Budget Deficit

The government expected to borrow Kshs 317.7 bn from the domestic market for the 2017/2018 financial year and Kshs 206.0 bn from the foreign market, while KRA has a revenue collection target of Kshs 1.7 tn for the 2017/18 fiscal year

The government has remained behind its domestic borrowing target for the current fiscal year, having currently borrowed Kshs 110.6 bn against a target of Kshs 228.8 bn (assuming a pro-rated borrowing target throughout the financial year of Kshs 410.2 bn budgeted for the full financial year as per the Cabinet-approved 2017 Budget Review and Outlook Paper (BROP))

(i)  The government is currently behind its domestic borrowing target for the 2017/18, having borrowed Kshs 110.6 bn against a target of Kshs 228.8 bn

(ii) The government has borrowed only 43.8% of its foreign borrowing target for the 1^st quarter of the 2017/18 fiscal year as per the Q1’2017/18 Budget Review by the CBK - which translates to 2.7% of the full year target - despite budget estimates having been revised downwards to Kshs 277.3 bn (BROP) from Kshs 462.3 bn in FY’2016/17

(iii)  KRA is expected to face challenges in meeting its overall revenue collection target of Kshs 1.7 tn for the 2017/18 fiscal year due to the economic slowdown brought about by expected subdued corporate earnings growth

During the 1^st quarter of the fiscal year 2017/18, recurrent and development expenditure were at 102.4% and 102.9% absorption respectively, but this was just 20.8% and 14.4% of the full fiscal year targets (less than 25.0%), respectively; attributable to the reduced business activity and political uncertainty experienced during the quarter. However, given KRA is expected to miss its revenue collection target, and the government is significantly behind its borrowing target in the fiscal year 2017/18,  the government may come under pressure

Inflation

To average above the government annual target of between 2.5% - 7.5% in 2017

Inflation declined to 4.5% in the month of December from 5.7% in October, due to improved weather conditions. The 2017 average inflation rate was 8.0%, compared to average  8.7% at the time of the last MPC meeting and 6.3% in 2016

We expect the inflation rate to increase marginally in January from December due to rising food and fuel prices but remain within the government target range,

and average at 6.6% in 2018

Currency

(USD/Kshs)

To remain stable supported by dollar reserves

The shilling has appreciated by 0.5% against the dollar since the last meeting, depreciating by 0.7% in 2017, primarily driven by increased diaspora remittances and Central Bank support. Diaspora remittances however decreased by 5.6% to USD 175.2 mn in November from USD 185.5 mn in October

Kenya’s forex reserves have declined from a high of USD 8.3 bn in May 2017 and USD 7.5 bn as at the last meeting; and currently stand at USD 7.0 bn (equivalent to 4.7 months of import cover). The balance of payment position continues to worsen with the country’s current account deficit expanding to 6.5% of GDP in September from 6.4% in July 2017, on the back of higher global oil prices.  Despite the weak fundamentals, the Central Bank has managed to support the shilling. We expect the currency to remain relatively stable against the dollar, supported by the CBK activity

GDP Growth

GDP growth to come in at between 4.7% - 5.2% in 2017, from 5.8% recorded in 2016

GDP growth for Q3’2017 came in at 4.4%, primarily on account of subdued performance of the financial & insurance sector and the manufacturing sector, bringing the average growth for the first 3 quarters of 2017 to 4.7%. The IMF cut their 2017 GDP growth projection to 5.0% from 5.7% due to slower agriculture growth in the 1^st half of the year, slowing private sector credit growth and political uncertainty experienced during the year

GDP growth in 2017 is expected to come in at 4.5% - 4.8%, having averaged 4.7% for the first three quarters. 2018 GDP growth is expected to come in between 5.3% and 5.5% driven by (i) recovery of the agriculture sector, (ii) continued strong growth in the real estate and tourism sectors, (iii) public infrastructural investments boosting growth in the construction sector, and (iv) growth in the manufacturing sector driven by the government’s initiatives towards supporting the various industries

Private Sector Credit Growth

Private sector credit growth expected to remain at low levels, below the government set annual target of 18.3%

The latest data from CBK indicates that private sector credit growth came in at 2.0% in October 2017, a slight improvement from 1.6% in August, which is below the government set annual  target of 18.3%

Private sector credit growth has remained low, improving slightly to 2.0% in October from 1.7%  in September, and is projected to remain low as the interest rate cap has made it difficult for banks to lend to riskier borrowers

Liquidity

Liquidity expected to remain high given heavy maturities of government securities

The money market has been relatively liquid, with bank’s excess reserves improving to Kshs 7.0 bn as at 5^th January 2018, compared to Kshs 0.9 bn at the start of November, as evidenced from the interbank rate’s decline to 7.1% from 8.8% at the time of the last meeting. However, the CBK has been active in the Repo market in a bid to inject liquidity, having injected Kshs 52.8 bn during the month of December and Kshs 22.8 bn in the first week of January

(i)      Money supply (M3) growth is stable, at 8.7% as at October from 8.3% in July 2017

(ii)     The CBK will remain active in the Repo market in a bid to inject liquidity in the market