In brief
- As expected, the Central Bank of Kenya maintained the benchmark policy rate at 9.5% in its May 2023 MPC meeting. Amidst an expectation of inflation trending higher on the back of removal of fuel subsidies, the Committee was bullish on the positive offsetting factors.
- With private sector sentiment somewhat going off the boil in 1Q2023, the Committee baked in a weaker 5.1% growth in the quarter (1Q2022: 6.3%). The Composite Purchasing Managers Index (PMI) averaged 49.3 points in the first quarter of 2023, signaling some contraction in private sector activity.
- All in all, the Committee’s tone was ambivalent on the growth outlook. Two Committee surveys ahead of its policy meeting pointed to some optimistic outlook but this sentiment was moderated by “concerns about the proposed increase in taxation, rise in electricity and fuel prices, and the weakening of KES”.
- Amidst the continued weakness of KES, we applaud the impact of restoration of FX interbank market that has resulted in a narrowing of quoted FX spreads between the official and retail rates. Nevertheless, we expect that FX pressure will rear its ugly head in August – September 2023 as the authorities honour the USD-settlement leg of the recently implemented government-to-government oil importation deal.
- Notwithstanding the expected external financing from multilateral institutions, the domestic financing outturn has not been satisfactory. Domestic borrowing outturn is at KES 251.4bn; 59.1% of the target with one month remaining in the current fiscal year.
- There is a Pavlovian expectation embedded following the twin TAP Sales that accompanied this month’s 3-year primary bond sale. We think the authorities will not follow through with a TAP Sale(s) in next month’s primary bond sale. We expect outsized appetite for the 7-year infrastructure bond that the authorities will mop up.
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