Mangoes & Oranges

Zain Group, Telkom Kenya update

2009-06-11T19:03:00.002+03:00

Zain Group to sell Africa business for $12bn
• Deal conclusion expected this week
• Sale is to French company; if it does not go through, Zain will consider sale to other bidders
• Price discounted by value of Zain’s outstanding debts
• Possible reputational risk; the change of ownership may be perceived as instability
• Change of management may result in upheaval of business operations

Telkom wins first round in dispute over layoff scheme
• 597 retrenched employees disputing going on early retirement until the retirement package is determined.
• Industrial Court stopped Telkom from proceeding with plans to send the employees into early retirement.
• Telkom has obtained a stay on this ruling from the high court.
• Next hearing is on June 25. The outcome of the dispute is crucial. If employees win, we should expect a higher cost base for Telkom (Orange) and lower profitability in future, as it will have to maintain the employees on payroll until the employees can go on early retirement.

What to buy right now

2009-04-07T18:09:00.004+03:00

The only thing anyone should invest in right now are companies that are fundamentally sound, companies certain to weather a difficult 2009 and emerge with minimum scrapes and bruises. What qualifies as fundamentally attractive, you ask? You need a set of screens that tells you if you’re putting your hard-earned (or not) money in an investment that will provide the returns you want.
First, does the company have a sustainable business model? The business model simply means the method a company uses to generate revenue, and refers to its position on the value chain. Is the company a producer, landlord, distributor, broker? Is the business model in use viable in the current economic conditions?
Are inventories lean, especially for the manufacturing companies? If not, can the company sell this inventory at a profit, or will re-pricing be a necessity, leading to a subsequent shrinkage in profits?
Does a company have any new or continuing factors that would be earnings accretive in the next financial periods? New products or clients? Distribution network?
Is the company well capitalized such that it can leverage its balance sheet to obtain financing for investment in an environment where credit is shrinking?
Check valuations and compare them to similar businesses to gauge performance.
The best investment advice comes from Warren Buffet. Look at the business. Go for companies whose business you understand. The more prosaic it is, the better. If you do not understand how they make their money, you have no business putting your money there.
But sometimes, fundamentals are not everything. Be on the lookout for anomalies in the pricing of a security. The anomalies represent opportunities to make money while everything is in a whirl. Where has the market overshot it? Which company has been significantly oversold in the bear market run, and is therefore underpriced and a good bargain? Which company is overpriced and should be exited from? In which counters can you average down your cost because of the bear run?
Happy hunting, people.

The importance of innovation

2009-03-20T21:44:00.002+03:00

The overlap in customer base is a critical issue for companies that are competing for a share of the Kenyan’s consumer’s income. These include the mobile operators, banks, breweries and consumer/retail goods manufacturers. Rising unemployment figures as a result of a contracting economy will lead to declining income. Additionally, inflation is increasingly stretching the purchasing power of consumers, raising the need to cut back expenditure on some goods. This is the first frontier of competition for companies. Are consumers buying your products?

At the same time, these companies are facing industry-specific concerns. High competition and falling ARPUs in mobile telephony. High costs of operation in the manufacturing space. High competition in the banking sector, and risk of declining spreads from tighter regulatory policies from the Central Bank. Most companies are finding themselves between the proverbial rock and hard place, locked between rising costs of operation and production, and faced with the inability to raise product prices because consumers are increasingly sensitive to such.

How does a company survive then? The answer is innovation. The ability to innovate is a key success factor for companies in the current economic environment. A good example of innovation is the mobile industry. The mobile telephony space is taking advantage of the large proportion of the unbanked population, using what began as money-transfer services and have increasingly evolved into methods of holding small-sized deposits. Further, they have also tapped into an already established distribution network of the PESA point ATM network, thus increasing their coverage and customer base to include the banked population. The creation of synergies between telephony and money services should be significantly earnings accretive to these companies, and allow them to prop up declining margins in other sectors of their business. THis form of out-of-the-box thinking should become the culture to follow, otherwise these companies will face a difficult financial year.

Mango’s Ministry Make-up

2009-03-16T20:02:00.002+03:00

Since the government is running out of money, it has been suggested that some of its 43 ministries need to go. I’m so on that train. And for that reason, here is my suggested list of ministries. And I think it could be condensed further, by someone with an eye more expert than mine.

1. Agriculture

2. ~~Co-operative Development and Marketing~~ (add to 1)

3. Defence

4. ~~Development of Northern Kenya and other Arid Lands~~ (add to 24)

5. ~~East African Community~~ (may be an actual requirement of the EAC, but I don’t think so. Add to 11)

6. Education

7. Energy

8. Environment and Mineral Resources

9. Finance

~~10.~~ ~~Fisheries Development~~ (add to 1)

11. Foreign Affairs

12. ~~Forestry~~ (add to 8) and ~~Wildlife~~ (add to 40)

~~13.~~ ~~Gender and Children Affairs~~(add to 38)

~~14.~~ ~~Higher Education, Science and Technology~~ (add to 6)

15. Housing

16. Immigration & Registration of Persons

17. ~~Industrialization~~ (just scrap this one. Industrialization will happen as a result of each of the other ministries. Or if you’re finicky, add it to 30)

18. Information and Communications

19. Justice, National Cohesion and Constitutional Affairs

20. Labour

21. Lands

22. ~~Livestock Development~~ (add to 1)

23. Medical Services

24. Nairobi Metropolitan Development (rename Metropolitan Development, Nairobi is not the only metropolis in Kenya.)

25. ~~National Heritage & Culture~~ (What exactly do they do here? Add to 18)

26. Office of the President

27. Office of the Vice-President and Ministry of Home Affairs

28. Office of the Prime Minister (?? I’m yet to establish exactly what he does, except appear on TV. Please, educate me.)

29. Office of Deputy Prime Minister and Ministry of Local Government (Now that Uhuru Kenyatta migrated to the Finance Ministry, doesn’t this structure become irrelevant?)

30. Office of Deputy Prime Minister and Ministry of Trade

31. Planning, National Development and Vision 2030

32. ~~Provincial Administration~~ (add to 27) and ~~National Security~~ (add to 3)

33. ~~Public Health~~ (add to 23) and ~~Sanitation~~ (add to 42)

~~34.~~ ~~Public Service~~ (add to 33)

~~35.~~ ~~Public Works~~ (add to 33)

36. ~~Regional Development Authorities~~ (add to 24)

37. ~~Roads~~ (add to 24, that way, people’s buildings are not built on alleged road reserves, because there is coordination)

~~38.~~ ~~Special Programmes~~

39. ~~State Law Office~~ (add to 19)

40. Tourism

41. Transport

42. Water and Irrigation

~~43.~~ ~~Youth and Sports~~

1 President + 1 Prime Minister + 2 Deputy Prime Ministers + 37 Ministers + 53 Assistant Cabinet Ministers = Total of 94

Then add the verbal-diarrhoearing government spokesman, 43 permanent secretaries, various key secretaries and directors in each of the ministries, and you have an avalanche of salaries. And who is paying them? That would be you and me.

