Theme: Fiscal Consolidation

Theme: Fiscal Consolidation Presented By: Britam Asset Managers

Date: February 23rd 2016

1

| Unit Trust Funds | Wealth Management | Pensions | Property

| Discretionary Management | Offshore Investments | Alternative

Investments

| Unit Trusts | Wealth Management | Pensions | Property

| Discretionary Management | Offshore Investments | Alternative Investments

Presentation Outline

2

PART ONE: WHO WE ARE

I. Overview of Britam Group

II. Introduction to Britam Asset Managers

PART TWO: FISCAL CONSOLIDATION

I. Fiscal Stimulus – Fast tracking growth to middle income status

II. Fiscal Discipline – Consolidating on previous gains

III. Summary & Outlook

IV. Questions & Answers

PART ONE: WHO WE ARE

3

I. Overview of Britam Group

• About Britam

• Our Regional Presence

• Our Journey

• Corporate & Business Leadership

II. Introduction of Britam Asset Managers

• About Britam Asset Managers

• Asset Management Executive Team

• Britam Asset Managers Growth

• Our Accolades



Investments



0.6

1.0% 1.0%

Britam Holdings Limited

Insurance

Business

Asset

Management

Banking

Business

• Life Insurance

• General

Insurance

• Health Insurance

• Pension

Business

• Unit Trust Funds

• Discretionary

• Property

• Diaspora Service

• Equity Bank

Stake – 10%

• Housing

Finance Stake –

48%

• Britam Properties-

100%

Property

Business

4

About Britam

• Britam is a diversified financial services group, listed on the Nairobi Securities Exchange

• The group has interests across the Eastern and Southern Africa region, with Operations in Kenya,

Uganda, Tanzania, Rwanda, South Sudan, Mozambique and Malawi

• The group offers a wide range of financial products and services in Insurance, Asset management,

Banking and Property



Investments



Our Regional Presence

1965 2016



Investments



First Branch 1970s

Today

End of 2016 Our Journey



Investments


| Discretionary Management | Offshore Investments | Alternative Investments 7

Dr. Benson I. Wairegi EBS

• Group Managing Director

“ Experienced, dynamic and cohesive leadership team and staff”

Kenneth Kaniu

• Chief Executive Officer, Britam Asset Managers

Gladys Karuri

• Director, Group Finance & Strategy

Corporate & Business Leadership

Muthoga Ngera

• Director, Marketing & Corporate Affairs

Nancy K. Kiruki

• Director, Legal & Company Secretary

Stephen O. Wandera

• Director, Insurance



Investments



•Development

Funds

• Income Funds

•Land, site &

service

Real Estate /

Property

•Unit Trust

Funds

•Discretionary

•Pensions

•Cash

Management

Solution

•Wealth

Management

•Diaspora

Services

Public Markets Business Alternative Markets Business

Private

Equity

About Britam Asset Managers

Asset Management Businesses

Vanilla

Products

Structured

Products

Offshore

•Private Equity

Funds

8



Investments



Elizabeth Irungu,

CFA

• Senior Portfolio

Manager

Anne Kibebe

• Business

Development

Manager

Miriam Kahiro

• Legal Manager

Passy Ndirangu

• Business

Development

Manager

Charles Chirchir

• Chief Operating

Officer

Asset Management Executive Team

Kenneth Kaniu

• Chief Executive

Officer

Emily Kariuki

CPA

• Fund Services

Manager

John Etyang

• Head, Business

Development

Janet Waweru

CPA

• Chief

Accountant

Dennis Katei

• Compliance

Manager



Investments



2 4 5 6

16 18

26

37

55

90

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AU

M

in K

ES

B

illio

ns

Years

Britam Asset Managers Growth

10



Investments



Britam Asset Managers Clinched the Fund Manager of the Year Award for three

consecutive years (2011-2013) and the Unit Trust of the Year Award in 2012 and 2013

