Kenya Interest Rates Environment - November 2015

7/24/2019 Kenya Interest Rates Environment - November 2015

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Interest Rates

Kenyas Interest Rate Environment

1. Q. Describe the current interest rate environment?

A. The economy is currently going through a high interest rate

environment as evident in the rapid increase in the Treasury bill

rates and cost of borrowing.

2. Q. What is the cause of the current high interest rate

environment?

A. A number of factors have led to the recent increase in

interest rates.

Firstly, for the fiscal year 2015/16, the government is expectingto borrow KES 219 billion from the local market through Treasury

bonds and Treasury bills. The government is carrying out mega

infrastructure projects such as the standard gauge railway and

as a result the government has stepped up its borrowing.

Secondly, In June 2015 the Monetary Policy Committee (MPC)raised the Central Bank Rate (CBR) from 8.5% to 11.0% and

further raised it to 11.5% in July 2015 in order to support the

Kenya shilling which had depreciated against the USD by 7%

from 92.7 in April 2015 to 99.25 in July 2015.

3. Q. What is the Monetary Policy committee (MPC) and the

Central Bank Rate (CBR)?

A. The MPC is a committee within the Central Bank that is

charged with setting the interest rates depending on the currenteconomic condition. The committee meets on a monthly basis

or as deemed necessary.

The CBR is the rate at which the Central Bank lends to

Commercial Banks.

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4. Q. How does the Central Bank use the CBR to support

the Kenya Shilling from depreciating?

A. The CBR supports the shilling as follows.

And the reverse is true, when the shilling stabilizes, Central

Bank reduces the CBR rate consequently reducing the interest

rates on government securities therefore Commercial Banksinvest less in Treasury bills and bonds.

Also high Treasury bill and bond rates attracts foreign capital

which in-turn strengthens the currency.

5. Q. How does all this affect consumer borrowing?

A. Increase in CBR affects consumer borrowing as follows:

6. Q. Who are the winners and losers in a high interest rate

environment?

Winners: Investors with an appetite for debt instruments,

importers who benefit as a result of a stronger currency &Money Market Funds

Losers:Mortgage holders & borrowers with floating interest

rates, credit card holders, businesses & individuals who use

bank overdraft facilities & corporate debt issuers- who have to

borrow from the market.

7. Q. What are the available investment opportunities?

A. Government securities (Treasury bills and bonds): Currently

the 91, 182 and 364 day T-bill are at 9.7%, 12.3% & 13.6

respectively.

Money Market Funds (MMF): Money market funds portfolio is

comprised of short term (less than 1 year) high quality liquid

debt instruments. Due to their liquid & short term nature, these

funds provide a viable investment opportunity in times of high

interest rates. Currently the highest MMF in Kenya is giving a

return of 14-18%.

Stock Market: There is an inverse relationship between interest

rates and the stock market performance. During a high interestrate environment, when stock prices are declining, it is the

perfect time to take a long term strategy on the stock market by

taking advantage of the weakening stock prices.

8. Q. What is the interest rate outlook?

A. We expect interest rates to remain at the current levels

(T-bill rates above 10%, CBR at 11.50%) through the remainder

of the year. However we expect rates to rise in the first quarter

of 2015.

This is because the Kenya Shilling faces external pressures

in particular uncertainty around the timing of increase in US

interest rates. A rise in US interest rates will spur capital flight

from emerging and frontier economies (Kenya included) by

US companies and this will put more pressure on the Kenya

Shilling.

Also fundaments support a high interest rate environment. This

is due to the current fiscal deficit which government forecasts

at 8.7% and with Kenya Revenue Authority (KRA) revenuecollection falling below target- current shortfall so far this

financial year amounts to KES 28 billion.


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Author: Joseph Kivuva Makau

Title: Fixed Income Investment Analyst

Contact: 0725 743 175

Email: [email protected]

AlphaAfricaAssetManagers

@AlphaAfrica

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Alpha Africa Asset Managers

P.O. Box 34530 - 00100, Nairobi, Kenya
mailto:[email protected]:[email protected]

Documents

Kenya Interest Rates Environment - November 2015