Kenya Macro Update: fresh IMF funding and a changing global environment

With continued Shilling consolidation since our last report (hovering around 129), a different (and not entirely popular) approach to taxation from the KRA, fresh funding from the IMF and a need to change strategy and keep up to date with a disrupted foreign political landscape, Kenya’s future outlook is an improvement from last year, yet may not hold stability for long.

At a Glance

• Continued Shilling consolidation since our last report (hovering around 129).

• Ruto targets single-digit interest rates whilst the IMF advises to hold firm.

• Tax is coming back in different forms, and with a different approach from the KRA.

• The data remains generally positive but despite this public sentiment is negative.

• Latest on the $606m fresh funding from the IMF, relationship re-strengthening. 

• Foreign developments, from US, India and the UAE, keeping Kenya FDI diverse but creating a juggling act.

Market Stability Impacted by Taxation and a New US President

The last couple of months have marked a period of apparent stability in the market, however more is going on than meets the eye. The Central Bank of Kenya (CBK) has been overtly engaging in the currency markets in order to maintain the 129 level, making their presence known, which, coupled with peak season levels of agriculture and tourism inflows has been effective to hold things firm in place. A changing macro environment, however, means the cost of artificially holding the level is likely to rise, with Trump championing an isolationist, dollar king policy. Emerging markets in general will expect a risk premium to be applied. 

On the ground in Kenya, ongoing tax-generating efforts are still catching the headlines, as the government looks to work wholesale taxation into the regime despite post-finance bill backlash. These are just a few factors that could move the needle, and draw things out of the currently subdued state. 

Below we look at them in more detail:

Value of the Shilling

The Shilling has been trading in a tight range over the past few months, with the majority of banks pricing a standard 50 cent bid offer spread, and showing a willingness to even take trades at cost to drive volumes and encourage engagement. Traders have even quoted the Shilling as a pegged currency of late, due to its recently static nature and the administration showing a willingness to defend the Shilling around the 129 level. CBK governor Thugge stated in a recent press conference that the Central Bank would be on hand to smoothen any price movement. This feels like, in reality, a step back.

The governor stating their willingness to effectively manipulate the market so conspicuously is going to flag up how liberal the market really is, and potentially curb foreign investment. Treasury bill rates have also been increasing - 91-day and 364-day Treasury bill yields at nearly 15% - reflecting tightened liquidity conditions as CBK tries to attract domestic investments and control inflation.

Expensive credit (which we will touch on in more detail), and rate stability, has led to a decreased demand for foreign exchange in Kenya over the past few months, as business activity has slowed. Imports are down by $4bn YoY off the back of this, serving as an anchor to the shillings level. This has given the CBK a perfect opportunity to shore up foreign exchange reserves. Foreign currency reserves are at multi-year high at $9.3bn (4.8 months of import cover), providing the bandwidth for the CBK to consider defending the Shilling in the first place. 

This period,  from an FX perspective, has certainly been to the delight of local corporates, with last year's day-on-day depreciation firmly in the rearview mirror for the time being. Considering how liquid the market is, the 129 level feels like a short-term floor, with upside (to 130 and beyond) a much more present risk. However, pairing T-bill yields with the latest inflation rate print (2.7%), is pointing to some peculiarity, and we may start to see a risk premium being priced in. At the time of writing, we are starting to see the market very slightly lift off the 129 handle.

High Commercial Interest Rates

A sticking point for business activity in Kenya is the relatively expensive credit environment, blamed for quelling domestic investment. Thugge pursued a 75 basis point interest rate cut earlier in the month, bringing the Central Bank Rate down to 12% flat (a larger cut than expected) targeting improved credit conditions and ultimately attempting to stimulate activity via increased borrowing. Given current inflation levels we would expect more cuts on the near horizon, despite the fact the IMF is pushing the government to resist cutting rates in order to maintain palatable real interest rates to foreign investors. 