Think Business Awards 2014-2015

1. Best Performing Equity Fund - Winner

2. Fund Manager of the year, Equity Fund – Winner

3. Unit Trust of the Year – Winner

4. Fund Manager of the year Alternative Investments & Private Equity – Winner

5. Fund Manager of the year Overall - 1st Runners up

6. Most innovative Trust - 1st Runners up

7. Best Trust in Quality Client Service - 1st Runners up

11

Our Accolades

PART TWO: FISCAL CONSOLIDATION

12

I. Fiscal Stimulus – Fast tracking growth to middle income status

• Kenya’s growth story and journey

• Hurdles faced along the way

II. Fiscal Discipline – Consolidating on previous gains

• Expenditure Review

• Funding Review

• Fiscal Deficit Evolution


• 2016 GDP Growth Outlook

IV. Questions & Answers

I. Fiscal Stimulus: Fast tracking

growth to middle income status

13



Investments



Kenya: A Diversified Economy

14

Agriculture

Manufacturing

Real Estate

Trade

Education

Transport

Financial

Services

Construction

ICT

Tourism

2010 2015 2010 2015

24% 23%

12% 11%

8% 8%

7% 8%

6% 7%

7% 6%

3% 3%

4% 5%

6% 6%

2% 1%

• The total contribution of the 4 major sectors has reduced from 50.7% in 2010 to 49.6% in Q3 2015,

indicating increased diversification of Kenya’s GDP



Investments



Vision 2030

VISION 2030

ECONOMIC

• Tourism

• Agriculture

• Trade

• Manufacturing

• Financial Services

SOCIAL

• Education

• Healthcare

• Water & Sanitation

• Environment

• Housing

POLITICAL

• People centered,

result oriented,

accountable &

democratic

political system

Key Focus Pillar

KEY PILLARS

The Second Medium term plan (2013-2017) aims to maintain a stable

macroeconomic environment to facilitate:-

Modernization of Infrastructure

Diversification of Agriculture

Increased contribution of manufacturing to GDP

Food security

SE

CO

ND

ME

DIU

M

TE

RM

PL

AN

(2

01

3 –

20

17

)



Investments



GDP Growth

6.1%

4.6%

5.7% 5.3% 5.4% 5.4%

5.0%

4.3%

4.9% 4.6%

3.4%

4.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2011 2012 2013 2014 2015E Average

Kenya Real GDP Sub Saharan Africa Real GDP

Source: World Bank

Kenya’s GDP growth has outpaced Sub Saharan Africa counterparts

• Kenya has achieved an average GDP growth rate of 5.4% over the last 5 years, compared to 4.4%

achieved by its Sub - Saharan Africa peers due to infrastructure spending and consumer demand

• Economic diversification propelled Kenya’s growth in the face of weakening global conditions

that adversely affected commodity exporters as demand and prices declined



Investments



17

Key Sectors

Source: Kenya National Bureau of Statistics, BAM Estimates, *Q3 2015 annualized figures

With Trade and Real Estate the best performers

• Kenya’s economic growth has been driven by strong performance in trade and real estate, which

have grown by 7.2% and 4.4% respectively since 2012

• Agriculture and manufacturing have also registered robust growth rates of 4.3% and 3.0%

respectively over the same period. These have all combined to result in the realized growth rates

2.9%

5.2%

3.5%

5.5%

-0.6%

5.6%

3.4% 3.6%

7.0%

8.5%

6.9% 6.3%

4.0% 4.1%

5.6%

3.9%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2012 2013 2014 *Q3 2015

Agriculture Manufacturing Trade Real Estate



Investments



Inflation has largely been contained in recent years

• After touching 14.0% in 2011, inflation has come down considerably, remaining within the CBK

range of 5% (+/- 2.5%) in the last 3 years

• This can be attributed to sound and active monetary policy by the CBK’s monetary policy

committee

Source: IMF

Inflation

14.0%

9.4%

5.7%

6.9% 6.3%

8.5%

9.5% 9.4%

6.6% 6.4% 6.9%

7.8%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2011 2012 2013 2014 2015E Average

Kenya Inflation SSA Inflation



Investments



19

Headline inflation remains vulnerable to supply side shocks such as food inflation

• Food inflation, which contributes approximately 36.0% to headline inflation, remains a key risk as

this cannot be managed via traditional monetary policy tools

• However, core inflation, which the CBK has actively managed via its monetary policy tools, has

remained in single digits over the last economic cycle

Source: KNBS, BAM Estimates

Food & Core Inflation

18.9%

10.5%

7.5% 8.8%

11.4%

6.3%

9.5%

4.2% 4.3% 4.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2011 2012 2013 2014 2015

Food Inflation Core Inflation



Investments



Local interest rates have compared favorably to East African Peers

• Local 3 month Treasury bills have averaged 10.1% during the last 5 years. This is lower than

Tanzanian and Ugandan 3 month treasury bills over the same period indicating that the Kenyan

government has been able to secure domestic credit on cheaper terms than EAC peers

