The Kenyan shilling is expected to continue losing value against the US dollar
According to data analysis and intelligence firm Stears, the Kenyan shilling is expected to continue losing value against the US dollar due to two primary factors: reduced foreign exchange inflows and increasing global interest rates. According to data from the Central Bank of Kenya (CBK), the Kenyan currency was trading at Sh147.26 against the US dollar on Thursday, compared to Sh120.45 during the same period last year, indicating a depreciation of 22.2 percent.
Kenya relies on various sources of foreign exchange inflows, including diaspora remittances, exports, tourism, foreign direct investment, and foreign loan disbursements, to maintain the stability of its currency. However, the US Federal Reserve has been steadily raising interest rates, leading to a flow of US dollars out of emerging markets like Kenya. This outflow of dollars is putting pressure on the currencies of these markets, including the Kenyan shilling.
Stears predicts that the combination of reduced foreign exchange inflows and ongoing increases in global interest rates will further accelerate the depreciation of the Kenyan shilling. This depreciation could result in higher import costs and increased expenses for servicing dollar-denominated loans, posing potential challenges for the country's economy.
CAPITAL MARKETS
1. Retail Investors in ILAM Fahari I-Reit Face Automatic Buyout
Retail investors who do not take up the offer to sell their units to the property fund's manager, ICEA Lion Asset Management Limited, will face an automatic buyout after three years, according to the fund's offering memorandum. The move comes after the closure of the offer and the subsequent delisting of the Reit from the Nairobi Securities Exchange. Non-professional investors still holding units at the end of this period will see their units placed into a single nominee account, which will be administered by ICEA Lion.
The Trust Deed will be amended to establish a sunset period for the operation of the nominee account, set at three years from the offer's closing date on October 6, 2023. In the event non-professional investors still hold units in the Reit after this period, the units will be automatically redeemed by the ILAM Fahari I-Reit at the prevailing unit price through a redemption process or an alternative method ensuring fair value, in compliance with regulatory guidelines. This mechanism aims to protect and represent the interests of non-professional investors unable to exit during the transaction period.
ICEA Lion Asset Management has extended a buyout offer at Sh11 per unit, representing 83.3 percent of the market price of Sh6 prior to a material disclosure made on August 29. The Reit initially went public at Sh20 per share in October 2015 but faced a subsequent drop to Sh6 before ICEA Lion's buyout offer was announced. Following delisting, the Reit will transition to the NSE's Unquoted Securities Platform, providing professional investors holding units with an avenue to trade. Retail investors are presented with the choice to either accept the buyout offer or acquire additional units to transition into professional investors.
2. Kenyan Retail Investors Face New Charges on the Central Securities Depository (CSD) Platform
The Central Bank of Kenya's recent implementation of the Central Securities Depository (CSD) platform, Dhow CSD, has brought about significant changes for retail investors seeking to purchase government securities. The alteration in payment methods, limited exclusively to Real Time Gross Settlement (RTGS) and Swift transfers via commercial banks, has left many investors grappling with new charges.
Among those hardest hit by this development are investors looking to purchase government bonds with a minimum value of Sh50,000. For them, the standard RTGS fee, which stands at one percent of their capital's value, adds a substantial cost to their investments. Commercial banks commonly charge fees ranging from Sh500 per RTGS transaction to as much as Sh1,500 for Swift transactions, excluding excise duty.
Previously, investors had the flexibility to pay for Treasury bills and bonds either by visiting the Central Bank of Kenya's banking hall and making cash payments at no additional cost or by using a banker's cheque, incurring fees ranging from Sh100 to Sh200. However, under the new Dhow CSD platform, investors must now instruct their banks to pay for successful bids directly from their accounts, requiring them to furnish transaction details such as the amount, transaction reference, and their CSD number.
MARKETS
Coffee Sales Plummet at Nairobi Coffee Exchange Amidst Looming Layoffs and Permit Confusion
The Nairobi Coffee Exchange (NCE) is witnessing a steep decline in both the volume and prices of coffee sold, as traders and buyers remain apprehensive about the market's stability amidst uncertainty surrounding trading permits. This downward trend aligns with ongoing reforms initiated by Deputy President Rigathi Gachagua, who oversaw the relaunch of the exchange in mid-August.
Data released by the NCE paints a grim picture, with auction volumes in August plummeting by a staggering 95.62 percent, dropping to a mere 192 tonnes from 4,380 tonnes recorded during the same period last year. The exchange, which plays a pivotal role in the Kenyan coffee industry, is currently grappling with a significant lack of participation, with an average of only 25 buyers attending each auction date. This limited turnout is adversely affecting competition in bids, a critical factor in the trade of up to 80 percent of Kenyan coffee.
