuel prices, fell to 7.3% from 7.5%, while an even narrower gauge, which excludes alcohol and tobacco, fell to 5.6% from 5.7%. Interest rate hikes are still expected as policymakers work to keep inflation under control and meet their target.

• Eurozone’s quarterly economic growth was confirmed at 0.1% in Q1 of 2023, following an inert previous quarter. Multiple factors have had a substantial impact on the bloc’s economy, including a large increase in consumer prices caused by increasing energy and food costs. Furthermore, the European Central Bank’s strong tightening of monetary policy, the fastest in over two decades, has added to the economic burden, as has a decline in business and consumer confidence. Germany, the Eurozone’s largest economy, recorded no growth in the first quarter, while the Netherlands contracted. However, the economies of France, Italy, and Spain expanded during the same time period.