Source: Bloomberg Information: 3 month Treasury Bills

Interest Rates

10.9% 10.1%

8.8%

10.5%

3.8%

6.1%

15.8%

13.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2015 5 Year Average

Kenya 3 month T bill Tanzania 3 month T bill Rwanda 3 month T bill Uganda 3 month T bill



Investments



The KES has been resilient despite recent pressures, to outperform regional peers

• The KES has averaged 5.1% in annual depreciation to the USD over the past 5 years, with Uganda

and Tanzania averaging 8.2% and 8.1% depreciation over the same period

• Increased diversification of foreign currency inflows helped shore up the KES despite Kenya

being a net importer

Source: Bloomberg; Information: Annual currency depreciation to the US Dollar

Regional Currencies

-12.9%

-5.1%

-22.0%

-8.2%

-24.0%

-8.1% -8.0%

-4.7%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

2015 5 Year Average

Kenya Shilling Uganda Shilling Tanzania Shilling Rwanda Franc



Investments



The Shilling’s depreciation has also been partly due to global US Dollar strength

• As highlighted above, currency depreciation has not been unique to Kenya or East Africa, with

global US Dollar strength affecting even the most prominent global currencies. The Euro, Sterling

Pound and Chinese Yuan all depreciated during 2015 by 10.2%, 5.4% and 4.4% respectively

Source: Bloomberg

Global US Dollar Strength

85

87

89

91

93

95

97

99

101

103

105

Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

EURO Sterling Pound Japanese Yen Chinese Yuan



Investments



23

Export growth has regularly lagged import growth, leading to a weaker balance of

trade position. This has hampered the overall balance of payments

• Kenya’s overall balance of payments has ranged -3.7% to 3.3% of GDP in recent years, following

robust performance from the capital and financial accounts

• The overall balance of payments has been hampered by poor export growth, which has averaged

6.9% over the last 5 years compared to 4.9% import growth over the same period, thus widening

the balance of trade deficit. The balance of payments crossed into negative territory in periods of

currency support via the use of forex reserves

Source: KNBS, BAM Estimates

Balance of Trade vs. Balance of Payment

-22.6% -22.8% -24.2%

-26.2%

-21.7%

-2.4%

3.0% 0.9%

3.3%

-3.7%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

2011 2012 2013 2014 Q3 2015

Balance of Trade/ GDP Balance of Payments/GDP



Investments



Kenya’s Current Account Deficit has been wider than Sub Saharan peers

• Kenya’s deteriorating balance of payments has resulted in a widening current account deficit,

averaging 8.8% over the last 5 years, with Sub Saharan Africa peers averaging 3.5% over the

same period. This has increased the Kenya Shilling’s vulnerability to external shocks

• Exports have been affected by slowing demand from our main trading partners. Meanwhile,

imports have been growing as a result of increased infrastructure projects in the country

Source: IMF, BAM Estimates

Current Account

-9.1% -8.4%

-8.9%

-10.4%

-7.2%

-8.8%

-0.7%

-1.9% -2.4%

-4.1%

-5.7%

-3.5%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2011 2012 2013 2014 2015E Average

Kenya Current Account/GDP SSA Current Account/GDP



Investments



Fiscal Deficits

Kenya’s fiscal deficits have remained above SSA average and peers over the years

• While GDP growth has outperformed the SSA average over the same period, there is still need for

more fiscal consolidation to rein in the fiscal deficits in the medium term

• The evolution of Kenya’s fiscal deficits underscores the policy directives undertaken to spur

growth in the economy in line with the Vision 2030 Blueprint

• However, this has left the country vulnerable to large interest rate and currency movements

-7.4% -6.5%

-7.9% -7.3%

-8.7%

-7.6%

-2.4% -3.3%

-4.3% -3.9%

-3.3% -3.5%

-11.7%

-9.6%

-6.9%

-3.8% -4.2%

-7.2%

-4.3%

-3.0% -2.6%

-4.5%

-7.0%

-4.3%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2011 2012 2013 2014 2015E Average

Kenya SSA Average Tanzania Uganda

Source: IMF



Investments



Average yields on benchmark bonds have been increasing, creating pressure on the

government’s borrowing costs

• Yields on 5 year and 10 year bonds stood at 13.2% and 13.4% during 2015, their highest levels in

the last 5 years, while 2 year bond yields were also quite high at 12.9%

• The increase in the fiscal deficit has led to increased borrowing pressure for the government

resulting in a corresponding rise in interest rates

Source: NSE, BAM Estimates

Cost Of Funding

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

2 Year Yields 5 Year Yields 10 Year Yields

II. Fiscal Discipline: Consolidating

on Previous Gains

27



Investments



Revenue vs. Expenditure

Source: Budget Policy Statement 2015 & 2016 * Based on Preliminary Figures **Revised Budget Figures

