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Global economic uncertainty –
implications for Kenya
Razia Khan
Regional Head of Research, Africa
[email protected]
June 2011
Global economy – from recovery to uncertainty
Lifting the legal
ceiling on US debt
issuance – Aug
2nd
Fed ends QE2
– June 30th
Eurozone & the
great policy
fudge
Oil – recent
spate of weak
economic data
Source : FT – ‘Sticky Summer’, Jun 16, 2011
2
Market implications
Risk
Aversion
Global
Economy
USD
• Euro area crisis centre of concerns
• Markets wary of ‘unsustainable policy fudges’
• Risk of contagion, peripheral Europe, ‘high Beta’ assets
• Oil, food & supply-side shocks
• Fed ends QE2 just as BoJ unwinds its earthquake-related liquidity injections
• What political deal is cut in Washington? Will Republicans push for more fiscal
austerity than the market has factored in?
• Announcement of QE2 weakened the USD
• USD traditionally benefits during periods of great uncertainty
3
Africa’s Decade – Frontier
Markets in Focus
‘The 7% Club’ – Africa rising
Africa dominates list of world’s fastest
growing economies
2001 – 2010
Growth seen close to pre-crisis trend
8
2011 – 2015f
6
World
Angola
11.1
China
9.5
4
2
China
10.5
India
8.2
Myanmar
10.3
Ethiopia
8.1
0
Sub Saharan
Africa
-2
1980
Nigeria
8.9
Mozambique
7.7
Ethiopia
8.4
Tanzania
7.2
Kazakhstan
8.2
Vietnam
7.2
Chad
7.9
Congo
7.0
65
Mozambique
7.9
Ghana
7.0
60
1985
1990
7.7
Zambia
6.9
Rwanda
7.6
Nigeria
6.8
Sources : IMF, excludes countries will less than 10mn population
2000
2005
2010F
Source: IMF WEO Oct. 2010
Africa has the demographic advantage –
Working Age Population (% of total)
70
Europe
USA
Latin America
Asia
Cambodia
1995
55
Sub Saharan
Africa
50
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Source : UN population stats
5
Increased consumption - the ‘real’ story behind African growth
8
Investments
Exports
Private consumption
6
Percentage Points
4
2
0
-2
-4
Imports
Real GDP growth
Government consumption
-6
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: IMF REO Oct 2010
6
The Commodity Myth
Higher growth, declining poverty –
mirror images
No clear relationship between terms of
trade and GDP
20
Angola
2,000
0.45
Poverty Rate, $1/Day
% Real GDP growth
16
1,900
12
0.40
1,800
8
The Gambia
Sierra Leone
GDP per Capita (RHS)
0.35
Tanzania
4
Kenya
Uganda
S Africa
Ghana
Zambia
1,700
Nigeria
Mauritius
Botswana
Cameroon
Cote d'Ivoire
0.30
0
0
100
200
300
400
1,600
1970
1980
1990
2000
2010
Terms of trade index (2000=100)
Sources : Standard Chartered Research, IMF REO, Sala-i-Martin, Pinkovskiy
7
Structural trends to support growth
Urbanisation and rising income
Making infrastructure investment more affordable
3,000
60
GDP per
head
50
2,000
1,500
40
Urbanisatio
n rate
30
1,000
20
500
10
0
% of population
USD (constant 2009 prices)
2,500
0
1980
1990
2000
2010
2020
2030
8
New trade corridors
Africa – increased trade with emerging markets
40
35
% of African Exports
30
25
Emerging Economies
20
15
10
5
0
1991
China
1993
1995
1997
1999
2001
2003
2005
2007
2009
Sources: IMF DOTS, Standard Chartered Research
9
China and Africa have a relatively balanced trade l
China imports commodities from a few African countries, but exports capital goods to all of Africa.
