Category Archives: Barclays

Kenya 2018 Budget Breakdown from Barclays

Barclays Bank has released a detailed budget breakdown of Kenya’s estimates for the year 2018/19. This was at an event for corporate investment banking clients of Barclays with a theme of “demystifying the national budget.” and which came a few days after Kenya’s Cabinet Secretary (CS) for Treasury, Henry Rotich had delivered his budget speech and estimates for the year to the country’s parliament.

The Barclays budget breakdown team featured Samantha Singh a Senior Analyst – Macro Research, Barclays Africa Group, Anthony Mulisa (Regional Treasurer East Africa), Peter Mungai (Head of Tax, Barclays Kenya) and James Agin, (Corporate Investment Banking Director). Anthony Kirui the Barclays Director of Markets said that while other accountants and audits had done budget analysis that mainly looked at the tax implications, the Barclays budget breakdown would focus on macroeconomic issues that affect their clients.

Some Highlights 

Revenue Targets:  The Kenya revenue estimates for 2018/19 are very bold, aiming for Kshs 1.9 trillion of domestic revenue, which is 40% more than last year. This is premised on a projected GDP growth for Kenya this year of 5,8%, but which Barclays expects will be at 5.5%

Tax Increases: Some new measure include import duties on iron, steel, oils, excise duties on money transfers sugar, private vehicles, and revised capital gains taxes, withholding taxes and business permit taxes. The Barclays team said that the income tax bill 2018 replaces some 1974 legislation that has not kept pace with time also changes the VAT act, and stamp duty acts.

The budget also moves several items from being zero-rated to be exempt, which means that suppliers are prohibited from claiming refunds and this will result in higher costs of products will be passed on to consumers. Also value added tax (VAT) on fuel products kick in from September 2018, while Kerosene taxes will also go up to match those of petrol.

While the CS mentioned reconsidering the 35% income tax on individuals, he was silent on that of corporations which are now likely to go to 35%, the highest in East Africa. The Barclays team said that Parliament needs to critically look at this, as the average corporate income tax rate across Africa is at 28%, while globally it is 25%. Also, the modalities of a new 0.05% excise duty on financial transfers of more than Kshs 500,000 ($5,000) need to be clarified.

Managing Deficits: Kenya’s deficits have been widening and this is due to lower revenues and higher expenditure, especially of recurrent items. Still, the government targets to reduce the fiscal deficit from 7.2% to 5.7% of GDP. The fiscal deficit is about Kshs 600 billion for 2018-19 is quite large; which the government plans to finance it with a mix of domestic and external finance, but Singh said it will be more difficult for Kenya and other African economies to get Euro Bonds as US interest rates are rising.

She said debt was not necessarily bad, but it was more about where the money went, which should be towards development, but not for recurrent expenditure or to defend currencies. The team was also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget while development expenditure is 25% of the budget.

Barclays expect foreign exchange reserves to remain adequate but that with an IMF facility ending in September, Singh said that international investors would want to see Kenya affiliated with IMF and have some standby assistance (even though the IMF is not popular), or it will be hard for them to continue to finance the fiscal deficit.

Debt & Development: The Barclays team was concerned that 4 out of every 10 shillings raised this year will go to pay for debt, and they were also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget. They noted that two years ago, 33% of the budget was going to development; now it is down to 25% and that is still going to come under more pressure as public salaries and recurrent expenditure goes up unless the government strengthens its public finance management, ensure efficiency in the collection of taxes, cut waste & corruption, and ropes in a large part of the population who are not making a fair contribution – and the team opined that if these three measures were achieved, the budget’s ambitious targets would be met and this could even enable future tax cuts.

Local Industry & Manufacturing Support: The Kenya government plans to grow manufacturing’s share of GDP from 9% to 15%. This will be enabled by raising customs taxes on iron, steel, textiles, footwear in order to promote local industries by protecting them from cheap imports. The government has also come up with offer off-peak electrical energy schemes at lower tariff’s to encourage businesses to manufacture over 24-hours.