Government expenditure has grown at a rate of 19% p.a. over the last 4 years

• Government expenditure has more than doubled over the past four years growing from KES 948

billion in FY 2011/12 to KES 1.9 trillion in FY 2015/16

• Expenditure growth has outpaced revenue growth necessitating an increase in government

borrowing. This has been financed both domestically and through foreign debt

28

764 867

974 1,106

1,311

948

1,132

1,301

1,639

1,907

0

500

1000

1500

2000

2500

2011/12 2012/13 2013/14 2014/15* 2015/16**

Total Revenue Total Expenditure



Investments



GDP By Consumption

The proportion of gross fixed capital formation to GDP at 21% is in line with the rate observed in other

developing countries

Government consumption expenditure has remained stable as a percentage of GDP

Gross fixed capital formation has increased over the last three years following greater spending on

infrastructure, real estate and machinery

Source: KNBS Economic Survey 2015

14.1% 14.4%

77.6% 76.0%

21.0% 20.0%

-14.6% -12.7%

1.9% 2.2%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2014 5 Year Average

Government consumption Private consumption Gross fixed capital formation Net Imports Others



Investments



Recurrent vs. Development Expenditure

Recurrent Expenditure has declined from 21% to 15% of GDP over the past 5 years

Fiscal policy has been redirected towards investment led growth resulting in the decline of the

proportion of recurrent expenditure to GDP

Development expenditure as a proportion of GDP has remained relatively stable over the same

period due to this shift in focus

20.8%

17.2% 16.3%

17.7%

14.9% 15.3%

8.7%

6.4% 7.4% 6.8% 6.3%

8.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009/10 2010/11 2011/12 2012/13 2013/14* 2014/15**

Recurrent Expenditure % of GDP Development Expenditure % of GDP

Source: National Treasury, QEBR Q415



Investments



Development expenditure has continually lagged recurrent expenditure

• The execution gap on development expenditure has persisted with recurrent expenditure outturn

exceeding budget at the expense of development expenditure

• Kenya has failed to meet budgetary targets in recent years, with actual development expenditure

only achieving 66%-80% of targets

• This has served to compromise on GDP growth, as development projects take a back seat to

recurrent expenses

Source: Treasury, BAM Research

Budget Absorption Rates

96% 94% 98%

105%

69% 66%

80% 74%

0%

20%

40%

60%

80%

100%

120%

2011/12 2012/13 2013/14 2014/15

Recurrent Expenditure Development Expenditure



Investments



32

Government Spending

New budgetary framework, anchored on driving growth has increased allocation on economic affairs

to 26% in 2015

• Increasing expenditure allocation to economic affairs which includes the key economic sectors

such as manufacturing, construction, transport and agriculture is expected to be a driver of

future growth

Source: KNBS Economic Survey 2015

Others* ;This includes transfers of general character, social and environmental protection, health, recreation and housing and community amenities

Expenditure as a % of public expenditure

19.6% 20.6%

13.6%

17.7%

10.6%

18.0% 16.9%

25.6%

10.9%

16.3%

8.2%

22.1%

0%

5%

10%

15%

20%

25%

30%

Public DebtTransactions

Economic Affairs Security Education General PublicService

Others*

4 Year Average 2014/15



Investments



33

National vs. Country Governments Expenditure

The National government expenditure proportion to GDP has remained fairly constant despite

transfers to county governments.

As more functions are taken on by county governments in future, national government

expenditure will need to reduce in order to curtail fiscal pressure from excess spending

Figures; KES Billions

Source: National Treasury QEBR Q4 2015 ;* Preliminary Results ,** Printed Budget

592 650 796 750

874

219 295

306 319

478 10 193

229

0

200

400

600

800

1000

1200

1400

1600

1800

2010/11 2011/12 2012/13 2013/14* 2014/15**

National Government Recurrent National Government Development Transfers to County Government



Investments



Government Revenue

Source: Budget Policy Statement 2015 & 2016 * Based on Preliminary Figures **Revised Budget Figures

Total revenue has grown by 81% from FY 2011/12 to FY 2015/16

• The 2016 Budgetary Policy Statement indicated a downward revision in expected revenue for FY

