Executive Summary
As the year unfolds and resets, all eyes are on the fiscal space. A key point of concern remains the Finance Bill, which has gained significant traction over the past two years, especially in 2024. However, despite the aggressive increase in the additional revenues proposed by the bill, little has been accomplished, as debt servicing costs continue to devour much of the revenue.
2025 is particularly noteworthy, as the IMF-Kenya program concludes. The big question is: Will Kenya propose a renewal of the program? This question looms large, given the weight of debt servicing costs, sluggish revenue growth, and steadily increasing expenditure. In recent years, Kenya has relied on the IMF for dollar inflows and forex reserves at a time when the global debt market was relatively out of reach. Meanwhile, the National Treasury has hinted at reducing tax revenue targets for both the current and next fiscal year, while the spending needle remains firmly stuck in the upward direction. It has also hinted on a leaner finance bill which leads us to believe that more than half of the country’s expenditure will continue to be financed by debt.
On the other hand, credit rating agencies are keeping a close watch on the country, assessing and evaluating every fiscal move. But the government appears to be playing its cards well. Instead of the previously planned switch, the government has opted for a buyback of three high-value bonds—originally put up for the switch that was eventually abandoned. This signals expectations of lower interest rates in the future, a crucial factor for rating agencies. With interest rates indeed trending lower, fixed-income securities in 2025 are poised to return to their traditional role as low-risk, low-return investments—a safe haven for capital-intensive portfolios. As such, we may see capital flight toward markets and asset classes offering higher returns.
For equities, capital bookings registered in 2024 (+34.1% returned by NASI) riding on base effects, with 2022 and 2023 being years of persistent value erosion. The banking sector did the heavy lifting with an estimated 57.9% contribution to 34.1% NASI returns. Looking ahead, we anticipate a sustained bull run in 2025 on the back of;
i. Technicals continue to speak of an upswing
Shy of the banking sector, mean reversion suggests that the deep discounts registered in 2022 and 2023 are set to continue seeing an upward reversal in 2025.
ii. Fundamentals remaining relatively strong across key sectors
Banking sector
A higher interest rate environment underpins the positive outlook for FY24 performance and dividend prospects. Key headwinds remain the sub-par economic growth, mounting pending bills, macro volatility, costs associated with managing risk and tightening regulatory requirements. Net interest margins are expected to smoothen as revenue growth slows from the high base in 2024, as projected lower interest rates take effect.
Telecommunication sector
We maintain an optimistic outlook on the investment by Safaricom in Ethiopia and continue to see latent potential in the financial service business in Kenya that the group can explore through license acquisition into the broader financial services. A key risk remains disruption from satellite internet providers in the GSM business.
Energy sector
For both listed counters, we see better dividend prospects on the government’s intent for parastatals to remit 80% of their earnings in dividends – a win for investors. For KenGen, we see the initiative to look into the use case for brine and invest in battery energy storage systems as a positive for long-term revenues and overall improved efficiency albeit with heavy capex requirements.
Agricultural sector
Tea and coffee prices are expected to remain volatile, with an expectation of upward price movement due to the likely impact of adverse weather conditions on other major global producers.
