Strategy Note /

IMF review consistent with our caution

    Christopher Dielmann CFA
    Christopher Dielmann CFA

    Director, Macroeconomic & Sovereign Research

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    24 October 2018
    Published by
    • The latest IMF Staff Report highlights continued economic challenges, but notes improvements following the underperformance in 2017.
    • Sovereign USD debt: The IMF’s raising of its “Risk of Debt Distress” rating to “moderate” from “low” is consistent with our cautious view. We reiterate our Hold recommendation on all Kenya eurodollar bonds.
    • Equities: The Nairobi All Share index has de-rated (trailing PB is on a c15% discount to the last 5y median) to reflect the risks to growth and the FX rate. But we see more opportunity in Egypt (Africa) and Pakistan (FEM).

    In general, IMF staff remain relatively optimistic about the country’s GDP growth prospects returning to more normalised rates, after the severe drought and two disruptive presidential elections in 2017. They note: “while domestic shocks reduced the pace of expansion in 2017, the economy is recovering and medium‑term growth prospects remain favourable”. The recently released WEO continues to forecast high levels of growth, predicting a rate of over 6% each year in 2019-23, stable inflation (5.6% in 2019, falling to 5% thereafter) and a steadily improving current account balance. However, deterioration versus the April WEO and the IMF’s raising of the risk of external debt distress to “moderate” from “low” are causes for concern.

    The present value of public and publicly guaranteed debt/GDP remains well below the threshold of 50% (this threshold is based on the country’s strong policy performance, as measured by the World Bank’s CPIA score), but the IMF’s debt sustainability analysis showed breaches in the shock scenarios of three of the five indicators: The present value of the debt/exports ratio, the debt service/exports ratio and the debt service/revenue ratio (see Appendix for details).

    The report also noted that, while the country’s “external position is broadly stable…there is also room for greater exchange rate flexibility.” As we have written in the past, despite our views that we are unlikely to see any deprecative movement in shilling in the short run, in order to maintain long-run competitiveness, it will be necessary for the shilling to trade closer to its REER parity rate. Based on our estimates, the shilling is c45% overvalued and partly to blame for the continued widening of Kenya’s trade imbalance.