Kenya as Biggest Bond Loser Isn’t Scaring Morgan Stanley Analyst

Updated on

Kenya’s domestic bonds lost more money for dollar investors than any other emerging-market debt last quarter. Yet for Morgan Stanley, now is the moment to put cash into the east African nation.

An index of Kenya notes fell 6.9 percent in the three months through June 30, the most among 31 developing nations tracked by Bloomberg, while the shilling weakened 7 percent against the dollar in the period, its fifth straight quarterly drop and longest run of losses since September 1999.

For Morgan Stanley economist Michael Kafe, that’s no cause for alarm. Investors should focus on the government’s financial support for transport and energy, the country’s oil discoveries and an economic growth rate above the sub-Saharan average. No matter that tourism earnings and tea production are falling, and the strength of the U.S. dollar has rendered Kenya’s first interest-rate increase in 3 1/2 years last month all but ineffective in shoring up the shilling.

“There’s no better time to be in Kenya than now,” Kafe, who covers African economies from Johannesburg, said by phone on Tuesday. “They’ve got all those big capital-expenditure programs coming up. In the next three to five years they’re going to be a producer and likely an exporter of oil and that changes the economy completely.”

Fed Risks

Investors in Kenya, like other frontier and emerging markets, will have to navigate the likelihood that capital flows will start to reverse as the Federal Reserve prepares to raise borrowing costs for the first time since 2008. To make local bonds more appealing and compensate foreign investors for the currency risk, yields will have to rise, according to Standard Chartered Plc.

“We’re really in a downward trajectory in terms of foreign participation, so for that to reverse, rates will have to go significantly higher from where they are now,” Samir Gadio, head of Africa strategy at the London-based bank, said by phone on July 30. “Foreign investors would get involved at somewhere around 14 to 15 percent. That seems to be the range that people like when the currency is relatively stable or at least depreciates moderately.”

Yields on shilling debt due January 2024 rose 69 basis points last quarter to a record 12.90 percent. The securities dropped for a second day on Thursday, falling 14 basis points to 12.66 percent by 6 p.m. in Nairobi.

Not Vulnerable

The shilling weakened 0.3 percent to 99.65 per dollar on Thursday. That’s the lowest on a closing basis since October 2011 and comes about three weeks after the Central Bank of Kenya raised interest rates more than forecast to 10 percent to try to stem the currency’s slide. The bank is due to make its next announcement on rates on July 7.

The currency will begin to stabilize because of the rate increase and as the country improves sources of foreign financing, Finance Secretary Henry Rotich said on Tuesday. Funding for many of the infrastructure projects has also been put in place, which should reduce foreign exchange demand, he said.

“I don’t think Kenya is particularly vulnerable,” Mahan Namin, who helps manage $60 million in African fixed-income assets at Insparo Asset Management, said by phone from London on Tuesday. Kenyan bonds “are still viewed as a favorable asset. It just has to be taken in context of the global macro backdrop, which is far from good.”

Kenya’s economy expanded at a rate of 4.9 percent in the first quarter as gains in agriculture, financial services and construction compensated for a drop in tourism following a spate of terrorist attacks, the statistics office said on Wednesday. The World Bank predicted in March that Kenya’s gross domestic product would grow 6 percent this year, while sub-Saharan Africa’s would expand 4.2 percent, compared with a global average of 2.8 percent.

“Kenya, in the context of sub-Saharan countries, is one of the better-run ones,” Morgan Stanley’s Kafe said. “From a long-term perspective, you would like to stick your money in there.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE