Decoding Kenya's Economic Pulse: Q3'2023 Bank Performance Unveiled

Embark on a journey through the intricate financial landscape of Kenya as we unravel the insights from the Q3'2023 bank performance analysis and economic indicators. The Cytonn Financial Services Research Team presents a comprehensive overview, shedding light on key factors shaping the sector's trajectory.

T-Bills and Money Market Dynamics

T-Bills and Primary Auction Insights: T-Bills faced a second week of undersubscription at 86.8%, with persistent favoritism towards the 91-day paper at an impressive oversubscription rate of 415.9%. The government accepted Kshs 20.7 billion out of Kshs 20.8 billion in bids, boasting a high acceptance rate of 99.4%. Yields on government papers continued to rise, signaling potential shifts in fixed-income dynamics.

Money Market Performance: In the broader money markets, 3-month bank placements closed the week at 13.5%. Yields on the 364-day and 91-day T-bills increased, mirroring the upward trend in most Money Market Fund and the average yields on the Top 5 Money Market Funds.

Liquidity and Interbank Rates: Liquidity tightened, reflected in the average interbank rate increasing to 12.2%. Interbank volumes traded increased by 4.7% to Kshs 33.7 billion, influenced partly by tax remittances offsetting government payments.

Financial Markets and Currency Dynamics

Kenya Eurobonds: Yield Movements: Eurobond yields experienced a downward trajectory, with the 30-year Eurobond issued in 2018 witnessing a significant decline, and the 12-year Eurobond issued in 2021 experiencing a more modest decrease.

Kenya Shilling: Exchange Rate Dynamics: The Kenya Shilling depreciated against the US Dollar by 0.9%, closing at Kshs 155.1. On a year-to-date basis, the shilling has depreciated by 25.7% against the dollar, influenced by factors such as a foreign currency flight to other stable market like the USA treasury bills, persistent current account deficit, government debt servicing needs, foreign currency owners reluctant to sell their hard currency, and dwindling forex reserves.

Key Economic Indicators and Government Finances

Revenue and Borrowings: Total revenue collected by the end of November 2023 amounted to Kshs 882.3 billion, with tax revenues reaching Kshs 847.3 billion. Total financing stood at Kshs 302.9 billion, with domestic borrowing at Kshs 222.3 billion. Debt servicing cost stood at Kshs 517.1 billion, equivalent to 58.6% of actual revenues collected. This high domestic borrowing reduces the amount of capital available to businesses and hence squeezing out local businesses and investors.

Challenges and Government Response: High fuel prices, sustained shilling depreciation, and a challenging business environment pose challenges to revenue targets. The National Assembly approved a first supplementary budget, increasing the government’s budget to Kshs 3.9 trillion. Government strategies include expanding the revenue base and addressing tax leakages. We are yet to see the benefit of this high taxation rates because it reduces liquidity and consumers overall expenditures. The high cost of energy in Kenya is a key deterrent to investors. However, the eventual loser will be Kenya Power, KENGEN as domestic and businesses turn to solar power to reduce their cost outlays.

Outlook and Strategic Guidance

Call for Action: Investors are advised to monitor T-bill trends, forex dynamics, and government fiscal measures closely. The government's commitment to stabilizing the business environment will be pivotal for economic recovery. Stakeholders are encouraged to stay informed and agile in navigating the evolving economic landscape.

In Conclusion: As highlighted by the Q3'2023 bank performance and economic indicators, Kenya's financial landscape demands a nuanced understanding. Challenges and opportunities coexist, requiring a proactive and informed approach. Collaboration and strategic decision-making will be paramount for sustainable growth as we approach the next phase of economic recovery.