In a Parliament of 222 members, 42% hold either a Cabinet post or an Assistant Minister post. Ridiculous. To make it worse, if any of these people sits on any one of those committees/commission they are so fond of setting up, they will earn something, effectively a second salary. No wonder the government is broke.

According to Daily Nation (Mar 16), the government spends billions on flowers and tea. That is how they use the money you and I slave for. In a country with 10 million people starving, it is morally corrupt, absurdly selfish, even evil, to be spending so much money lining the pockets of few people. And Kenneth Marende (speaker) had the unmitigated gall to speak of philanthropy on the question of MPs paying tax. As though it is a question of philanthropy. Evil, just evil.

I’m frustrated. Some of these people need to go. The rest can multitask or follow them.

Atwoli at his best

2009-03-14T18:34:00.001+03:00

COTU Secretary General Francis Atwoli is my hero. This man just might be the most accomplished government critic in Kenya. Not only does he make his point with no ambiguity or bootlicking, but he manages to make it sound as funny as hell. Lately, I've managed to catch him on the prime time news, spewing his particular brand of criticism. Here, I begin a list of his famous quotes, to be updated whenever he utters a new one…

· “We can’t elect people to go to Parliament to steal maize!” - on William Ruto and the maize scandal.

· “You want to go down there (downtown Nairobi), be accompanied by a Kenyan.” - on tourists and insecurity in Kenya.

· “A law maker becomes a law breaker. What a nation!” - on MPs and their refusal to pay taxes like other Kenyans.

Mobile telephony: the price war goes nuclear

2009-02-27T22:29:00.010+03:00

Econet, or Yu, just blew the level of competition in mobile telephony space to a whole new sphere. In true low-cost tradition, Econet has introduced a unique tariff in which subscribers will be charged Sh7.50 for the first two minutes of the first call made in a day, but subsequent minutes and calls will be charged at a new rate of Sh0.50 a minute.

Usually, people do not like free things with strings attached. They like free things, period. That said, I do not see how this offer will not be attractive, especially for people who make plenty of calls. Say I spend the requisite Sh15 on the first call to get to the offer zone. If I make calls totaling 60 minutes for the rest of that day, my total expenditure for the day is Sh45.

In my view, Econet is assured of at least Sh15 for every call made by a subscriber wishing to take advantage of the lower call rate. That is an ARPU per call of Sh15, at the very minimum. Very neat. In the battle for subscribers, Econet also pays you 75 cents a minute for every call you receive from a rival network. Makes the bitter pill of shifting from one network to an unfamiliar one much easier to swallow.

What it costs you to make calls: a comparative analysis

Low-cost service provision is a sustainable business model, but only if you can find new ways to keep the competitive edge. Which Econet just did. The response from other providers remains to be seen, but it is safe to say that a quick and comprehensive response is required. In the meantime, ARPU will keep declining until price equilibrium is achieved, and new forms of competition - other than price - take effect.

The peculiarities of the Nairobi City Council

2009-02-27T00:19:00.008+03:00

Sometimes, and I regret that ‘sometimes = too often’ here, you see things in Nairobi just puzzle the hell out of you. On Moi Avenue, near Optica, and on Kenyatta Avenue, near the burnt out Nakumatt, someone has attached a row of shrubs (like the one pictured) to the railings on the pavement. Either this was a misguided attempt at beautification or... I don't know.

Oil price controls: consumer protection or crap economics?

2009-02-26T23:27:00.002+03:00

The oil industry in Kenya has seen a series of upheavals in recent times, in the forms of shortages and the KPC-Triton scandal. The shortages have been blamed on pirates and delayed shipments, on equipment breakdown at the refinery, on manipulative oil marketers who hoard supplies or fail to import. We all know who the culprits of the Triton Petroleum scandal are (hopefully, the ones reported, not some hidden ones).

Then this now...

Standard Newspaper, Wednesday Feb 24^th

by Macharia Kamau

The process of reintroducing price controls in the oil sub-sector is almost complete. The Energy Regulatory Commission (ERC) says it is finalising on its recommendations and would within a few weeks forward them to the Ministry of Energy for legislation. Using a price control formula, the Commission proposes a maximum margin of Sh6 for wholesalers and Sh3 for retailers for every litre of premium petrol, meaning that consumers would today buy a litre at a maximum of Sh9 above the cost of international crude oil.

The maximum margin for diesel and kerosene would be at Sh2.80.

Apparently, we are regressing. We are going back to the pre-1994 era, when the government determined what wholesale and pump prices would be. It did not work then, it will not work now. If we cannot learn from our own mistakes, let us at least learn from the follies committed by others. During the oil crises of the 1970s, the U.S government implemented oil price controls on ‘old oil’ – oil already in the market for sale. New oil could be sold at a higher price. Result: marketers withdrew the old oil to benefit from the higher revenue from sale of new oil.

Setting a ceiling on the price oil can only achieve one thing: an inefficient market. Suppose there is cheaper oil to be had. Some consumers may benefit from lower pump prices, but what about those who spend hours in queues waiting for their turn because of the resultant fuel shortages? Because a shortage is what will happen. A price limit will force the oil marketers to lower the size of their import consignments; there is no incentive to import if the revenues are declining. In an industry where the fixed costs of operation are substantial, every litre of oil sold is valuable, as it helps spread the costs around. If what they are making on the sales is not sufficient to cover their costs, they will do a Chevron on us and close up shop.

Trying to substitute the economic forces of demand and supply with a government-determined price makes for crap economics, pure and simple. I understand these are harsh economic times for most Kenyans. However, killing off industry is not the way to rectify the situation. The government cannot hope to dissipate the price effects of external forces by using stopgap measures that will, in the long-run, create an even bigger problem. They should instead focus on handling the underlying difficulties. Handle the pirates. Repair and maintain the refinery. Invest in another refinery, preferably one that the current generation will actually get to use. Build up an oil reserve. Better yet, create a suitable investment climate so the private sector will do it for you. We claim to be a capitalist country. Let’s act like it.

One more thing. The government makes a lot of money from import duty on fuel. Why they would want to cut off such a lucrative cash cow is beyond me.

Dearth of financial reporting at the NSE

2009-02-24T16:32:00.003+03:00

As long as the country is in a racket over the many failures of the Capital Markets Authority to maintain order in the industry, I may as well throw in another shortcoming. On the NSE, listed companies are required to comply with IFRS. Regulation being the lax enterprise it is, only those companies in the Main Market segment comply with this directive with any degree of accuracy. The banks are particularly exemplary at it - they religiously release quarterly earnings reports. Most of the other companies get away with half-yearly announcements and, when the going gets tough, profit warnings. The Alternative segment on the other hand, is seriously deficient in fulfilling financial disclosure. I have never laid eyes on a financial statement/annual report from any of the companies on the alternative market. Granted, these companies are subject to less stringent requirements, but investors still buy shares in them. For this reason, if no other, they should be put to greater scrutiny than they have subjected to thus far. Enforcing legal and ethical practice by stockbrokers is just one front in the protection of investors in Kenya. Ensuring investors are not dumping money into a bottomless pit with no returns is another facet, one that has been neglected in the face of greater concerns. These companies should be policed to ensure they produce financial reports that are comprehensive and comparable, and allow investors to make accurate decisions.