Interest Rate Caps: In his budget speech last week, the CS Treasury requested a repeal of interest rate caps and the Barclays team was hopeful that would be approved by Parliament, saying that the cap had resulted in unintended consequences that were detrimental to the credit sector – with small businesses being unable to access bank credit and that t had also complicated monetary policy decision making.

Financial Behaviour: The team also discussed a draft financial markets conduct bill that was recently introduced as one of the alternative solutions to the interest caps and which is now going through public participation. They said that Barclays had given feedback on the bill which is likely to increase the cost of regulation through double licensing, and which is unclear on who it protects.  They said that the bill borrows from Western countries where there was aggressive credit expansion to people who should not have been borrowing, whereas here it is the opposite situation of there being too little credit.

Conclusion: The budget breakdown is a part of a series of sessions that Barclays will have on topical issues that impact their corporate clients, and another session will take place in Mombasa.

S&P ranks top banks in MEA (Middle East & Africa)

Qatar National Bank (QNB) with $229 billion of assets is the largest bank in the Middle East and Africa (MEA) zone according to S&P Global Market Intelligence. It is followed by First Abu Dhabi with  $182 billion and then the top African bank, which is the Standard Bank of South Africa (Stanbic) with $164 billion of assets. Fourth and fifth are banks from Israel which S&P notes rose on the list due to the appreciation of the country’s Shekel currency versus the US dollar.

S&P MEA top bank origins

South Africa has the most African banks on the list with First Rand (ranked 8), Barclays Africa with $94 billion of assets and which is rebranding to Absa is ninth, while Nedbank and Investec are in 13th and 27th place respectively on the S&P list.

Other African banks are the National Bank of Egypt (14)  and Attijariwafa of Morocco (23 ). QNB, which has been publishing quarterly results in Kenyan newspapers alongside other commercial banks, is also the second largest shareholder of Ecobank of Togo, but there are no Nigeria banks or any Sub-Saharan ones from the East or West blocks of the continent on the MEA list. Kenya’s largest bank group – KCB has about $6.5 billion of assets.

QNB and the banks on the MEA list are ranked according to IFRS accounting principles but certain banks use local accounting measures e.g Israeli GAAP, Eqyptian GAAP and Qatari GAAP.

The MEA banks are a sub-set of S&P’s list ranking the largest banks in the world. The list was topped by four banks from China, led by the Industrial & Commercial Bank of China with $4 trillion of assets, followed by China Construction Bank, Agricultural Bank of China and the Bank of China. There is more diversity after that with Mitsubishi UFJ of Japan in 5th place with $2.8 trillion of assets, followed by  JPMorgan Chase (USA), the UK’s HSBC and in 8th place is BNP Paribas of France with $2.3 trillion of assets. Eighteen of the top 100 banks are from China, with $24 trillion of assets, the US had eleven banks and Japan has eight banks, but none from the MEA.

7th BAFM – Building African Financial Markets – Day Two

Summary of day one of the BAFM.  

The second day of the 7th BAFM – Building African Financial Markets seminar continued with more explanations on changes in the global scene and how they could affect African exchanges.

Michele Carlsson of Nasdaq said immediate top compliance concerns were the need to fully understanding regulations and how they affect exchanges, and the inability of technology to meet current market requirements. She said it was important for exchanges to have market surveillance systems that could look at several assets classes, do powerful visualizations, have flexible alerting, and enable real-time controls as well as being scalable and resilient.