2015/2016 by approximately KES 47.3 billion on account of projected shortfalls in tax, which

accounts for over 90% of government revenue

• The contribution of Tax to total revenue decreased by KES 53 billion while that of Grants and

Appropriations in Aid to total revenue went up by KES 5.6 billion

34

774 748 797 776 920 919

1,086 1,031

1,255 1,202 15 70 91

67 55

94 75

103 109

75 21

27

59

28

73 73

600

800

1000

1200

1400

1600

Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual

FY2011/2012 FY2012/2013 FY2013/2014 FY2014/2015* FY2015/2016**

Tax AiA Grants



Investments



Main sources of tax revenue have been income tax and value added tax

• Total revenue has grown by 55% over the last 4 years driven by growth in excise duty (71%), VAT

(60%) and income tax (57%)

• The downward revision in ordinary revenues is on account of projected shortfalls in Income tax

(KES 37.5 billion) largely on account of PAYE and VAT (KES 14.1 billion)

Tax Revenue

Figures: KES Billions

Source: Treasury; Budget Policy Statement 2015 & 2016 * Based on Preliminary Figures **Revised Budget Figures

35

373

450

509

586

58 68 74 85 86 102 116 147

185

233 260

296

74 67 73 89

0

100

200

300

400

500

600

700

FY 12/13 FY 13/14 FY 14/15 * FY 15/16 **

Income tax Import duty(net) Excise duty Value Added Tax Other



Investments



Kenya has the highest tax to GDP ratio in the EAC

• Kenya’s tax to GDP ratio is expected to continue outpacing its EAC peers, growing from 17% of

GDP in 2010/2011 to 21% of GDP in 2015/2016

• Government remains keen on tax reforms to broaden the tax base, with plans to grow revenue

by 2% of GDP in FY 2015/16.

Tax to GDP Ratio

Source: African Economic Outlook

36

21%

18% 18%

16%

11%

13%

17%

14%

0%

5%

10%

15%

20%

25%

2015/2016(p) 5 Year Average

Kenya Tanzania Uganda Rwanda



Investments



37

Evolution of Debt Levels

Source: KNBS

Fiscal expansion program has led to increased debt levels

• Kenya’s stock of domestic and foreign borrowing has grown at an annualized growth rate of 18%

over the last 5 years, in line with the growth in government expenditure while nominal GDP

expanded by 14% year-on-year

• Debt levels have remained sustainable at 50% of GDP, below the 55% comfort level advocated by

the IMF for developing economies

600 686 822 922 1,171 1,491

720 800 971 1,189

1,308 1,541

3,169

3,726

4,261 4,731

5,358

6,088

42% 40%

42% 45%

46% 50%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015*

Fig

ure

s in

KE

S B

illi

on

s

Foreign Debt Domestic Debt GDP Market Prices Total Debt/GDP



Investments



38

Foreign vs. Domestic Debt

Source: World Bank

Stock of foreign debt has increased over the years

• Kenya’s stock of foreign debt has increased over the last two year after receipt of Kenya’s maiden

Eurobond in 2014, but still remains sustainable below 25%

• Kenya’s merchandise and services exports cover foreign interest payments 20 times, having

fallen to 10 times in 2014 after the repayment of the syndicated commercial loan in the year

19% 18% 19% 19%

22%

24% 23%

21% 23%

25% 24% 25%

29 28

26

20

10

20

0

5

10

15

20

25

30

35

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015

Foreign Debt/GDP Domestic Debt/GDP Foreign Interest Payments Coverage Ratio



Investments



Fiscal Expansion & Debt Accumulation

Robust GDP growth has been supported by fiscal expansion framework

• Fiscal expansion framework adopted by the government has resulted in higher GDP during

expansionary fiscal policy and accumulation of debt to finance the deficits

• Fiscal propelled growth has proven to be unsustainable in the long term and there is therefore

need for anchoring future growth within a fiscal consolidation framework

-7.4% -6.5%

-7.9% -7.3%

-8.7% 0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2011 2012 2013 2014 2015

Fiscal Deficits GDP Growth Debt to GDP (R.H.S)

Source: IMF



Investments



-1.5%

-2.8%

-6.0% -5.7% -7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

2001-2005 2006-2010 2011-2015 2016-2019**

40

Fiscal Consolidation Average Budget Deficit % of GDP

Source: IMF ; ** 2016 BPS Estimates

The Case for Fiscal Consolidation The Case for Fiscal Stimulus

The initial stimulus was to drive

growth in the face of global and

domestic macro economic shocks

experienced in 2008-2009 and 2011

The government spent more to drive

growth leading to GDP expansion

GDP has grown from KES 3.1 trillion

to KES 6.0 trillion. Fiscal deficit as a

% of GDP should fall to reflect the

expansion in the economy.