The Alternative Market should not become a permanent residing ground for companies that have not yet complied with the full listing requirements. It should be a medium for these companies to put their act together and advance to the Main market. Otherwise, they are not growing and do not offer investors any meaningful returns. By definition, a market is a competitive arena – stagnation is not an option. Companies in the Alternative Market that do not fully comply after a certain period of time should be delisted. If the various authorities are committed to the idea of financial markets deepening, then this is one of the places they should start.

Savings in a shrinking economy?

2009-02-18T08:16:00.000+03:00

In the Business Daily today (Feb 18):

CBK to spur savings by raising interest on deposits

The Central Bank is working towards increasing the rates commercial bank’s pay their customers for their deposits in an effort to spur savings and reduce the bankers’ interest rate spread — the difference between lending and deposit rates.

The move is set to encourage more Kenyans to put their money in banking vaults as an investment avenue, and raise the country’s savings to 32 per cent of the gross domestic product (GDP) up from 15 per cent.

Besides boosting savings levels and providing a pool of cash that can be lent to businesses and households, the CBK move look poised to hurt the banking industry’s main revenue source: income from lending.

“The Monetary Policy committee is keen to squeeze the spread by increasing deposit rates,” said Prof Njuguna Ndung’u during a briefing to announce the promotion of Sustainable Banking Awards, an initiative of the International Financial Corporation and the Financial Times of London.

The governor explained that the savings in Kenya stands at about Sh800 billion, with a huge fraction of this money being placed in temporal accounts that can be withdrawn at short notice and its in small portions.

The lending rate has risen by a higher margin than the deposit rate making for a bigger spread that continues to be a puzzle for the monetary policy authorities.

I don’t understand this at all. If there is a bunch of people who are confused, it is the Monetary Policy Committee. Their monetary policy seems very random and multi-directional.

First, in a shrinking economy, like ours is, the idea would be for the banks to lend more, get more money into circulation, so consumers can spend and raise economic activity. For consumers to borrow, you need low interest rates. No one will borrow when it will cost an arm and two legs to pay it back. The MPC seemed to be on the right track there for a while interest rates were cut in December by 50bps and cash ratio requirements for banks were lowered.

In the press release of its 30^th January 2009 meeting, the MPC said:

“The decisions initiated had the desired effect of increasing market liquidity and moving to a low interest rate regime.”

Now, they want to suck all that liquidity back out and move to high interest rates, in the name of increasing the level of national savings and reducing banking profits.

Second, there is a possibility the banks will up the lending rate goes up in tandem with the deposit rate? All the MPC will have achieved is higher deposit and lending rates, same spread, and no joy for the mwananchi. Even worse for the economy.

The hyena at the crossroads indeed.

How it all started: the crisis in a nutshell...or not

2009-02-17T20:56:00.005+03:00

Watched a documentary today on CNBC Africa (very useful channel) called House of Cards in which David Faber traces the origins and the development of today’s economic crisis. I feel compelled to put down a concise look at the events described in the documentary, together with my own additions from other sources, for other persons who may want to have a look.

The beginning
After the dot-com crash in 2000, the US was in a minor recession. In his book, The Age of Turbulence, former Fed Reserve Chairman Alan Greenspan indicates that they rapidly lowered interest rates to stimulate the economy and stabilize markets. The policy worked, and by August 2001, the biggest issue they faced was how far to lower interest rates. Then 9/11 happened, and the US economy entered shutdown mode. Consumers stopped spending, unless they were buying bunker goods, security and insurance. Industries such as tourism, hotels, travel, entertainment,and convention suffered. The suspension of air freight disrupted logistic channels for producers, especially those operating JIT lines. Jobless claims went up. A $100bn stimulus package of spending and tax cuts was approved – but got released too late- in March 2002- and without any significant effect to the people it was supposed to help (thanks to politicians). Meanwhile, the Fed continued cutting interest rates to encourage consumer borrowing and continued spending. These had a more direct effect, because the economy bounced back; industrial production jump-started and jobless claims declined to pre-9/11 levels.
The result of continued interest rate cuts was lower mortgage rates. Suddenly every advertising commercial was about where you could get a low mortgage rate to buy your own home and live the American Dream. Households increased their borrowing, and the housing and construction industry took off. Demand for housing was so high, they were building houses on land that was previously cattle ranches in California. (Not unlike Kenya, in this way. I live in an area that used to be a swamp.) Housing prices went up exponentially, growing at 8% per annum. Housing became so popular, the trend of flipping houses emerged. People bought houses and sold them at a healthy profit six months later. The concept was advertised widely on national television, became the content of reality TV. In 2005, housing and related industries created 800,000 new jobs in the US and 20 pc of all new loans were mortgages. Just one problem: people’s incomes did not increase at a similar rate to the growth in housing prices.

Wall Street comes to play
At the time, the mortgage industry was basically controlled by Fannie Mae and Freddie Mac. These two institutions bought mortgages from different households, pooled them and created mortgage-backed securities. Their dominance prevailed until they became embroiled in accounting scandals. Then Wall Street took over the mortgage business. The new kids on the block were less restricted, more innovative. They came up with the root of all evil – the collateralized debt obligation, or CDO. A CDO was a pool of different mortgage backed securities. The creators took a series of MBSs, cut them up into portions, picked random portions from different MBSs and pooled them into what is known as a CDO. A mortgage from a perfectly creditworthy individual could end up lumped with a mortgage held by an individual with a high likelihood of default.

At least 60 pc of these CDOs were sold to East Asia and Europe. They just could not get enough. The high demand had Wall Street scrambling to find more mortgages that could be repackaged and sold. They hit upon the idea of using mortgage originators to generate the required volumes. Bill Dallas, founder of Ownit Mortgage Solutions - one of the mortgage originating companies that went bust- likened these two to opposing electric wires that should never have made contact.

Arguably, the most prominent of these mortgage originators was Quick Loan Funding, founded by Daniel Sadek, a Lebanese with quite the rags to riches story. QLF gave mortgages to persons who had no business getting a mortgage because their income could not support one - people on the sub-500 range on the FICO credit score. It took a measly 20-30 minutes to obtain a loan, possibly the biggest loan in any person’s life. Pizza delivery and car sales men became loan officers. The only skill required was the ability to close a loan.

Nobody bothered to vet whether these mortgage applicants were creditworthy. Stricter standards would have driven the originators out of the market. And Americans obliged. Whether it was in search for a better way of life, or just a greed to live beyond their means, apply they did. Liar loans became the norm. Income was overstated wher necessary to obtain a loan. Nobody read the fine print, and if they did, they would not have understood it anyway. Unemployed and low-income persons had access to homes in California’s snazzier districts. And Sadek used the profits to finance some crap movie called Redline, all about women and cars. And the big banks – Citi included – were not left out. They gave Sadek’s QLF credit lines to loan to home owners.

