Kenya: Threats to COVID-19 rollout and yield curve play in focus

Kenya’s economic recovery seems well underway. Private sector activity has improved, mobility indicators reveal an uptick in movement and it seems that the Kenyan population is slowly returning to some kind of normalcy. As a result, the economy could expand by between 5.50% and 6.00% in the full year 2021 although this largely reflects a low base.

However, there are concerns that this return to normal could be triggering a third wave. On Sunday, the positivity rate rose to around 10% and while this may just be one data point, it does increase calls for a speedy rollout of vaccines in Kenya.

The question now is … will the pace of the vaccine rollout be sufficient to counter any potential increase in COVID-19 infection rates?

Well, the government has confirmed that about one million vaccines will be arriving into the country in the wee hours of Wednesday morning and will be ready for distribution by the end of this week. Further, the authority confirmed that Kenya had in total secured around 3.5mn doses via the COVAC arrangement which should be distributed within the first half of 2021.

Now, this 3.5mn vaccine doses translates to a meagre coverage of about 6.7% of the Kenyan population and will mainly target frontline workers. There is also some doubt as to the quantum of vaccines the government can afford to vaccinate all Kenyans though I must highlight that there is a real possibility that private institutions/hospitals will as well secure some vaccines and sell them at a much higher cost than the government’s projected KES 200 per shot.

A modest coverage of the population coupled with realities of hurdles in distribution, concerns around a ‘third wave’ and new mutant strains, could interrupt earlier optimism around the country’s bounce back potential.

Possible setbacks to the recovery could further aggravate government finances sustaining a wide fiscal deficit should spending needs remain sticky. While efforts to ease expenditure especially around debt restructuring, moratoriums and increasing the pool of concessional financing have thus far proven successful, revenues are expected to underperform projections even after the reversion to pre-COVID tax rates.

However, could there be a slight silver lining for revenue collections??

Rising global crude oil prices, currently around US$ 60 a barrel, have sustained upward pressure on local fuel prices. According to recently released inflation data for the month of February 2021, fuel inflation has maintained a 3-month acceleration. It is projected that crude oil prices will remain elevated in 2021 supported by an increase in demand linked to the global economic recovery. However, this is subject to a possible enhancement in crude oil production which is currently under debate by OPEC and OPEC+ nations.

The current positive outlook for oil prices could sustain higher fuel prices in the country. It is estimated that between 40% and 45% of fuel prices are tax related so it could be assumed that tax revenues could be supported somewhat at least in the short term.

That being said, the government’s debt appetite is projected to remain elevated and yields should continue to trend higher. A modest rise in inflation expectations (February 2021 = 5.78%), albeit anticipated not to overshoot the 7.5% upper band, should as well further support an upturn in yields.

That said, healthy demand for government securities could somewhat blunt the upward momentum. Subscription to Treasury auctions have proven successful with the central bank seemingly more willing to absorb more ‘expensive’ bids ahead of its target.

An anticipation of higher yields should maintain the bias towards investments on the shortest end of the curve. A widening yield differential between the six and twelve month papers could enhance preference for the latter. Year to date, T-bill yields have risen to 6.931% (up 2.50bps), 7.722% (up 32.20bps) and 9.014% (up 66.60bps) for the 91, 182 and 364 day papers respectively.

Also more BROADLY, angst over succession politics may shift investor interest to the shortest end of the curve as markets gauge political temperatures to the run up of the August 2022 general election. This may sustain subscription to as well issuance of government securities with short and medium term maturities.

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