China’s imports from Africa
50
50
40
40
30
30
20
20
10
10
-
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Other manufactured goods
Machinery and transport equipment
Chemical products
Fuels
Ores and metals
Food
China’s exports to Africa
60
USD bn
USD bn
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Other manufacturing goods
Textile fibre, yarn, fabric and clothing
Iron and steel
Machinery and transport equipment
Chemical products
Primary commodities (including food and fuels)
Sources: UNCTAD, Standard Chartered Research
10
China and Africa have a relatively balanced trade ll
In aggregate, China-Africa trade is seemingly in balance.
80
China's imports from Africa
60
Trade balance
40
20
0
-20
-40
China's exports to Africa
-60
2000
2001
2002
2003
China's imports from Africa
2004
2005
2006
2007
China's exports to Africa
2008
2009
2010
Trade balance
Sources: China Customs, Standard Chartered Research
11
Market Assessment
Bond yields – anticipating tighter policy
Post-crisis, Frontier FX stabilises
1.8
Change in 3Y yields Sept 10- June11, bps
800
1.7
700
1.6
600
1.5
500
1.4
400
1.3
300
1.2
200
1.1
100
1.0
0
0.9
-100
0.8
Jan-06
-200
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Ghana
Kenya
Nigeria
South
Africa
Uganda
Zambia
12
Inflation a key threat in 2011
West Africa
East Africa
21
35
Ghana
12
20
% y/y
25
9
Nigeria
10
3
5
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Uganda
15
6
0
Mar-06
Kenya
30
15
Tanzania
0
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Southern Africa
18
15
Zambia
Botswana
12
% y/y
% y/y
18
9
6
3
0
Mar-06
South Africa
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Sources: Datastream, Standard Chartered Research
13
Vulnerability to food and fuel price increases
Food as % of total imports
Fuel as % of total imports
South Africa
Zambia
Zambia
Nigeria
Botswana
Angola
Botswana
Uganda
Kenya
Ghana
Ghana
Uganda
Nigeria
Mauritius
Gabon
South Africa
Côte d'Ivoire
Zimbabwe
Kenya
Senegal
Gambia
Tanzania
Sierra Leone
0
5
10
15
20
25
30
35
Sources: FAO , Standard Chartered Research
0
5
10
15
20
25
30
35
Sources: IMF, Standard Chartered Research
14
The Kenyan Outlook
Despite poor rainfall, growth momentum is still robust
Quarterly GDP growth, % y/y
Agriculture, bank credit growth both matter
9
8
7
6
5
4
3
2
1
0
-1
Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10
Sources: KNBS, Standard Chartered Research
16
Understanding Kenyan GDP growth
Kenya’s
political
cycle
• Gradual recovery
from 2008 lows
• Successful
passage of
constitutional
referendum
• Fiscal stimulus
Broad
policy
thrust
• Monetary easing
• Still over 24% of
economy
Agriculture
• Better
performance lifted
2010 GDP
• Infrastructure
spending
Financial
inclusion
• Rapid deposit
mobilisation
• Embrace of new
technology
• Banking sector in
good shape
17
Kenya’s key policy successes during the crisis
Credit to government, private sector, % change y/y
60
Claims on central
government
50
40
30
20
Claims on private sector
10
0
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Sources: IMF, Standard Chartered Research
18
Private sector credit is broadbased, supporting growth
% share of total credit to the private sector
Real estate
Trade
Manufacturing
Business services
Private households
Consumer durables
Agriculture
Building and construction
Mining and quarrying
Finance & insurance
Transport & communications
Other activities
-10
0
10
20
30
40
50
Sources: CBK,Standard Chartered Research
19
In 2011, inflation is the big threat – and is yet to peak
With moderate tightening forecast, real interest rates will remain negative for a while
20%
18%
CPI (y/y)
16%
CPI forecasts (after release of April CPI data.
Prior to latest round of KES weakeness)
14%
12%
CBR forecasts
10%
8%
CBR
6%
4%
2%
0%
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
Sources: KNBS, CBK, Standard Chartered Research
20
Inflation scenarios – supply-side or demand-led?
