By Alistair Gould in Investing — Apr 28, 2024

When it pours...

Heavy rains brought towns & cities in the region to their knees as it was nothing close to usual business over the past few days. Boats were a valid option for navigating Nairobi, while one bank raised rates and the CBK was at a crossroads in an undersubscribed auction.

Here are the main stories that caught our eyes and ears in the week:

Kenya set to become Africa's 4th largest economy
Big debt maturities put pressure on Treasury
CBK balances rates in undersubscribed auction

"Nothing about the shiny shilling?", you ask? Read on to see where that one floated off to.

SPOTLIGHT

Different boats for different folks

Generated with AI - Microsoft Copilot - Get the prompt here

CBK dictates the direction of interest rates primarily through the CBR (see this edition), a tool used to influence the demand and supply of credit. However, CBK last year allowed banks to implement 'risk-based loan pricing' which lets banks charge different rates to customers based on their risk profile.

What happened?

Last week, NCBA Bank issued a notice to customers that they were increasing their base lending rates on any floating KES & USD loans.

Between the lines

Kenya’s biggest banks collectively incurred a record jump in bad loans last year amid concerns over rising defaults due to an economic slowdown. The rising defaults could force banks to cut back on lending to the productive sectors of the economy. Higher risk implies higher rates.

Should you care?

As a borrower, this means higher loan repayment costs. It is likely that other banks will follow suit soon enough. As an investor, this is good for the bank's interest income but loan quality may be negatively impacted.

💡

Risk-based lending is a lending practice where the interest rate and terms offered to a borrower are determined based on their creditworthiness and the level of risk they pose to the lender.

HEADLINES

The week's big stories

Kenya set to become Africa's 4th largest economy. Kenya will overtake Angola to become the fourth largest economy in sub-Saharan Africa this year, behind South Africa, Nigeria, and Ethiopia, a forecast by the International Monetary Fund (IMF) shows. This is despite projected slow down in growth to 5% in 2024 from 5.3% in 2023.
Big debt maturities put pressure on Treasury. The Treasury needs to raise Sh1.58 trn in revenues in three months to the end of June to fully fund its budget of Sh4.28 trn for the current fiscal year. Difficulties seen recently in domestic tax revenue mobilization could hurt prospects of fully funding the 2023/2024 budget.
CBK balances rates in undersubscribed auction. The Central Bank of Kenya (CBK) Weekly Treasury Bills auction underperformed for the first time in 8 months. CBK accepted bids worth KSh 23.3 billion against an advertised amount of KSh 24 billion for the 91-day, 182-day and 364-day T-bills at 15.82%, 16.46% and 16.49% respectively.

INSIGHT

Explained by AI (and I): Interest Rates, Exchange & Inflation

Generated with AI - Microsoft Copilot - Get the prompt here

We previously learned how central banks play a crucial role in shaping exchange rate movements through their monetary policy decisions. This is mainly transmitted through interest rates. Interest rates in turn have a bearing on exchange rates and inflation. Here's how the three relate with each other:

Interest Rates and Inflation

Central banks adjust interest rates to manage inflation, aiming to keep stable. When central banks raise interest rates, borrowing becomes more expensive, leading to reduced consumer spending and investment, which can help cool down inflationary pressures. Conversely, when central banks lower interest rates, borrowing becomes cheaper, stimulating spending and investment, which can boost economic growth but may also lead to higher inflation if not carefully managed.

Interest Rates and Exchange Rates

When a country's central bank raises interest rates, it typically leads to higher returns on savings and investments denominated in that country's currency. Higher interest rates attract foreign investors seeking better returns on their investments, increasing demand for the currency. This movement of capital affects exchange rates, as increased demand for a country's currency drives up its value relative to other currencies.

Inflation and Exchange Rates

Inflation erodes the purchasing power of a currency over time, leading to a decrease in its value relative to other currencies. Higher inflation rates tend to result in depreciating currencies, as investors demand higher returns to compensate for the loss of purchasing power. Inflation differentials between countries can influence exchange rates, with currencies of countries experiencing lower inflation typically appreciating relative to those with higher inflation.

"Risk comes from not knowing what you are doing." -Warren Buffet

This may feel like a lot of information, but understanding these interconnections, even at a basic level, is essential for making informed decisions and managing risk effectively. This will make you a better investor.

ICYMI

Quick takes

TPS Eastern Africa doubles profits. TPSEA, operator or Serena Hotels, registered a record net profit of KSh 870.9 million for the financial year ended December 2023. The group attributed improved performance to a strong recovery in the travel, conference, and leisure segments of the tourism business in Kenya and East Africa. Great results, no dividend.
No more appreciation for the KES? The Kenya Shilling appreciation against the US Dollar appears to have finally hit the floor and could be in reverse gear. This has been attributed to a stronger US dollar due to tensions in the Middle East, and reluctance by the US Federal Reserve Bank to cut interest rates. If you read the explainer above, this should be easier to understand.

One liners

Nairobi home prices dip as costly loans hit demand [Business Daily]
Nation Media Group Sinks into KSh 205.7 Mn Loss [Kenyan Wall Street]
Multi-agency group to regulate crypto industry [Business Daily]
Strong shilling slashes Kenya’s external debt by Sh1.2tr, says Thugge [People Daily]

REGION

What in the East Africa?

[UG] Gold reclaims spot as Uganda's largest export commodity: In the 12 months to February, gold has re-emerged as the largest export commodity, contributing 37 percent of export revenues. [Link]

[UG] Uganda's 1.1 Trillion Shilling Supplementary Budget Raises Eyebrows: The Ugandan government's latest supplementary budget request of 1.1 trillion shillings (approximately $318 million) has sparked controversy among Members of Parliament (MPs) who question both the timing and the allocation of funds. [Link]

[TZ] CRDB requests additional stake in 'Co-op' bank: CRDB Bank, one of the largest lenders in the country, has launched a formal request to the government to buy additional shares of the proposed national cooperative bank. [Link]

[TZ] Tanzania pushes for wider internet access, tax reforms: The government is working out initiatives aimed at bolstering local investments and implementing tax reforms to enhance affordability and access to smart devices and increase internet usage across the nation. [Link]

[RW] Rwanda records 39pc rise in new bank borrowers: Rwanda recorded a 39 percent growth in the number of customers taking up loans with commercial banks in 12 months to June 30, 2023, supported by fresh measures by the central bank to accelerate financial inclusion in an economy weighed down by the informal and traditional methods of saving money.[Link]

[ET] Safaricom Ethiopia out to triple network coverage in three years: The company currently operates a network of 2,500 towers, 1,000 of which it leases from the state-owned Ethio telecom, according to Wim Vanhelleputte, CEO of Safaricom Ethiopia. [Link]

CURIOUS

One: I usually try to share shorter content here but made an exception on this one because of the quality of the idea. In this talk, Adam Grant discusses something that we all can get better at - rethinking. I hope you enjoy it as much as I did.

Two: Remember me saying it was hard for people not to think all Kenyans are great runners? Emmanuel Wanyonyi just made it even harder for all of us by breaking another world record at the aptly named 2024 Adizero Road To Records event.

That's it for today. That and the fact that I'm now considering moving to another country as a runner, or a running influencer...at least the Kenyan in me is. I know I may have to rethink this...but while I busy myself with that, I wish you all the best with setting any records (or personal bests) in the week ahead. Have the best one possible.

Yours truly.

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