Kyle Bass, in his interview with David Faber, sums it up pretty well. He says, “Name me a market, that is worth a trillion dollars, that directly touches the consumer, that is unregulated.” David Faber says “I can’t.” And Kyle says, “This is it, there is only one. Mortgage origination.” Wall Street had become greedy (greedier may be more accurate). There were no loans made by the originators that Wall St would not buy, repackage and sell. Wherever there was a reliable future stream of income, there was a potential securitization candidate.

Adjustable what?
It does not stop there. Adjustable rate mortgages were propagated and encouraged. These loans allow borrower’s interest payments to vary with the movement in interest rates. They promised low payments, and when the payments got too high, the concept of refinancing took root. Refinancing involved negotiating new terms on your loan, say for a lower interest rates. Households used this option to reduce their monthly interest payments, and obtain money for other expenditure - pools, redecoration, travel, you name it. Instant gratification. Retail spending upped significantly.

Then came the pay option negative amortization adjustable rate mortgages. What does that even mean, you ask? This is how it works. This type of mortgage allows the borrower to alter the amount of repayment they do each month. They can effectively lower their interest rate. However, the amount that you do not pay every month is added to the principal amount. What happens is your interest rate goes down, but the outstanding loan balance goes up. In essence, you are not paying your loan, but increasing it with time. People were leveraging their homes too heavily. And no one said a thing.

The rating agencies
To sell more of the repackaged loans, Wall Street needed the instruments to carry good ratings. Enter the rating agencies –Moody’s, Standard and Poor’s and Fitch. There was a deep conflict of interest here – the Wall Street banks that required the instruments to be rated (and paying for it) were the same ones selling them. The agencies had to give good ratings, otherwise the next time a bank required a rating on some convoluted CDO, they would take their business elsewhere. So, how do you make something that’s essentially crap into a AAA investment-grade instrument? It’s very easy apparently. According to a former Moody analyst, you can follow the rules of rating without following the spirit of the rules. It then becomes easy to cheat at every single step. The standards for a AAA rating were lowered.

The house of cards collapses
The boom in housing created an excess of homes, and as economics, surplus causes a decline in prices. Housing prices peaked in 2006, and then began declining. Refinancing options became scarce; you had to pay what interest you owed, no excuses. People, especially those whose mortgage applications had overstated their income, defaulted. Foreclosures began, and the number of homes up for sale increased, with no people to buy them. Delinquencies escalated at a rapid rate as more homeowners defaulted. And the declining prices pushed the value of homes lower. The MBS and CDOs were now based on mortgage assets that had just become very high risk, and whose value was declining rapidly. Their value also declined.

In creating the CDOs, structured products specialists – and I use this word in the loosest way possible – used models that forecasted housing prices would grow at 6-8% per annum in perpetuity. They assumed that the bubble would continue forever. But, housing prices misbehaved; they crashed.

Lipstick on a pig
Who’s to blame? Greed is at the core of this thing. Wall Street’s need to make more money spiralled out of control. Simple instruments could no longer do; they combined a little bit of this with a little bit of that to make the most complex financial instruments. Pricing these instruments was so hard, even Greenspan could not understand the mathematics behind them. According to Kyle Bass, Wall Street basically “put lipstick on a pig” and sold it, through clueless brokers around the world to even more clueless, unwary, unsophisticated buyers. As long as the instrument came with a AAA rating, they snapped it up. There was no oversight in this industry. The SEC said they believed the banks would police themselves. Then WTF were they being paid to do? There was no financial sophistication on the part of the rating agencies either. Aside from issuing undeserved ratings to maintain their business volumes, they also had no idea exactly what they were dealing with. The only people who had any clue of what they were selling were in Wall Street, and no way in hell were they going to stop the piggy bank raining money.

Full documentation (of people’s incomes) would have helped flush out the potential defaulters. More oversight by the regulator. Prudency from the buyers would have been good, even expected. When making investment decisions, understand what you’re buying. If it looks too good to be true, it is. And if you know you cannot afford it, what the hell are you doing buying it? But the prime requisite was honesty and ethical conduct from Wall Street.

But you can’t have everything, can you?

The Kenya I want

2009-02-16T13:37:00.004+03:00

Everybody seems to be throwing in their two cents, so here is mine. This is my wish list, the things I would like to see in my country, the things that, when I am in the midst of foreigners, would make me proud to say I am from Kenya. They are not arranged in any order of priority, just as they popped into my head. So, I want a Kenya where...

There is running water from the taps. Where I live, we have to buy water every two weeks from the truck vendors at a cost of KES3000. (Then every month, the water guys come to read the meter. Only they know why they bother.)
The city council does not spend ridiculous amounts of money digging up roundabouts, making them beautiful with flowers and shrubs, and then digging them up a month later to create a fountain. It’s not a beauty pageant, people.
Every time I turn on the TV, I do not see some wild-eyed politician making uninformed edicts. If you can get rid of this bunch altogether, even better.
People who incite others to commit violence against their neighbours are taken to the ICC at the Hague without question, and suggestions of some bogus, local tribunal whose only mandate will be to sweep their crimes under the carpet do not even arise.
People who commit violence against their neighbours face the full force of the law.
The lawyers do not try to take you for every single farthing you are worth, on the pretext of representing you
The judiciary actually does the work they are mandated to do, and the Chief Justice can actually be Chief of something meaningful.
I do not cross the road when I see a policeman coming towards me.
The roads are not footpaths pretending to be roads.
I do not spend three hours of my day stuck in a traffic jam.
The matatus do not charge me an exorbitant fee because fuel prices are spiking from shortages and high import bills.
The petrol stations actually have fuel in their reserves because the refinery is doing its job.
KPC does not steal from the oil companies in collusion with other companies.
The Minister for Energy does not threaten oil marketers with price controls because he does not know any other way to control the high fuel prices. They are in business, not charity, you.
There is no power rationing.
We do not have to rely on Independent Power Producers to get additional diesel-produced electricity, which is more expensive, to supplement flagging production from hydro and geothermal.
Food shortages are not escalated through inefficiencies like congestion at the port.
The ocean waters are secure, so the government does not have to spend KES 250 million of taxpayers’ money to ransom a ship loaded with arms whose ownership is questionable. A case of it wasn’t me, if ever there was one.
We can call ourselves an emerging market and not have everybody in the room frowning or laughing out loud.
Stockbrokers do not steal from their clients, and people in the industry actually know the meaning of ethics.
The government does not hire incompetent persons to run Ministries just to reward them for services rendered.

To be continued whenever I have something new to gripe about...

Inflation and high oil prices: a case of the chicken and the egg?

2009-02-12T13:04:00.009+03:00

Which came first? Did high oil prices cause inflation, or was it the other way round? Both issues have been the centre of most business and economic discussions in 2008. This here is part 2 of the oil prices blog.

Inflationary pressure has been the most dominant of the many concerns facing Kenyans recently. General consensus was high oil prices are making it difficult for business to operate, and goods are becoming more expensive as a result. I believe the reasons for the continuous jump in inflation were a bit more varied, but each has complemented the other, like different accelerants feeding the same fire.