Anne Clayton of the Johannesburg Stock Exchange spoke on the impact that various new European Union regulations that could have on African capital markets. These include rules on general data protection (GDPR, May 2018), benchmark regulation (BMR – Jan 2018), financial instruments regulations (MiFID II –  Jan 2018) and others on derivatives trading. She explained that data on GDPR, EU citizens had to be notified of data breaches and they also the right to be forgotten if they requested it i.e. to have all their data wiped out from a system  – .but that is in conflict with “know your customer” (KYC) and “anti-money laundering” (AML) laws, which require that financial data, is kept for seven years.  African exchanges have low liquidity and the costs of compliance keep going up, now estimated at 5-10% of turnover, even where there is no uptake of products or use of some of the new rules. Many of them have low liquidity and are heavily dependent on foreign investors to provide liquidity, but such investors are sensitive to any policy or taxes which can make them shift to other markets. But non-compliance could result in heavy penalties for companies.

Dr. Anthony Miller spoke of new opportunities from linking exchanges to the United Nations Sustainable Development Goals (SDGs) through new products. Last week Fiji launched a green bond at the London Stock Exchange while there was a gender bond floated in Asia to support women funded entrepreneurs. This is at a time that companies like Bloomberg are tracking the growth of green funds around the world, while many other investors are eliminating carbon investments, like coal, from their portfolios.

Block chain and bitcoin were top topics of discussion on day two of the BAFM. One talk was an explanation on the different aspects of block chain technology, which could offer African institutions the ability for Africa to leapfrog old hurdles. Sofie Blakstad spoke of using block chain to provide cheaper rural financing that is much cheaper than from commercial banks, and that the technology also enabled an unprecedented level of validation of the impacts of targeted funding programs such as micro-finance institutions  e.g. how ethical or green their funding programs are, by looking at data from the beneficiaries.

(Away from the BAFM, on the same day, Juliani, a popular Kenyan gospel musician launched Juliani “Hela” a loyalty point-based currency earned by customers on every purchase of an official Juliani event ticket, a T-shirt, or album).

David Wagemma spoke about M-Akiba which was the first mobile-traded government bond in the world that cost Kenyan investors just $30 and which took five minutes to sign up and pay for, all via their mobile phones.

Later in a panel on block-chain as a disruptive technology for markets, Abubakar Mayanja said that progressive regulators should have sandbox licensing so that regulation goes on even as new ideas are developed, while Reggie Middleton, said the 1,500 cryptocurrencies in existence could grow on their own without needing each other and they did not need to concern central bankers and regulators in Africa as they had nothing to do with currencies.

In their remarks to close the event, Geoffrey Odundo, CEO of the Nairobi Securities Exchange (NSE), thanked organizers, saying that the BAFM had trended for two days and he saw that even the Deputy President was still following the conversation, while Oscar Onyema, President of African Securities Exchanges Association (ASEA)  said that this had been the best event in the BAFM series, with the next one to be hosted by the BRVM in Ivory Coast in April 2019 – who would be challenged to excel of the Nairobi event

Day two of the 7th Building African Financial Markets seminar was held at the Villa Rosa Kempinski Hotel in Nairobi Kenya on April 20, 2018.

7th BAFM – Building African Financial Markets – Day One

The 7th BAFM – Building African Financial Markets seminar was officially opened by Kenya’s Deputy President William Ruto with a joke that it was important that the organizers, who were the African Securities Exchange Association with the Nairobi Securities Exchange go out and clarify the difference “stock exchanges” and “stock theft” which is a big menace in Kenya. He then mentioned that securities exchanges provided assets protection and wealth creation and that some companies that the government had divested from like Kengen, Safaricom, and KCB were now among the leading institutions in Africa.

He asked the capital markets to help revive the agricultural sector and urged them to work on a commodities exchange and use block chain to create a ledger for collateral, and that he hoped the summit would redirect shareholders attention to the opportunities that reward vigilant, flexible and innovative investors.

One of the highlights of the day was a talk by Terry Adembesa who explained the complex processes and long steps that the Nairobi Securities Exchange has to go through to introduce new products and to persuade companies to list on the exchange. He explained how they had passed regulations to allow derivatives trading and short selling (which they plan to introduce later in 2018 for selected equities_ and to also allow market making by selected firms for stocks and bonds. They had made strides get pension and insurance funds to recognize their new products like Real Estate Investment Trust’s (REIT’s) and lobbied alongside Barclays to get Exchanged Traded Funds as an accepted class of equities that local funds could buy into. They had also lobbied the Kenya Revenue Authority to waive taxes on development REIT’s.

