Kenyan corporates have been struggling with scarce dollars, disrupted supplies in the global market due to the Covid-19 pandemic, the war in Ukraine and negative sentiment in the run-up to the August elections.
Marc Merlino, Citi’s Global Head of the Global Subsidiaries Group, was in town to meet clients as firms navigate these turbulent times. Business Daily sat with the banker to understand how they are navigating the challenges.
From the conversation you're having with the multinational clients you bank, what are some of their biggest concerns?
Probably the primary area of concern is the economy. We have had longer-term conversations, strategic discussions with long-term strategic investors looking to build production facilities and employ people and bring multinational expertise to ESG.
The conversations have also pivoted to happiness around the results of the election. And then not so much in terms of who won, but in terms of the peaceful transition of power here. Our multinational clients are always happy when there are stable, predictable, you know, transitions in power.
What about concerns about accessing dollars?
If you look at what is happening, with the Federal Reserve raising interest rates to control historically high US inflation. That action has global implications on emerging market currencies. You know, it is not the Kenyan shilling alone that has maybe lost six percent this year that is under pressure, it is all currencies.
But it's not just the Fed that raised rates. The Bank of England, and European Central Bank are also doing coordinated monetary policy actions to try and bring down inflation across the board. So yes, there has been what I would call an imbalance in terms of FX demand and supply in the domestic market.
How, do you think, will this imbalance be resolved?
There was elevated demand earlier in the year because of the dividend season. A lot of corporates did not pay dividends during Covid, then they paid in 2022 as a catch-up. So there was significant demand, and we came into an economy that opened up significantly in 2022. Seven and a half percent in 2021 growth means a lot of industries opened up so there was a demand for dollars from manufacturers, oil importers, consumers, capital goods importers, etc.
Kenya imports a lot of consumer goods as well. Lastly, I think this phenomenon was around an abundance of caution going into the election, where you have people holding onto dollars, not because they have no faith in the shilling, but just because of the uncertainty of the electoral period.
But I want to put it to you that the long-term prospects of the shilling are positive, it will stabilise. Supply-demand will normalise and that is a function of time. So a Citi perspective and a banking industry perspective, we do believe that this is just a matter of time before that issue resolves itself.
Citi is one of the banks that have been arrangers for Kenya’s sovereign debt and we saw the cancellation at the beginning of the year. What sort of conversations would you be having with the government in terms of how best to access commercial markets?
We have a very deep relationship with the government of Kenya, and of course, when called upon to assist in the fundraising programme, externally, we will be responsive to that call.
But I think in terms of strategy, in terms of direction, I would refer that question to the Treasury because that's the authority that will make that decision. Of course, we have our views, and Kenya is a well-regarded and well-known issuer offshore. Having issued in excess of four Euro bonds, Kenya is known in the international market.
So there's nothing new about Kenya going back to the market once it settles down. We certainly will see Kenya re-approaching the market.
What is the general outlook for sovereign markets?
Most African sovereigns are single B issuers and what we call frontier markets. Frontier markets have seen their yields elevated in the last six to 12 months. Because of that elevated pricing, a lot of the frontier markets have stayed away from issuing Eurobonds so this is not a Kenya phenomenon.
Kenya is not locked out of the market as a country because of something specific that it has done. It's a broader frontier market phenomenon and sell-off. So I think what you should look out for is what is going to happen on the global stage. Kenya’s long-term fundamentals and prospects are still attractive to the long-term investor.
Do you see the problems around inflation, the rate environment in the big markets resolving soon?
Markets function based on the basic valuation methodology and a market is a discounted present value. But the present value requires you to have a view of the future, and then you discount that based on what a rate is.
The problem is when the view of the future becomes cloudy or uncertain, it becomes very difficult for all the market players.
In terms of portfolio and FDI flows, how do you see this space evolving for Kenya?
Kenya's prospects remain excellent, we don't see the long-term customers changing their view because of this temporary dislocation. When we had the election concluded and President William Ruto sworn in, we had flows come back into the equity market, which rallied.
We have seen financial flows exit, but we have also seen corporate flows coming back into the market for long-term investors. On the corporate side, a lot more of the investments that have been delayed have started coming back to the market. Why do I know this? Because we've had a good year as Citi-Kenya as client activity has picked up. When our clients do well, our business does well. And that alone is a barometer, the fact that our customers are starting to come back and get on with business.
Who are some of your typical clients here?
We are positioned to focus on three sets of clients. The historical western multinationals that have been here for decades, the emerging champions that are coming out of East Africa, and then the digital champions that are largely being born have been born in the last 10 years.
What is happening now is we are now seeing digital champions. And these are companies that are broadly digital in their approach to things. These are companies that have cross-border ambitions immediately, and there are several great examples.
What happens, in times of greater uncertainty is, we have a lot more conversations with our clients. They are reaching out to us not to get a quote on an FX trade or to talk about a loan or a product. But they want our advice and perspective because things are changing.