High oil import bill
In the previous post, I discussed the reasons for high oil prices in the international markets. Due to these spikes, Kenya’s import bill for oil grew 24% in the June-Sep 07 period, 22% in Oct-Dec 07 period, 6% in the Apr – Jun 08 period. The total bill for the 2007/2008 fiscal year was $2.5bn, 24% of total imports. And, what do you know, the Kipevu oil refinery does not have sufficient capacity to cushion the economy in the event of volatility of prices in the world markets. This was the starting point.

Post-election violence
The effect of this tragedy was a breakdown in access to goods and services in both rural and urban areas. Transporters abandoned their business (or were uprooted in Kibera), shops shut down, and people cowered in the safety of their homes, leaving the streets to rioters and those police with green gear and ginormous guns. Small shopkeepers hoarded goods and the big supermarkets rationed basic foodstuffs. Essentials traded at higher prices, as demand exceeded supply by a wide margin.
I like to think we would have waited out the high oil prices, which began declining in the second half of 2008 faster than you could say ‘crisis’. But no such luck; the PEV thing worked like a trigger. Any tiny shocks that existed beneath the surface became rumblings above ground; any hidden or skulking difficulties blew right into the open arena for everyone to see. By the time the fighting fettered out and the dust settled, all the world knew Kenya was at war. I remember reading an article about a guy – don’t remember the name – who went to Nigeria, and when he tells the cab driver he’s from Kenya, the driver says “Oh, you’re the people killing each other?”. But I digress. Kenya had just cemented her ‘politically unstable’ status. The guys from Central bank and Treasury should have known right then that their sovereign bond plans were in deep shite. Fitch downgraded Kenya’s credit rating outlook from positive to negative, essentially on a watchlist.

Inflation at work
The PEV and the rising cost of fuel created a highly unsuitable environment for business, especially those in the manufacturing industry. Because Kenya relies on Independent Power Producers to supplement hydro and geothermal power, the cost of power ratcheted to in June. Up the prices of manufactured goods went.

Aside:
There are very few listed companies (I don’t know of any, but I will allow for the possibility that some exist) that did not hold the PEV or high fuel prices responsible for a less-than-acceptable financial performance in 2008, be it half-year of full-year. What I did not see, and correct me if I am wrong, is a company that quoted not meeting revenue targets for the year. Surely these companies had better projections for 2008 in their budgets, before all the gloom and doom struck. Granted, fast adjustments would have been made once the shit hit the fan. But still, their forecasts’ would have been higher than the actual reported figures, right? And the reason revenues would have declined is inflation –here meaning higher prices. People’s wallets were stretched to the limit, and consumption suffered.

Declining forex reserves
So the import bill is rising, the shilling is being battered in the currency markets, KRA is not meeting revenue collection targets, takers for Treasury securities declined. Government budget for FY08/FY09 was KES720bn, to be funded through tax revenue (KES463bn), donor funding, sale of State resources and additional borrowing. The additional borrowing avenue was shot to hell when the global markets went into crisis. Complete and utter turmoil. No funds for Kenya. The KES24bn sovereign bond issue was suspended on 28th October.
Declining forex reserves meant the government could not readily help starving Kenyans. Then unscrupulous characters exacerbated the shortage of maize, and hunger was declared a national disaster.

Build-up at the port
To curb the maize shortage – about 3 million 90kg bags were required- the government began importing from South Africa and other countries. Unfortunately, the port is not accustomed to the high grain volumes that arrived in November, including wheat and maize for Kenya’s reserves and WFP relief consignments headed for Somalia and Southern Sudan.
Ships waiting to discharge took as long as 10 days to be cleared. Each delay at the port incurs a penalty between $40,000 and $75,000 a day from the vessel, so by the time the grain is cleared, it is very expensive for the local market and regional markets that Kenya supplies.
Add to that the inadequate inland infrastructure – an antiquated rail network and bad roads, add a healthy dose of high transportation costs – fuel again, and by the time the food gets inland, the consumer is heaving under the weight of transferred costs. This is a very clear source of inflation – if we define inflation as an increase in price levels.

==
It’s a vicious, vicious circle. The high oil prices and PEV drive up the costs of production and operation. Goods become expensive, and oil is a good like any other. Inflation reduces the purchasing power of people, and Kenyans begin starving. Infrastructural inefficiencies experienced when trying to tackle the hunger problem make goods even more expensive, inflation pushes oil prices higher. The boundaries may blur a bit, because oil is such an integral part of today’s world. But no question about it, it is cause and effect all the time with these two factors.

What now?
The Central Bank is therefore wasting everybody’s time issuing pithy statements on inflation targeting. Ministers are firing at the wrong demon, issuing price control threats on legitimate business enterprises. What they SHOULD do, is focus on the real issues and stop blathering about the end result.

Dambisa Moyo has penned a book –Dead Aid – on the reliance of African countries on aid from the developed world, and what the consequences of the global crisis will be. The crisis may put the brakes on some of her suggestions for raising funds - increased trade partnerships, particularly with Asia, financial markets, encouraging FDI and microfinancing. But she says those are not the only options. So we have no money, fine. Where can we get it? China. With $4trillion in reserves, China on its own is a sufficient market for Kenya’s sovereign bond. We just have to get smart and convince them we’re not lunatics who like killing each other.

Oil prices, part 1: who did what?

2009-02-11T21:26:00.004+03:00

Here begins a two part series on oil prices. This part will cover the factors that have caused the rise in oil prices in the international markets.

China, China, China...
Everybody blames China. With an average economic growth rate higher than 10 pc for each of the last five years, and more, China is on a roll. There is always a downside to being the biggest kid in the playground. China is not alone in its rabid demand for oil. The rest of the BRICS are in there too, and other emerging markets around the world. But China is a good scapegoat. Like by saying China, we are including all those others countries. Anyway, the phenomenal growth in these countries is sustained by industry, and industry needs oil. For everything. You want to run a factory, you need oil. You want plastic, you need oil. You want transport, you need oil. You want perfume or an insecticide, yep, it came from oil. The beast has many heads.

Another consideration when discussing the high consumers of oil is the level of inflation in these countries. Inflation – increase in money supply, and therefore an erosion of its purchasing power – has resulted from the high level of economic activity in these economies. More money, better standards of living, results in higher prices. The much-loved ‘China effect’ of cheap goods is about over, people.

Speculation?
OPEC refuses to up production levels, saying oil prices are not driven by the forces of supply and demand, but rather by speculation in the financial markets. There is no problem with supply; we can’t fix what ain’t broke, is the mantra. The idea of speculation-driven jumps may have some merit, given the high volatility recorded in day-to-day trading of oil prices. However, any speculative activity ongoing is highly permissible and cannot be criticized out of hand. After all, that is what the derivative markets are for – to allow investors to hedge against risks. The dollar is weakening and stocks are crashing around everybody’s ears - commodities are a safer option. And if you can make some money off someone else’s misery, well, that’s just life.

