Tension was high in the wake of the Kenyan presidential election. President Uhuru Kenyatta won with 54.2% of the vote (on a turnout of 8.2million votes) versus 44.9% for opposition leader Raila Odinga. However, in what was a shock to markets, the Supreme Court later ruled that the result was “invalid, null and void” as it had not been conducted in accordance with the constitution. While many will see the decision in a negative light, it is also a display of judicial independence and represents an opportunity to build genuine trust in the country’s institutions, especially in the highest courts.
Despite the surprise ruling, the market reaction on the Eurobonds and the local market has been relatively muted so far. This is encouraging, although there is lot of uncertainty about what the next couple of months hold before the re-run, so there’s scope for further downside as tension inevitably increases once again.
The currency should hold up given the central bank has plenty of firepower to defend any speculative attacks on the shilling. In fact, policymakers have near record reserves of around US$8 billion and have clearly signaled their willingness to protect the shilling before the election. The Eurobonds and local rates could, however, encounter further pressure as the additional election spending will weigh on an already poor fiscal position.
I would expect the re-run will be a lot tighter than the last one. The Jubilee Party still has the advantage of the incumbency and, let’s not forget, the judges did not find them guilty of any irregularities. But Odinga is going to feel vindicated and emboldened which will swell his support. The main concern at this stage is just how much tension will ratchet up. The electoral reforms and attempts to bind Kenya’s tribes together more closely after the 2007 and 2008 election will be tested. It’s definitely a victory for the independence of the judiciary but it does strike a match pretty close to the tinderbox.
Moving away from the political scene, the country’s finances are being managed much more prudently than they previously have been. They’ve learnt the lessons of 2015 when the currency sold off heavily, rates rose to 22% and a series of banks failed. The root cause then was a host of concerns about the country’s finances. Some of the causes of the upheaval then, like whether the Fed would aggressively raise rates, were beyond Kenya’s control. But authorities have learnt that they could have done more to control some of the factors. For example, foreign exchange reserves dwindled to worrying levels and have since been built back up to near record levels. The economy is in much more resilient shape than it was back then.
President Kenyatta has indicated that infrastructure will remain a priority along with reining in the high fiscal deficit. These are worthy priorities. Improved infrastructure could make a massive difference to the economy. For instance, the new train line between Nairobi and the port at Mombasa should cut journey times for manufactured goods from two, or even three, days to four hours. The fiscal deficit has been steadily coming down over the last three years but more progress would be welcome. Speculation that the controversial interest rate cap will be removed now that the election is out of the way is also encouraging.
On the other side of the continent, the health of Nigeria’s President Muhammadu Buhari continues to deteriorate and some predict dark times should Buhari be unable to serve out his term. We’ve been here before though, and without drama. When the then-President Umaru Yar’Adua died in office in 2010, the appropriately named Vice President Goodluck Jonathan stepped in without a fuss.
If Buhari is unable to finish his term then there’s little chance for the structural reforms that Nigeria so desperately needs. But Buhari has shown little appetite for reform so his being in office or not makes little difference to whether those reforms will happen. Governance in Nigeria has continued even as the President’s health has worsened. The country belatedly accepted the need to allow its currency to adjust when the President was in London on a medical trip. The currency adjustment has been largely credited to Vice President Yemi Osinbajo, who would be viewed as a safe pair of hands heading into the 2019 elections.
Ghana’s credible plan
Ghana has had a torrid time in recent years but is a model for democracy in many ways. It has had a strong dual-party system in which both sides have swapped the leadership mantle going back to 1992, when elections were first restored. There was naturally some scepticism when the opposition New Patriotic Party (NPP) took office in 2016. It inherited a poisoned chalice from the previous leadership who blew a hole in Ghana’s finances and any reputation for fiscal responsibility. After winning by a comfortable 7% margin, the NPP reassured investors that it would stick to the campaign pledge and right the country’s finances. That might seem like a straw man coming from a party that was voted out less than a decade ago for fiscal indiscipline. But it has unveiled a very credible plan – a fiscal framework capping the deficit at 3.5% of GDP – that is rare in emerging markets, and unheard of in Sub-Saharan Africa.
It would be remiss not to mention that Ghana has benefitted this year from a benign external backdrop to help finance a high fiscal deficit. Foreign demand for local currency debt has been fairly robust while Eurobond yields have fallen to around 7%.
Outlook and positioning
From a market standpoint, Kenyan Eurobonds have performed well this year with the 2024’s offering a yield just above 6%. Kenya is one of the more stable economies in Sub-Saharan Africa. Nairobi is the location for a number of multi-national companies. It has sustainable debt and ample foreign currency reserves (along with the support of the International Monetary Fund (IMF) if necessary) to help stem any heightened volatility in the currency, which has been stable amid the negative headlines. The country is not without its issues but it has a credible plan and it is working.
In Nigeria, there’s something more to the appetite for debt than the perpetual search for yield. Nigeria issued a 15 year Eurobond earlier this year which was eight times oversubscribed and the yield has fallen over 1% to 6.7%. Following a long hiatus, offshore demand for local currency debt is also reviving as investors are getting more comfortable with the new currency regime.
Meanwhile, the elephant in the Ghanaian room is debt sustainability. All eyes are on whether they deliver on the fiscal targets under the existing IMF programme, and the market is pushing Ghana to extend it beyond April 2018. But, for now, the negative headlines about the country, and continent as a whole, remain overblown.
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