On Monday, the Central Bank of Kenya (CBK’s) monetary policy committee (MPC) voted to leave the benchmark interest rate unchanged at 10 per cent. The neutral stance on policy was good news to the bulls who have in the past five months staged a mighty comeback.
But wanting to get a sense of their future expectation and its implication on the markets, I ended up dividing the statement into three buckets: the good, the bad and the verdict.
The Good: Inflation is headed the right way. Month-on-month overall inflation decelerated to 9.2 per cent in June after peaking at 11.7 per cent in May. Non-food-non-fuel (NFNF) inflation is still below 5 per cent. What’s more, first-quarter growth stands at a respectable 4.7 per cent. CBK’s foreign exchange reserves, now at Sh780 billion (5.2 months of import cover), are near record highs. And just in case things get awry, a Sh150 billion stand-by credit facility from the IMF is there to keep things stable.
The Bad: Weak credit growth to the private sector falls further to 2.1 per cent over the last 12 months ending May 2017. Ratio of gross non-performing loans to gross loans has jumped to 9.9 per cent, up from 9.6 per cent recorded in the preceding month of May.
Twelve-month current deficit now stands at 6.2 per cent of GDP, up from 6 per cent recorded in March. Moreover, views from CBK’s Private Sector Market Perception Survey suggest that business confidence sentiments are rather mixed. Forthcoming elections are also a big concern.
The verdict: the MPC is likely to be in less of a rush to raise rates, and certainly not at any time in the foreseeable future.
Why? The CBK runs the risk of damaging the economy were it to hike – especially considering the “bad” list of factors. More to the point, the damage to the economy could be substantial, which is usually a mistake worth avoiding. Further dimming any prospects of a rate hike is the state of the deteriorating business conditions. The latest CFC Stanbic’s Kenya Purchasing Managers Index (PMI) shows a record contraction in private sector activity (the index fell to 47.3 points last month—the lowest reading since the series began). Besides, the CBK slashed its own inflation expectations over the next few months, opening up room for a rate cut in the coming months.
So, which Mr Market? It’s simple, a potentially dovish MPC is usually a gift for the equity markets. Key to this point is the expected restructuring and loan repayments, a scenario which potentially should see the repairing of many of the “broken” balance sheets.
So, looking at the trend since February - the market is up 14 per cent year-to-date, it seems investors are instinctively following this view and betting on better days ahead. With the key rate on hold, there is no reason why the bull shouldn’t keep charging ahead. As the CBK possibly chooses a more subdued stance, bullish investors are likely to respond with their Shillings and sense.
Mr Mwanyasi is MD, Canaan Capital Limited