Digression: do you know, there was a time when Venezuela and Saudi Arabia could not see eye to eye? Made decision making a very tedious process; decisions made in OPEC meetings did not last. Especially when the decision had to do with cutting production to prop up falling prices. This changed round about 1999, when Hugo Chavez took up Venezuela and the Saudis had a financial crisis of sorts. Unanimity became the word. Now they sing in harmony. See what cooperation can achieve?

Supply constraints
Venezuela has political issues and strikes, Nigeria is plagued by rebels in oil producing zones, the Middle East is at war, production from major oil fields in Mexico, Saudi Arabia and Russia has slumped in recent years. And while new production zones may be found, oil drilling is heavily capital-intensive and time consuming. The OPEC countries need infrastructure and stables policies to support world demand, and these measures need time to be put in place. In the meantime, spare capacity is a myth. Deal.

A struggling currency
Because oil contracts are valued using the USD, the two assets have a cause- and-effect thing going on. The dollar has devalued in recent times as a result of the Fed Reserve printing to cover budget and trade deficits, and from interest rate cuts in recent years. There were very loud calls for replacement of the USD with the Euro as the world’s go-to, premier currency.

==

When you think about it, some of these factors are not really the cause, but merely icing on the cake. The factors with far-reaching domino effects remain the same as for any good – supply and demand. And since the supply is running out, it’s time to put the renewable energy thinking cap on, folks. Oil is taking a sabbatical.
Part 2, coming soon, will attempt to make sense of the effect of these escalated prices in a local – Kenyan – context.

Mumias Sugar 1H09 pretax down 73 pct

2009-02-06T11:55:00.001+03:00

Sugar does not seem to be the business to be in lately. Mumias Sugar’s pretax profit for the 1H09 dropped 73 pc, to KES230.8 million compared with KES864.8 million in 1H08. According to the company, the dismal performance was brought on by a reduction of sugar cane supply due to heavy rains from August to October, a factory shut-down for maintenance in August and a strike by workers, which affected harvesting and transportation operations. Mention was also made of declined demand for sugar due to the global economic downturn and a food crisis in Kenya.

The reasoning behind the ‘global economic downturn’ baffles me; there are very weak linkages between domestic sugar growing and manufacture and the global crisis, since Mumias is not a large exporter to Western and Asian economies. Most, if not all, of its production is consumed locally. The food shortage may be a more plausible justification, and this would only be a viable reason if Mumias’s outgrower cane farmers opted to go the way of subsistence farming, and/or the famine affected productivity of the company’s labour force. Reduced cane supply and a workers strike that affected harvesting and transportation of cane to the factory would be permissible. However, gross sales declined 8.2 pc, and net sales were down 7 pc. Hardly going to result in a 73 pc decline in PBT. Which leads me to attempt to find alternative reasoning, and the problem obviously lies in the expense structure of the company.

High average inflation for the year - approximately 26.2 pc - would be my pick. Lower demand from lower disposable incomes, thus declined revenues, and higher operational costs for the company from runaway fuel prices and spiked energy costs. Time for Mumias to pull their act together.

Opportunities:
• Power generation project: Mumias is currently increasing is co-generation capacity from 2MW to 35MW. They expect to inject an additional 23MW of power into the national grid, raising the company’s contribution to 26 megawatts from 3 megawatts.
• The KES 24billion TARDA Integrated Sugar Project at the Coast Province would be providential. Not only because of the ability to produce matured cane in half the time it takes in Western province, but also because of the ethanol production venture that would allow Mumias to produce and use a cheaper source of power. Also included in this plan is a 34MW co-generation plant, exporting 35MW to the national grid.

Risks:
• The looming 2012 deadline when Kenya’s trade policy changes to allow duty-free sugar imports from COMESA countries. Mumias will face increased competition from cheaper sugar imports every year, until 2012 when the import barriers will be completely lifted. The amount of imports will depend on how much surplus the foreign producers have, and also how cost-effective it is to produce and transport their goods to Kenya. If there exists a significant difference between Mumias’s pricing and their cost of production and transport, then we can expect an influx of sugar imports.
• The TARDA project is mired in court cases filed by environmental lobbyists, and may not be freed up soon enough to allow Mumias to prepare itself for the unrestricted entry of COMESA producers.

The Kenya shilling in 2009

2009-02-04T20:57:00.003+03:00

As with most goods, the currency exchange rate – here I mean the USDKES rate, but the same principles applies to other currencies – is a function of supply and demand. Supply(of the dollar) will be dictated by tourism, agricultural exports and remittances, as they are the key exports; while the major factor of demand is dollar demand by importers. Given these factors, we can attempt a prediction of the relative behaviour of the KES against the USD this year.

Tourism: Despite an additional KES1billion market budget allocated in October, contraction is expected in this industry. The industry has been hard hit in the last one year, first by the post-election violence, then from delayed effects of the global economic downturn. Tourist arrivals from key destinations such as Europe are expected to decline, as middle-income households cut their luxury budgets. The white knights in this bleak scenario may be the high-spenders who maintain their travelling habits, crisis or no. There’s also the conjecture that the election of Mr. Obama as President of the United States may bring in an unprecedented influx of visitors from the US, but don’t count on it. Not that there won’t be any, just that there won’t be enough to cover the deficit from other world regions. The number of households pinching pennies has increased drastically in the last one year, and travels to exotic locations in Africa have become luxury goods. Bottom line: few dollars coming in, less demand for the KES.

Agricultural exports: With commodity prices undergoing a downward correction in world markets, there will be a decline in inflows of dollar earnings from agricultural exports. Horticulture earnings are expected to decline 5-10 pc in 2008 from 2007’s $1billion, if sales are exposed to ramifications from the global crisis. Tea is expected to earn some $684 million in 2008, from $572 million in 2007, but tourism proceeds are forecast to fall by over 20 pc to $665 million. Coffee exports declined 2.4pc in the year to October 2008; the crop has ceased to be a major contributor to Kenya’s forex reserves.

Remittances Remittances are a leading source of foreign reserves for Kenya’s coffers, behind horticulture at and almost at par with tea. As developed and emerging markets slow down, the investment flows that have supported growth are going to decline. Along with FDI and portfolio flows, remittances from Diaspora are expected to drop in 2009, not only in Kenya, but across Africa. This will be another shock to the economy in what has become a series of them. (Just FYI: According to the AfDB, remittances from the African Diaspora are estimated at US$27.8 billion for 2007 alone. Remittances represent 3.9% of GDP for North African countries and about 2% for the rest of the continent).

Demand for the USD (and therefore supply of the KES) by importers is more difficult to predict, because of the varied types of goods that enter the country. On a national scale however, the country’s import bill has expanded significantly during 2008, and the culprit is crude oil – an increase of 64% from October 2007. According to CBK, import cover reserves - foreign currency available for import bill payments - dropped to 3.5 months at the end of October 2008 from 4.30 months. This figure of 3.5 months is an average of imports over a period of 36 months. The one-year figure is more frightening – 2.9 months ONLY. The ideal import cover is 4 – 4.5 months. It is therefore safe to say this should be an ongoing trend in 2009. Reserves as at December 2008 were $2.76 billion. It can be argued that the country’s import bill is going to decline because of falling of oil prices in the international markets, but this remains to be seen, given OPEC’s intention to cut supply further.