At a roundtable with business executives, President Ruto, however, was quoted to be envisioning a world of single digit lending rates. Banks are so far unwilling to pass these cuts onto the private / retail sector. Private sector lending has continued to decrease since the benefits are not reaching borrowers, with banks focused on improving the quality of their existing portfolios (a lot of legacy non-performing loans) and exude caution around issuing anew. We expect the administration to force the banks hand here.

Governor Thugge will lead this charge, bringing banks to the table and encouraging a more concerted effort to encourage a business-friendly credit environment. Kenya lowered the benchmark lending rate by 25 basis points in August to 12.75% (bringing it down from the highest seen for over a decade), and the committee has said there was scope to ease policy gradually as inflation had fallen below the midpoint of its target range. The direction of travel is clear, we expect the policy rate to reach 8% by the end of the year. October’s inflation print of 2.7% brought the data within touching distance of the CBK’s 2.5% target, remains testament to Thugge’s work anchoring inflation, and his willingness to introduce tougher policy. 

One to watch into the close of 2024 is planting season, which could be a source of food inflation, although we doubt it will be able to reverse the general trend significantly. Recent inflation and growth data brought positive sentiment from the IMF of late, but there’s more work to be done.

Kenya Receives Another Tranche of IMF Funding

Coming soon to the end of a four-year programme with the IMF, Kenya received another tranche of funding. Initially this was expected at around $850m. In reality, only $606m was approved. 

Earlier in the year the programme stalled, with the IMF stating a lack of clarity regarding the government's objectives. The feeling is that the administration now has control of the currency, shoring up reserves and therefore it can slowly introduce measures without needing to rock the boat. 

The latest bout of funding was necessary, and emphatic, considering the already problematic nature of Kenya’s debt servicing costs. Despite this, a high risk of debt distress remains, struggling to shift the association with the previous decade or so of overzealous borrowing, where funds generally not put to good effect. The current administration wants to separate itself from the past, and present a considered and balanced approach to borrowing. 

Issues ignited when President Ruto was forced to strike down the finance bill earlier in the year. Said bill seems to be creeping back in various forms (seen in the taxation efforts below), showing the IMFs pressure remains. The reintroduction will have to be managed very closely to avoid backlash seen earlier in the year. 

Though not every Kenyan is all in on the IMF, Mbadi (National Treasury Cabinet Secretary) struck out at the IMF at a recent conference in Washington D.C., arguing the state had the apparatus to raise much more by leveraging the aforementioned KRA taxation initiatives to raise something along the lines of 400bn Shillings. A mixture of both investment and taxation would be most sensible to allay pressure on the population. What’s clear is that the IMF saw the public's response to wholesale taxation, and is pushing for a better equilibrium on spending rather than significant reforms this time around.

Stricter taxation laws and enforcement 

There has been a tightening of the screws on individuals and businesses in Kenya of late, in order to balance out the deficit. The latest screw to be tightened was the Kenyan Revenue Authority (KRA), who pushed banks, remittances and telcos to deepen integrations with their system. Enforcing registration of IMEI mobile device numbers to ensure they are being taxed correctly will begin from early 2025 (this includes tourists). The KRA are also targeting mobile money payments - mandating them into virtual electronic tax registers by the end of next year. It’s well known that mobile money has long since created inefficiencies for tax collection agencies, with businesses underreporting tax figures. The primacy of mobile money for retail customers and business has expedited the inevitable crack down (processing 7.95 trillion shillings in transaction volume last year). 

The KRA also intends to tackle data protection laws in order to catch out tax dodgers, accessing large databases to cut through anti-tax business practices. Evasion tactics to get around increasing regulation are becoming and will become even more prevalent, as tax policy tightens, ambitious dodgers are finding ways to skirt around it. Tax expenditure loopholes alone account for 2.95% of GDP in 2022. 

The government also looks set to re-introduce a number of taxes and levies which many would associate with the disastrous finance bill earlier this year. The total deficit in July 2024 stood at $82.5billion~ and rising, leaving the administration with little choice but to leverage fiscal policy to tackle falling numbers. Austerity measures, like a 5% withholding tax on interest earned from infrastructure bonds is one key example. Bonds like this were introduced over a decade ago and are arguably a major success due to their tax free nature. 