He added that African exchanges like Kenya’s have low volumes compared to Johannesburg and Mauritius; they mainly trade equities, with low participation from local investors (Trading at the Nairobi Exchange is 35% by local investors compared to 100% in many Asian markets) and later this meshed well with a nice presentation on the African Financial Markets Index by George Asante of Barclays Africa. It was a nice illustration of the maturity levels of stock exchanges in 17 countries that constitute 60% of GDP of Africa, with a startling finding that there was a significant cost borne by African countries by them not having effective capital markets.

Sallianne Taylor explained how Bloomberg  collects data and showcases African companies and exchanges to the wider world, facilitating financial leaders and exchanges to meet investors and financial journalists, while Nora Owako traced the evolution of Safaricom’s M-Pesa which has changed over the years to match the needs of consumers and now encompasses international remittances, savings, loans, utility payments, and merchant finance.

Another striking revelation was by David Waithaka of Cellulant during one of the afternoon panels on fintech as an enabler. The company, which was founded in Kenya, had run a platform in Nigeria that had connected 15 million farmers to 6,000 agro-dealers for farmers to get inputs and with commercial banks providing bridging finance to agro-dealers as they awaited reimbursements from the government. The program had a redemption rate of 59% and through it, farmer incomes improved from $700 to $1,800. It was later extended to rice and saw $2.4 million worth of commodity trades in two months. It is being rolled out in Liberia and event participants asked” Why not Kenya?”!

One of the shocks of the first day of the BAFM was from Joseph Tegbe of KPMG Nigeria who gave a talk on cybersecurity and warned that there was a real possibility that countries could use cyber attacks to target and destabilize the stock exchanges of other countries.

NSE Chairman Samuel Kimani thanked the BAFM gold sponsors – Bloomberg and Barclays, silver ones – CMA Kenya, Safaricom, Kengen, EFG Hermes, and others. The day ended with news during a panel on fintech as an enabler, that Barclays launched a green mortgage product, offering cheaper financing for energy-efficient homes

Day one of the 7th BAFM – Building African Financial Markets seminar was held at the Villa Rosa Kempinski Hotel in Nairobi Kenya on April 19, 2018. 

Nairobi hosts the 7th BAFM – Building African Financial Markets seminar

This week sees Nairobi host the 7th Building African Financial Markets (BAFM) seminar with the theme of “adaptive innovation as a lever for growth and sustainable development of financial markets”. 

News of the seminar was unveiled by Nairobi Securities Exchange (NSE) CEO, Geoffrey Odundo in January 2018 when Barclays launched its Africa Financial Markets Index (AFMI) report in Nairobi. The Barclays AFMI measured African stock exchanges by six pillars of market depth, access to foreign exchange, market transparency, macro-opportunity, enforceability of agreements and capacity of local investors, and it ranked South Africa on top, with Kenya in fifth place.

The NSE and the African Securities Exchanges Association are organizers of the BAFM event with  Bloomberg and Barclays as gold sponsors. The ASEA, which was founded in 1993 with the Nairobi Stock Exchange as the first member, now has a membership of 40 African stock exchanges.

The BAFM will be officially opened by William Ruto, the Deputy President of the Republic of Kenya. It will feature leaders and speakers from organizations such as Nasdaq, the Johannesburg Stock Exchange, EFG-Hermes – a Cairo-based investment bank that is new to Nairobi, and Safaricom, while some of the sessions of great interest are likely to include “a blueprint for orderly markets in Africa”, M-Akiba; the $30 mobile-phone government bond as a disruptive technology reshaping African financial markets, “building new markets in frontier economies”, a guide for managing cyber risk, linking African exchanges organically, and “is blockchain the future of finance or a flash in the pan?”.