Investments



41

Fiscal Cycle: Potential Pitfalls Of Expansionary Policy

Soaring Fiscal

Deficits to stimulate growth

Rising GDP Growth, Rising

Inflation

Soaring current account deficits, currency weakness

Rising interest rates & debt levels

& susceptibility

to external shocks

Softening GDP growth,

poor performance

of key sectors

Government increases

expenditure to catalyse

economic growth

focusing on development

projects and creating

more jobs in the

economy

Debt financing pressures

results in reduced

implementation of

development projects

thus spilling over to the

private sector resulting in

economic slow down

Government increases

domestic and foreign

borrowing to support

increased spending.

Thus, cost of government

debt increases

Unemployment rate drops

and wages rise. Import bill

rises due to increased

expenditure by government

on infrastructure projects

and higher disposable

income

We are here


42



Investments



Despite several hurdles along the way, economic growth has been impressive. Fiscal

discipline would enable the government to consolidate on previous gains

• GDP Growth impressive: GDP growth has averaged 5.4% over the last 5 years, while regional peers

have averaged 4.4% over the same period. This has been facilitated by:

A vibrant, well diversified economy

Stable currency, interest rates and inflation

Sound monetary policy & expansionary fiscal policy

• Challenges still remain: Kenya’s economic growth has been curtailed by:

Wide fiscal and current account deficits

High cost of borrowing

Low budget absorption rates

• Fiscal Consolidation is key: We believe fiscal discipline will enable the government to consolidate on

previous GDP growth and set up the economy for even better economic growth going forward

Summary



Investments



With Global Growth Stuttering, More Consolidation Is Needed While the fiscal stimulus program has proven effective in spurring growth, it has come

at a cost of more susceptibility to external shocks and credit cycles

• Increased Domestic Borrowing: The increased financing of the budget deficits through domestic

borrowing has had the following consequences:

High interest rate environment in the country

Crowding out of the private sector during peaks in the interest rate cycles

Inconsistency between monetary and fiscal policy regimes

• Expensive Foreign Borrowing: Substituting domestic for foreign borrowing has had its own challenges:

More commercial financing as opposed to concessional loans

Weak performance of the Kenya Shilling amplifying foreign liabilities

Emerging and Frontier Markets aversion has been gaining traction as risk builds up

• Fiscal Consolidation is paramount: Fiscal discipline enables us to consolidate on current growth

trajectory, build a platform for more sustainable growth and mitigate against adverse external shocks



Investments



Outlook

Economic Growth 2016 5.5% to 6.0%

Fiscal & Monetary

Policy

Inflation &

Interest Rates

Currency

Currency: Shilling to exhibit more gradual depreciation in

2016 as global dollar strengthening wanes off and current

account deficit narrows. We expect the Shilling to trade

between 102.00 – 108.00 on average in 2016

Fiscal Policy: Fiscal consolidation efforts by the

government are expected to complement monetary policy in

taming the appreciation of rates in the near term. We expect

more commitment from the government in cutting fiscal

deficits below 7% in the medium term

Monetary Policy: We expect the CBK to have increased

scope for a reduction in CBR during the second half of 2016

after shoring up liquidity and refinancing management

during the first half of 2016

Inflation: Inflation for 2016 is expected to average 6.8%

trending downwards in the year, driven by softer food,

electricity and fuel prices

Interest Rates: Short term interest rates are expected to

trend between 13%-14% on average in 2016, as the CBK

seeks to balance borrowing needs



Investments



46

Fiscal Discipline: The Way Forward

Expansionary fiscal policy, average 7-8% fiscal deficits

Rising inflation, interest rates and widening current account

Rising economic growth, increased susceptibility to external shocks

Adoption of fiscal discipline. Fiscal deficit below 5% on average

Economy more resilient to external shocks. Interest rates, inflation and currency exhibit stability

Robust and sustainable private sector led economic growth, averaging 6.5% - 7.0% in the medium term

Fiscal Consolidation Growth

Fiscal Expansion Growth

THANK YOU

With you every step of the way

47

Documents

Theme: Fiscal Consolidation