With a rising import bill and declining inflows of foreign currency (read dollars), the Kenya shilling is set for a difficult year, and we will most likely see the current trend continue. A range of KES73 – 80 against the USD should be the norm for the year.

Infrastructure and sovereign bonds: inspired thinking or utter folly?

2009-02-04T09:56:00.003+03:00

The postponement of the $500million sovereign bond in November put the skids on the government’s planned expenditure on infrastructure projects. The recently launched (on sale from Jan 28 to Feb 18) 12-year infrastructure bond, seeking to raise Sh18.5 billion from the domestic market is the alternative (See bond prospectus). Possible takers include pension funds and insurance companies, et cetera. The pundits do not think the government will be able to raise even a third of the astronomical amount. I am inclined to agree. In the current economy, sucking KSh18.5bn out of circulation will shrivel up almost all liquidity. The upside: it may just control our runaway inflation. That said, you do have to admire the heads at Central Bank sometimes. Late last year, they reduce the cash ratio for the banks, ensuring there will be sufficient (they hope) liquidity when they launch the bond. Remains to be seen if the ploy works.

Infrastructure investment - rail, roads, water and sanitation, electricity grids, and ports - is touted as a way of combating downturns and recession in economies. The assertion is that such projects attract FDI flows into a country, spurring economic activity and can be reinvested in profitable in developed economies. The government does intend to issue another bond, an international one, seeking to raise KSh33billion, timing not yet determined. The consideration of an international bond brings to fore various issues, and while the below discussion is in no way exhaustive, it gives an idea of the challenges Kenya will face.

Where the money cometh from?
By going the way of international bonds, Kenya will have to compete with other economies for the same funds in a rapidly shrinking pool. Nigeria is looking to raise $500mn, Uganda pulled back from a $1bn issue over sustainability concerns, Tanzania also suspended her $500mn interest following the global credit crisis, Ghana wants to do a second one. And this is just in Africa. Developed economies are upping their debt structure, Australia being a notable example. And let us not forget the ubiquitous U.S of A, which raises huge amounts on a daily basis. Then come the emerging economies - Brazil and Turkey just issued sovereign securities. The effect is a reversal of flows – countries and funds that sought to invest in Africa prior to the credit crisis now need those funds, and have developed a healthy risk aversion. Africa just became untouchable.
Kenya enters the ring at a disadvantage – she does not have the substantial fiscal surpluses based on commodity price booms or current account surpluses that economies such as China have. Such an asset would allow her to comfortably fund investment plans such as the infrastructure bond – borrow and repay without dipping heavily into the returns from projects. Quite the opposite in fact; she is afflicted by a gaping budget deficit. Other alternatives exist, including wooing sovereign wealth funds or private investors. To do this, you need outward-looking trade and foreign investment policies that are competitive enough on a global scale to trounce all others. Our foreign investment policies and political demeanour will be a crucial determinant of the level of investment we attract.

Currency denomination of the bond
CBK governor, Prof Ndung’u, proposes denominating the sovereign bond in local currency – and get rid of all those exchange rate fluctuations headaches. My take: foreign investors would be leery of investing by way of a soft currency such as the Kenya shilling. People see the dollar or the euro, they see stability. Tell them about the Kenya shilling, they see all kinds of risk, real and perceived.

The maturity of our financial markets
Trading an international bond from the NSE is like selling a Mercedes Guardian from a littered junkyard. Archaic regulations and nasty monopolistic tricks abound. I would hope that before they attempt to woo the rich Arabs and their richer sovereign wealth funds, they will at least attempt to sweep the mounds of dirty laundry under the carpet away from prying eyes. Financial markets deepening is not a catchy phrase to be bandied about at conferences and seminars then shut away in the bookcase with the rest of your nicely-bound reports and plaques for speeches delivered, it’s actually something that you are supposed to work on and deliver to your country. Yes, it’s you I’m talking to. You know yourself.

International issues aside, the debut IB has been pegged as a benchmark for future bonds issued by public and private sectors corporations. The question is asked, who is worthy? Among the proposed issuers of these bonds are Kenya Electricity Generating Company (Kengen), Kenya Airports Authority, Kenya Ports Authority and Kenya Pipeline Corporation, because of their inherent stability, born of the nature of their enterprise, and their capital-intensive activities. I’ll bet the CMA never imagined the tricks that Kenya Pipeline could get up to. Daylight robbery, if there was ever a case. Tut, tut, what will the investors think?
More importantly, the critical criteria for issuers will be their ability to sustain the debt and maximize returns from the investing funds acquired. These companies’ balance sheets and accounting practices will and should be subjected to fine-toothed combing, to establish creditworthiness.

Apparently, the CMA has been inundated with requests from multilateral agencies seeking to provide guarantees to state-owned institutions that intend to issue infrastructure bonds. This is what is called irony. Because, believe it or not, there exists a law - it’s in the Local Authorities Act - that prohibits the same parastatals from issuing bonds. Go figure. A guarantee is a very good thing; it significantly lessens the risk of default, and gives potential investors a reason to look at you (the borrower) like you smell of roses instead of with jaundiced, suspicious eyes. Why must we always insist on shooting ourselves in the foot?

This post may seem to lean heavily towards devil’s advocacy and criticism (like much of this blog). However, I do believe the issues raised are pertinent. While we cannot live in a perfect world, we should at least try for some semblance of progress, not regression. If the infrastructure planning does get on track and off the ground safely, companies to watch locally include basic materials suppliers (e.g. cement), engineering and construction companies, telecom and technology companies.

The much-discussed budget deficit

2009-02-03T15:54:00.001+03:00

Reuters recently carried a story on Kenya’s budget deficit, estimated at KES127 billion; apparently, the 2008/09 budget deficit is the largest in independent Kenya’s history. The government is getting hit from all directions; the money is running out fast, and the options running out even faster. Have a look.

Stretched overdraft facility: In November, one of the dailies reported that the government’s reliance on its overdraft facility at the Central Bank had spiked significantly. The facility rose from zero in June to Sh14.1 billion on October 31, 2008 - about Sh2.9 billion away from the threshold. The facility has an authorized limit of Sh16.9 billion and is reserved for immediate funding requirements that cannot wait such as payment of salaries of civil servants or immediate debt obligations.

Postponed sovereign bond: The government was forced to postpone the issuance of the $500 million Eurobond, following a downturn in the global economy. Mr. Michuki may have prevaricated all he wanted, but the plan still had to be shelved. Who’s going to buy another country’s sovereign bond, when their countries need the money? Further, after the meltdown of investment banks in the U.S, investors suddenly became most risk averse. And yes, a bond issued in a frontier market like Kenya is considered high risk, the issuer being sovereign or not. The point here is that risk averse investors will demand a higher premium for lending you their money, which translates to higher interest payments. Issuing the bond as scheduled would have blown public debt out of the water. Lesson learned: Mr. Kimunya (prior to his exit) may have been a tad hasty by incorporating the proceeds of the bond issue as a source of financing for government programmes during the 2008/09 financial year. Now they are talking infrastructure bonds. We will see.

