Kenya: External Market Volatility to Sustain Preference for Local Borrowing

The month of November is kicking off with two key central bank policy setting meetings in the US and the UK.

Source: DailyFX

Both economies are facing more persistent inflation pressures, largely linked to supply chain bottlenecks, which were initially believed to be transitory.

The narrative has since changed as consumer price increases prove more durable heightening calls for a much sooner than expected unwinding of extensive monetary stimulus measures.

In the US, the Federal Reserve is expected to reduce its bond purchases by the end of this year – as opposed to hiking its policy rate above the current 0.00% – 0.25% range. In the UK, the central bank is expected to not only reduce its asset purchases but as well hike its policy rate beyond the 0.10%.

Expectations of a faster tightening of monetary policy in advanced markets should prove a key headwind for riskier assets. Already in Kenya, Eurobond yields have on average increased by 40.00bps in the month of October. Coupled with a resultant strengthening of the US dollar, volatility in external debt markets should continue to raise preference for local deficit financing.

In Kenya, the anticipated upturn in yields should remain moderated by healthy demand for sovereign risk. Moreover, further improvements in revenue collections following the reopening of the economy and removal of curfew restrictions should help tame local debt appetite – at least for now.

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