Economic performance and outlook: Real GDP growth was a robust 5.8% in 2016, driven mainly by services (which accounted for 66% of growth) and industry (which accounted for 19% of growth). Agriculture accounted for 15% of growth, the lowest in recent years. Growth in services was driven by real estate (which grew 12%) and transport and storage (which grew 10%), and growth in industry was driven by construction (which grew 8.2%) and manufacturing (which grew 6.2%). Real GDP growth declined to an estimated 5% in 2017, due to subdued credit growth caused by caps on commercial banks’ lending rates, drought, and the prolonged political impasse over the presidential election. The half-year estimates show that the economy remained fairly resilient, growing 4.8%. Services accounted for 82% of that growth, and industry accounted for 17%; agriculture’s poor performance continued. The economy is projected to rebound to GDP growth of 5.6% in 2018 and 6.2% in 2019.
Macroeconomic evolution: Overall macroeconomic fundamentals were stable in 2016. Authorities pursued prudent monetary, fiscal, and exchange rate policies. The central bank retained the policy rate at 10% to anchor inflation at the single-digit level (6.3%). Fiscal policy was expansionary and focused on financing infrastructure megaprojects. Higher government spending, coupled with weaker revenue mobilization, increased the budget deficit to 8% and the public debt–toGDP ratio to 54%. The December 2016 International Monetary Fund (IMF)–World Bank Debt Sustainability Analysis put the country at low risk of debt stress. The balance of payments deficit improved slightly to 0.6% of GDP for the year ending June 2017, from 1.7% for the year ending June 2016, on the back of improved current, capital, and financial account balances. This progress increased foreign exchange reserves 0.8%, to a new high of $7.8 billion at end-June 2016. The increase in foreign reserves, as well as the precautionary arrangement with the IMF amounting to $1.5 billion, contributed to exchange rate stability. Economic performance in 2017 was mixed. The drought and the presidential election crisis likely affected macroeconomic performance. Inflation increased to an estimated 8.8%; the budget deficit remained high, at an estimated 7.8% of GDP; and the current account deficit increased to an 5.9% of GDP. The economy is projected to be stronger from 2018 onward.
Tailwinds: Kenya’s economy remains resilient due to its diversity; services contributed the highest proportion to GDP growth. This is expected to continue as the country remains the leading regional hub for information and communication technology, financial, and transportation services. Recent investment in rail and road and planned investment in a second runway at Jomo Kenyatta International Airport are potential growth drivers. Macroeconomic stability continues, with most fundamentals projected to remain healthy. The business-enabling environment has improved as well; Kenya moved up 12 places to a ranking of 80 in the World Bank’s 2018 Doing Business report.
Headwinds: Continued drought in 2016/17 hindered agricultural productivity and resulted in high inflation for food prices. Prolonged political activities and the presidential election impasse hurt private-sector activity. Although not conclusively assessed, interest rate caps have reportedly constrained credit expansion, leading to reduced private sector investment. Continued high public consumption expenditure keeps the budget deficit at close to 10% of GDP, while the expected maturity of public debt could lead to debt distress.
- The government securities yield curve extended to 30 years with five benchmark points along the curve (2-5=10-15 and 20 years).
- The longest bond tenor in Kenya is currently 30 years (currently 25 years remaining to maturity) which is a Saving Development Bond.
- The strategic target is to maintain Treasury bonds at 70% of domestic debt vs. 30% for Treasury bills.
- Kenya is 7th in the ABMDI 2017 Ranking Report.
In May 2001, the Government restructured the domestic debt portfolio from a ratio of 30:70 to the current 70:30 for Treasury bonds and Treasury bills respectively. According to the 2015 Medium-Term Debt Management Strategy (MTDS), the projected debt stock for 2015-16 is 46.8% of GDP (of this percentage, 48.7% is external debt and 51.3% domestic debt). As of June 30th, 2014, the total domestic debt was valued at KES 1,284.3 billion or 25.4% of GDP.
In 2007, the Central Bank introduced the Benchmark bond program through the reopening of Treasury bonds. This program was intended to:
- Address the problem of bond fragmentation.
- Develop appropriate maturity and volume to boost liquidity in the secondary market.
- Develop appropriate size and frequency of benchmark issues.
- Lengthen the maturity profile of domestic debt.
- Firm up Kenya’s sovereign yield curve.
All government securities are sold by the multiple-price auction method.
In 2008, Kenya issued the first long-dated 20-year bond. This was followed by a 25-year security in 2010 and a 30-year Savings Development Bond in 2011.
As of 2007, the Government of Kenya began to outline the appropriate maturity distribution. It created benchmarks with large issue amounts. There are five benchmark maturities for government securities in local currency (KES): 2-5-10-15 and 20 years.