Lower inflation
requires positive
supply shock
May CPI – evidence
of deceleration in
m/m inflationary
pressure
Factor in more KES
weakness – CPI
could plausibly peak
at +20%
21
Exchange rate is under pressure, worsening the inflation outlook
USD-KES
90
85
80
75
70
65
60
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Sources: Datastream, Standard Chartered Research
22
Kenya – increasingly reliant on Africa for its exports
Exports to Africa vs. to the rest of the World, KES millions
45,000
40,000
35,000
30,000
25,000
Exports to the rest of the World
20,000
15,000
10,000
Exports to Africa
5,000
0
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Sources: CBK, Standard Chartered Research
23
…but imports are a key vulnerability. Trade balance worsening
Trade balance, KES millions
0
-10,000
Trade balance
-20,000
-30,000
-40,000
-50,000
-60,000
-70,000
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Sources: CBK, Standard Chartered Research
24
T-bill yields correct, but not nearly far enough
T-bill yield %, Difference with CBR creates arbitrage opportunity
12
10
6m
8
3m
6
4
2
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Sources: Reuters, Standard Chartered Research
25
Pressure on the KES
Market perception of ‘one-way
risk’ – the CBK response
High inflation and negative
interest rates
Current account deterioration:
fiscal policy, infrastructure
spending
26
Restoring market confidence is key to KES stability
M3 and Foreign currency deposits, KES bn
1,400
1,200
1,000
800
600
M3
400
200
0
Jun-06
Residents' FX deposits
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Sources: CBK,Standard Chartered Research
27
Difference between CBR, T-bill yields creates arbitrage
opportunity
Interbank rate, %
7
Interbank rate
6
5
4
3
2
1
Jan-11
Jan-11
Feb-11
Feb-11
Mar-11
Mar-11
Mar-11
Apr-11
Apr-11
May-11
May-11
Jun-11
Sources: BoK, Standard Chartered Research
28
15-Jun-11
8-Jun-11
1-Jun-11
26-May-11
18-May-11
11-May-11
4-May-11
27-Apr-11
19-Apr-11
13-Apr-11
6-Apr-11
40
30-Mar-11
23-Mar-11
16-Mar-11
9-Mar-11
2-Mar-11
23-Feb-11
16-Feb-11
9-Feb-11
2-Feb-11
26-Jan-11
19-Jan-11
12-Jan-11
5-Jan-11
Commercial bank borrowing via overnight discount window surges
Commercial bank borrowing via overnight discount window, KES bn
60
50
Overnight discount
window
30
20
10
0
Sources: CBK, Standard Chartered Research
29
15-Jun-11
8-Jun-11
1-Jun-11
26-May-11
18-May-11
11-May-11
4-May-11
27-Apr-11
19-Apr-11
13-Apr-11
6-Apr-11
30-Mar-11
23-Mar-11
-10
16-Mar-11
9-Mar-11
2-Mar-11
23-Feb-11
16-Feb-11
9-Feb-11
2-Feb-11
26-Jan-11
19-Jan-11
12-Jan-11
5-Jan-11
CBK OMOs – not quite compensating for liquidity risks
CBK open market operations, KES bn
15
Liquidity Injecting
10
5
0
-5
Liquidity Mopping
-15
Sources: CBK, Standard Chartered Research
30
Bold action required to reverse KES weakness
Restore positive
real interest
rates
Close gap
between T-bill
yields and policy
rate
Thin market
liquidity – FX
intervention?
31
Finally, a word on Budget FY 12
Fiscal
consolidation
delayed?
Going for growth?
Pro-poor?
• Wider overall deficit 7.4% of GDP
• Healthy share for
development spending
• Removal of excise duties
on kerosene
• But improvement in
primary deficit to -2.7%
of GDP Vs. -3.8%
previously
• Infrastructure spending
rises by one-third
• Duties on maize, rice
• Greater reliance on
external financing of
deficit
• But more is needed to
fight inflation
32
Standard Chartered website for African, EM and Global Research
http://research.standardchartered.com
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