Kenya

Country Summary

Macroeconomic performance: Real GDP grew an estimated 5.9% in 2018, from 4.9% in 2017, supported by good weather, eased political uncertainties, improved business confidence, and strong private consumption. On the supply side, serv- ices accounted for 52.5% of the growth, agriculture for 23.7%, and industry for 23.8%. On the demand side, private consumption was the key driver of growth. The public debt–to-GDP ratio increased considerably over the past five years to 57% at the end of June 2018. Half of public debt is external. The share of loans from non- concessional sources has increased, partly because Kenya issued a $2 billion Eurobond in February 2018. An October 2018 International Monetary Fund debt sustainability analysis elevated the country’s risk of debt stress to moderate.

A tighter fiscal stance reduced the fiscal deficit to an estimated 6.7% of GDP in 2018, with the share of government spending in GDP falling to 23.9% from 28.0% in 2017. To stimulate growth, the Central Bank of Kenya reduced the interest rate to 9% in July 2018 from 9.5% in May. Nonetheless, a law capping interest rates discourages savings, reduces credit access to the private sector (especially small and medium enterprises), and impedes banking sector competition, particularly by reducing smaller banks’ profitability. The exchange rate was more stable in 2018 than in 2017. The current account deficit narrowed to an estimated 5.8% of GDP in 2018 from 6.7% in 2017, thanks to an improved trade balance as a result of increased Kenyan manufacturing exports. Kenya’s gross official reserves reached $8.5 bil- lion (5.6 months of imports) in September 2018—a 7% increase from a year before.

Tailwinds and headwinds: Real GDP is projected to grow by 6.0% in 2019 and 6.1% in 2020. Domestically, improved business con- fidence and continued macroeconomic stability will 

contribute to growth. Externally, tourism and the strengthening global economy will contribute.

The government plans to continue fiscal consoli- dation to restrain the rising deficit and stabilize public debt by enhancing revenue, rationalizing expenditures through zero base budgeting, and reducing the cost of debt by diversifying funding sources. Inflation is projected to be 5.5% in 2019 and 5.4% in 2020 due to prudent monetary policy. Kenya also benefits from renewed political momentum (including the 2010 con- stitution and devolution), a strategic geographic location with sea access, opportunities for private investors, and the discovery of oil, gas, and coal along with continued exploration for other minerals.

Among downside risks are possible difficulties in making fiscal consolidation friendly to growth and in finding affordable finance for the budget deficit caused by tightening global markets. Boosting domes- tic resource mobilization and enhancing govern- ment spending efficiency are critical to restrain public borrowing.

Kenya continues to face the challenges of inade- quate infrastructure, high income inequality, and high poverty exacerbated by high unemployment, which varies across locations and groups (such as young people). Kenya is exposed to risks related to external shocks, climate change, and security. The population in extreme poverty (living on less than $1.90 a day) declined from 46% in 2006 to 36% in 2016. But the tra- jectory is inadequate to eradicate extreme poverty by 2030.

Kenya’s Big Four (B4) economic plan, introduced in 2017, focuses on manufacturing, affordable housing, universal health coverage, and food and nutrition secu- rity. It envisages enhancing structural transformation, addressing deep-seated social and economic chal- lenges, and accelerating economic growth to at least 7% a year. By implementing the B4 strategy, Kenya hopes to reduce poverty rapidly and create decent jobs.

Source: African Economic Outlook 2019

Fixed Income

Summary

  • 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.

Issuance strategy 

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: 

  1. Address the problem of bond fragmentation. 
  2. Develop appropriate maturity and volume to boost liquidity in the secondary market.
  3. Develop appropriate size and frequency of benchmark issues. 
  4. Lengthen the maturity profile of domestic debt.
  5. 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. 

Benchmark issues 

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 

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. 

Interpolation methods 

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.

Display platform 

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.

Further details on the investment process for T-bills are available here and for T-bonds, click here

Settlement Cycle

Settlement ranges from T+3 to T+0.

Taxation

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. 

Market restrictions

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.

Capital controls 

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).

Profit repatriation

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.

Credit rating

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).

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