The infrastructure bond introduced during Q1 2024 was supplementary to bringing the rampant depreciation of last year to heel. The most recent auction in August attracted bids totaling 126.3bn Shillings with yields clearing 18% - a far cry from lacklustre government bond auctions of late (and not helped by credit rating downgrades). 

More painful for the man on the street is the reintroduction of a VAT hike (currently the standard rate sits at 16%). President Ruto will be hoping for a more muted response, as changes in policy are individually slipped in through the fire escape rather than a welcome party at the front door. The priority for the administration in favour of reducing the deficit and keeping institutions onside above public opinion. The next election is in 2027 and there is a lot to be considered before we look to a popular vote.

Political Discontent in Kenya

An October 2024 poll by Infotrak found that 73% of the public felt the country was heading in the wrong direction. This feeling is particularly driven by the youth, and is something that the current administration will struggle to distance themselves from after the protests seen earlier in the year. Outside of the fallout from tax increases from the failed finance bill, 53% of Kenya’s youth (18-35) are without work, which naturally creates frustration and discontent among this section of the population. Cabinet Secretary for Labour and Social Protection, Dr. Alfred Mutua, recently spoke out at the 𝐄𝐚𝐬𝐭 𝐀𝐟𝐫𝐢𝐜𝐚𝐧 𝐄𝐦𝐩𝐥𝐨𝐲𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐒𝐮𝐦𝐦𝐢t making it clear that “it can no longer be business as usual” regarding initiatives to integrate youth into the workforce, and marking intentions to introduce new stratagems. 

The Re-election of President Trump Raises Concerns

Trump’s reelection will be concerning across the African continent, due to the US president never travelling to Africa in his first term (although the G20 is hosted in South Africa next year), campaigning on blanket 10-20% tariffs, and generally showing a disinterest for non-American problems. More frustrating for President Ruto is the previous effort put into currying favour with the Biden administration with Kenya being designated a major non-NATO ally, and championing peacekeeping missions in Haiti. 

During the previous administration, Trump said the AGOA (the African Growth and Opportunity Act) would not be renewed when it expires in 2025. Furthermore, timing of ongoing agreements becomes problematic. An example is a direct US-Kenya agreement, due to be imminently concluded next month. This enables American investment into a number of sectors like climate resilience (of particular interest to Kenya after a catastrophic El Niño earlier in the year). Trump’s anti-foreign aid rhetoric may row back on some investments included, leaving Ruto with no choice but to double down with his more willing investors to the East. 

Foreign Investment Tactics and a New Loan from the UAE

Ruto’s government has set the target of attracting $10bn of FDI over the next four years through the Strategic plan 2023-2027. This is no mean feat, and we expect the government to pull all immediate levers to attain this goal. The government are engaging the Adani group again, this time with a $736 million power infrastructure project currently being held up in a Kenyan court due to anti-competitive practice in the selection process. This comes after a $1.85 billion concession proposal to manage and upgrade Jomo Kenyatta International Airport (JKIA) for 30 years. The fact Ruto would entertain another bid from Adani after the trouble that the airport deal created suggests confidence in his resilience to public backlash or that there is a rather desperate need to attract investment.

Kenya is closing in on a 194bn~ shilling loan from the UAE at 8.2% interest. This deal would be particularly positive as it marks a diversification of loan sources, shifting emphasis somewhat from the US and IMF. 8.2% scrubs up nicely when compared to the 10.7% offered on the Eurobond issued earlier in the year, though the IMF stated their reservations about continuing to rely on high-interest dollar denominated debt. With Kenya looking at 4.3% budget deficit, and a burning need to diversify from current loan sources, this deal would be a roaring success to prop things up in the short term and would be an important feather in the cap for Ruto, who has championed a globalist mission. If the boat can be stabilized, then the projected 5.3% GDP growth should tide things over nicely in the medium term. After all, these swashbuckling borrowing tactics worked to great effect earlier in the year.