Undersubscribed Treasury instruments: This situation was so dire, the central bank had to slash the minimum investment threshold to attract bids for the weekly auction in Treasury bills and bonds.

So what next to troubleshoot this widening deficit? A Dr. Geoffrey Mwau, Economic Secretary at the Ministry of Finance, interviewed by one of the dailies, says “the widening deficit is a cause for concern.” More like, the concern. If the government cannot finance public expenditure, where exactly are we heading? Think no Vision 2030, you’ll get the idea. He goes further to say, “We expect to re-prioritise and postpone some of the less important expenses in the original budget estimates in view of the revenue shortfalls.” One sincerely hopes that the trips some ministers and government officials had planned by to see Mr. Obama get inaugurated were the very first insignificant expenses that were scrapped.
The government, says Dr Mwau, will also be fast-tracking the privatisation of targeted public corporations and the issuance of a planned domestic infrastructure bond to raise extra cash to finance its programmes. Privatization may work, but someone once told me the government only privatizes parastatals that are on their deathbed. You may look at Safaricom and think that premise is completely off-base, but believe it or not, there are telecom companies way more profitable than our darling Safaricom. In Africa, no less. Further, after the debacle that was Safaricom’s IPO and subsequent listing in 2008, which sane Kenyan is going to go back to the stock market for seconds? Once bitten, twice shy, my friends.

2009 may actually be worse than 2008

2009-02-02T21:03:00.005+03:00

It’s early 2009, and what seemed impossible may become reality. The problems of 2008 may dim in comparison to what Kenyans have faced so far.
We are hungry: A drought that could cause 10 million people to starve is in effect. Reduced productivity of the general population equals decline in economic activity which in turn equals decline in economic growth. The government’s estimate of 3.5 - 4 p.c. growth is looking very optimistic, and may not be achieved. President Kibaki’s belief on the possibility of 7 p.c. growth is looking highly uninformed and smacks of propaganda.
We are burning: in the span of less than a week, there were two fatal fires in Kenya, one in Nairobi, another in Sachang’wan in Molo, Nakuru. These events may seem very localized with no economic impact, but we cannot dismiss them. Most of those people who died constituted a portion of Kenya’s labour force, and while a portion of Kenya’s 60% unemployed population will rise up to fill the gaps, these deceased may have had dependents who will now join the leagues of poverty so many Kenyans are mired in. Or if they were already there, they may sink even deeper. Further, the destruction caused by the Nakumatt fire is worth billions in property and goods, and the future earnings of those employees who lost their livelihood.
Global economic crisis: will impact tourism, trade and everything in between. Africa’s agricultural economies and Europe, which constitute Kenya’s major trade partners, are facing a hectic year, which means Kenya’s revenues from trade will be significantly hit. Tourism will be affected by declining arrivals from Europe and Asia.
Inflation: the National Bureau of Statistics may tell us that inflation has declined in January, but that may only be because they rectified a flaw in the computation formula. The mwananchi is unlikely to feel any lessening pressure in the prices of basic commodities.
And after all that…the government is facing an extensive budget deficit. End result: a series of economic shocks, and no visible mitigating factors or loopholes through which we can escape.

CBR unchanged at 8.5 pc

2009-02-02T19:35:00.005+03:00

The Central Bank Rate (CBR) - benchmark lending rate – will remain unchanged at 8.5 p.c. due to improved market liquidity and the need to allow earlier rate cuts to filter through the economy.
The Monetary Policy Committee left the rate unchanged to allow for the impact of previous decisions to be fully absorbed by the economy.
In December, the MPC slashed the CBR rate by 50 points, and reduced the cash ratio requirement for banks to 5 percent from 6 percent to boost liquidity and stimulate growth.
According to commercial bank officials, the interbank overnight volume and rate improved to approximately 13 billion shillings ($163.3 million) and 5.65 percent from about 20 billion shillings and 7 percent before last December's decision.

Opinion:
Kenya battled with relative hyperinflation for most of 2008, and the central bank’s rate cuts and relaxed restrictions on cash reserve may seem to be the tools to combat the inflation monster. Theoretically, these tools would act by spurring an increase in lending by banks and a counteracting increase in borrowing for investment purposes by consumers and corporations; the end result is increased liquidity in the economy. By using the interest rate as a monetary policy tool to control inflation, the government must also be careful not to shoot itself in the foot. With a burgeoning budget deficit, the Central Bank is sourcing money from wherever it can get it, and one of those sources are individual investors. In December, the threshold limit for investing in Treasury bills and bonds was slashed from KES1million to KES100,000, with the aim of upping the subscription rates at the weekly auctions. The central bank would want to a avoid a situation where it repels its new class of lenders by offering a measly rate. The prevailing rate is already considered unattractive.

Another question can be raised – how effective are these tools in an economy where there are no investment opportunities for which to borrow, or the ones that exist are beleaguered by problems and most likely will not provide sufficient return? What happens when there is no suitable investment climate, where political instability, corruption, poverty and hunger abound, and the commitment of the political class to a better Kenya seems to be waning? These measures become a stopgap, and sooner or later, the floodgates will open. Foreign direct investment will pick up its collective skirts and find better climates in the region – read Tanzania. And Vision 2030 becomes the pipe dream everyone thought it was.

January headline inflation declines

2009-02-02T18:39:00.002+03:00

Kenya's headline inflation eased to 21.9 percent in January from 27.7 percent in December. The drop is attributed to declines in the cost of fuel and power, according to the National Bureau of Statistics.
Core inflation - excludes food items from the consumer price basket - rose, however, to 11.1 percent from 10.6 percent in December.
"The fuel and power index decreased by 2.3 percent ... due to decreases in the cost of diesel, petrol and paraffin," the bureau said in a statement.
A Reuters poll of analysts last month forecast headline inflation slowing to 13 percent by the end of this year, mainly due to a change in the method of calculating the index and base effects.

Comment: While the inflation level may decline in coming months, it is unlikely that the effects of high inflation in the past one year will wear off as fast. The economy is unlikely to grow by more than 4 p.c. in 2009.

Kenya Airways profit warning

2009-02-02T18:20:00.002+03:00

Kenya Airways has issued a profit warning for FY09 ending March – profits are expected to plunge at least 25 percent as a result of the global crisis, high fuel prices and political violence.
In FY08, the carrier’s annual pretax profits fell 2.5 percent to 3.9 billion shillings in 2007/08 from 4.0 billion shillings in FY07.
The company directors however stated that they expect the company to remain profitable, although on a lower scale than previous years.

Opinion:
The PEV in late 3007 – early 2008 cut KQ’s passenger traffic in Q1. High fuel prices also served to increase costs for the carrier.
FY10 outlook is slightly better, but traffic decline will be exacerbated by the global crisis. The decline will be most notable in tourist arrivals from key destinations in Europe and Asia.