Yield curve calculation models
Building a benchmark yield curve is a consideration for issuance as it provides a pricing reference for other financial market products. This is supported by the issuance of benchmark bonds by auction, or by tap sales and reopening.
The yield curve is generated from actual traded yields of benchmark bonds (excluding trades on infrastructure bonds, sell/buy-back transactions and benchmark bonds lower than USD 500,000 or KES 50M per transaction). However, for the tenors where no actual trading took place, the indicative yields obtained from bond market traders are used. The estimation for the yield curve is simple trend with logarithmic fit. The calculation method used for Kenya’s benchmark curve is the Nelson-Siegel method.
Where there is no traded yield for a certain point along the yield curve, linear interpolation is used to generate an appropriate yield.
Yield curve managed by
Kenya’s yield curve is generated by the Nairobi Securities Exchange on a weekly basis. However, different market players also generate independent yield curves.
The yield curve can also be accessed from the Nairobi Securities Exchange website and the Bloomberg platform.
Challenges in building an efficient yield curve
- Market fragmentation: implementation of the benchmark bond program is at an advanced stage to reduce the number of small illiquid outstanding bonds.
- Narrow investor base: reforms are needed to diversify the investor base .
- Lack of transparency in pricing: there are reforms to improve price discovery and promote a firm two-way quote system.
Guide to Buying Bonds
Procedures for market participation
To participate in the primary market, investors must first open an account (free of charge) with the Central Depository & Settlement Corporation Limited (CDSC). Details on the opening of a CDS account are available here.
Investors must then submit an application form to the Central Bank or to one of its branches; forms for T-bills and T-bonds are available on the Central Bank website.
Investors may place their application either as competitive or non-competitive (average) bids. The minimum amount required to invest in a Treasury bond is KES 50,000 and to invest in a Treasury bill is KES 100,000; the maximum an investor can invest per CDS account and tenure is KES 20 million.
Settlement ranges from T+3 to T+0.
Bonds with maturities ranging between 2 and 9 years bear a withholding tax rate of 15%. Bonds with maturities of 10 years or more bear a withholding tax rate of 10%. There is no capital gains tax.
Kenya has signed double taxation agreements with the following countries: Zambia, Norway, Denmark, Sweden, U.K, Germany, Canada and India.
Openness to International investors
The Kenya Investment Authority, KenInvest, is the Authority in charge of developing local and foreign investment in the country. Foreign participation in the capital markets is regulated by the Capital Markets (Foreign Investors) Regulations, 2002. This regulation currently addresses only equity investments.
Kenya is making efforts to harmonize regional tax regimes with Uganda and Tanzania. The East Africa Community (EAC) is also looking at removing any barriers and at creating a common stock exchange.
The Exchange Control Act was abolished in 1995 allowing free remittance of capital, profits and income after tax. Investors are free to repatriate the entirety of their profits, after they have fulfilled their tax duties with respect to the Kenyan Revenue Authority (KRA).
There are no restrictions on FX repatriation or profit repatriation. A Certificate of Approved Enterprise permits foreign investors to repatriate initial capital investments and remit future dividends.
In January 2015, Fitch affirms B+ rating on the long-term foreign currency issues (and BB- on local curreny issuances). S&P also affirmed Kenya rating at B+ on April 2015.
List of Primary Dealers
The Capital Markets Authority (CMA) has not disclosed yet the names of the financial institutions that will operate as Primary Dealers (PDs).
Documents & Resources
Documents - Ministry of Finance
Documents - Debt Management Office
- Kenya_Medium-term_Debt_Strategy-2015.pdf (0.90 MB)
Documents - Central Bank
- CB_Kenya-AR_2014.pdf (3.85 MB)
- Kenya_bking_sectr_improved-Q2_2015.pdf (124 kB)
- Challenges_of_dvpg_bond_mkt_in_Kenya.pdf (17.57 kB)
Documents - Stock Exchange
- How_to_list_on_the_NSE.pdf (116 kB)
- NSE_Demutualizes-_July_2014.pdf (296 kB)
- Day_trading_Kenyan_bonds-Aug_2014.pdf (272 kB)
- Kenya-OTC_Automation_T-bills_Trading-June_2014.pdf (88 kB)
- New_Kenyan_bond_trading_sys-Sep_2014.pdf (195 kB)
Documents - Capital Market Regulator
- Capital Markets Authority of Kenya brochure (1.20 MB)
- Kenya_CMA_Strategic_Plan_2013-2017.pdf (15.37 MB)
- Kenya_CMA-Master_Plan-2014-23.pdf (1.83 MB)
- Kenya-Capital_Markets_Act_2002.pdf (23 kB)
- Capital_Markets_brochure-Kenya.pdf (1.20 MB)
- Press_Release_-_Kenya_1st_Eurobond_-_June_2014.pdf (267 kB)
Documents - Other sources
- Finance Act - Kenya (2012) (1.05 MB)