Amid these challenges, confusion over the issuance of trading permits by the State has further dampened market activity. Out of the 121 coffee buyers licensed by the Agriculture and Food Authority for the 2023/24 season, a mere 58 have registered at the NCE to participate in the auctions. The combination of declining volumes, reduced competition, and permit-related concerns is casting a shadow over the Kenyan coffee industry, raising concerns about the livelihoods of coffee farmers and the future of this vital agricultural sector.
AUCTIONS
Kenyans Seek Bargains at Auction Yards Amid Soaring Car Import Prices
Kenyan consumers are feeling the pinch as the prices of imported cars surge due to a severely weakened shilling and the imposition of fresh taxes. In response to this economic challenge, a growing number of savvy buyers are turning to banks' auction yards in search of affordable alternatives. Repossessed vehicles from loan defaulters are providing an unexpected boon to lenders, who are looking to recoup their debts.
The Kenyan car market has witnessed a remarkable shift in recent months as the prices of used vehicles skyrocket. Factors such as a depreciating shilling and new tax regulations have pushed car import prices up by as much as 25 percent. Consequently, auction centers across the country have seen a surge in activity, with buyers eager to take advantage of the potential bargains. The demand for vehicles like the Land Cruiser V8, Mercedes Benz C-Class, Subaru Outback, Nissan X-Trail, Mazda Demio (Petrol), and Toyota Vitz has risen sharply, with prices climbing nearly 50 percent since the start of the year.
Banks and auctioneers have seized the opportunity presented by this trend, as they grapple with an increasing inventory of repossessed vehicles from customers who have defaulted on their loans. This unexpected market shift has allowed them to offload these assets and recover some of the outstanding debts. For Kenyan consumers, the auction yards are becoming a silver lining in an otherwise challenging economic landscape, offering a chance to own a car without breaking the bank.
TAX
Kenya Considers Suspending Tax Waivers on Interest Income from Global Financiers of Infrastructure Projects
In a move that may strain relations with key lenders, including China, Kenya's Treasury has hinted at a potential suspension of tax waivers on interest income generated by global financiers of mega infrastructure projects. The decision comes as part of a contingency plan, should the revenue-raising measures outlined in the Finance Act 2023 fail to yield the desired results. President William Ruto's government has committed to the International Monetary Fund (IMF) to eliminate exemptions on interest income as part of a broader set of "corrective tax measures," which also encompass reducing tax expenditures.
The Treasury announced its intentions, stating, "[The government will be] submitting to Parliament by end-October 2023, along with the Supplementary financial year 2023/24 Budget, a package of legislative changes to strengthen tax collection, including but not limited to... the reduction of tax exemption on interest income." Interest income is the revenue derived from lending money to other entities, with lenders charging borrowers interest for the use of their capital in the form of debt.
This decision could have significant ramifications for the repayment of foreign loans that financed various foreign-funded mega infrastructural projects in Kenya, such as the Standard Gauge Railway (SGR), roads, ports, airstrips, and power sub-stations, all of which were constructed using foreign loans during the tenure of retired President Uhuru Kenyatta. As the government seeks to bolster its revenue streams, the suspension of tax waivers on interest income emerges as a pivotal strategy that may impact international lenders and the ongoing development of critical infrastructure projects within the country.
WHAT YOU MIGHT HAVE MISSED
KRA has rolled out field officers to ensure compliance
KRA rolled out an on-ground customer support program comprising field officers whose responsibility is to support taxpayers with their compliance needs. The staff are to have staff identification cards and will be in uniform.
Founders of I&M Group are set to build a Sh3.24 billion hospital
The founders of I&M Group are set to build a Sh3.24 billion hospital on Ngong Road’s Nairobi Business Park, which they acquired last year for more than Sh2 billion. Disclosures in an environmental and social impact assessment study commissioned by the National Environment Management Authority (Nema) on the project show that the facility to be known as the World Trade Centre Hospital, will have a capacity of 150 beds.
The hospital will sit next to the Grade A office block at the business park, which is situated near the Ngong Race Course.
Kenya’s fuel prices 12th Highest in Africa
Kenya now has the 12th costliest fuel in Africa following the recent price review that increased pump charges by up to Sh21.32 per litre. A litre of diesel jumped by Sh21.32 to Sh200.99 ($1.37) in Nairobi while that of super petrol rose by Sh16.96 to Sh211.64 ($1.4) in the wake of high taxes and a sharply falling shilling. A comparison of fuel prices across Africa shows that Kenya only trails the Central African Republic (CAR), Malawi, Zimbabwe, Sierra Leone, and seven other countries.