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Satchu's Rich Wrap-Up
Monday 17th of September 2018

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17-SEP-2018 :: A decade after Lehman @TheStarKenya

My Career in the Financial Markets was in what is called ''The Repo
Market'' which was described thus in a Bloomberg Article

''Over here are investors with cash that’s not doing anything
profitable at the moment. Over there are banks with tons of bonds and
a need for ready money. The so-called repo market is where the two
sides meet. Repurchase agreements make up an essential, if esoteric,
piece of financial plumbing. By providing a place where assets can be
pawned for short-term loans, a healthy repo market helps a wide range
of other transactions go more smoothly. But a repo meltdown was a
crucial part of the financial panic in September 2008..''

I started my career financing Credit Suisse First Boston's balance
sheet and basically in those more ''swash-buckling'' days you could
pirouette leverage of $200.00 to $1.00 of equity. I then ran a
Customer Financing desk, where we would finance Hedge Funds and all
sorts. We expanded the business to include all the G7 markets and even
Emerging Markets. All through the second half of the 1990s and
onwards, one of the most profitable trades was at Quarter-End with
Lehman Brothers. Lehman were renowned for playing the Leverage Game at
300 and 400 to 1 but at Quarter End would need to show a much reduced
leverage Ratio and we would enter into ''repo'' transactions with them
which were characterised as Index-linked Swaps.

Subsequently and much later these were called Repo 105s.

Repo 105 is Lehman Brothers' name for an accounting maneuver that it
used where a short-term repurchase agreement is classified as a sale.
The cash obtained through this "sale" is then used to pay down debt,
allowing the company to appear to reduce its leverage by temporarily
paying down liabilities—just long enough to reflect on the company's
published balance sheet. After the company's financial reports are
published, the company borrows cash and repurchases its original

I also recall a time when I was asked to interview with Lehman in New
York and after a full day of interviews I finally got to Dick Fuld's

And he turned to me and asked ''Aly-Khan How much do you earn? How
much are you worth?''

I said a number. And he turned and said to me ''This room right here
is where we print money.''

He then asked two other colleagues, ''Tell Aly-Khan How you are worth?''

And they both said about $50m which was a lot of money then and is
still now. And all their money was in Lehman stock, which is why I
always say making money in the markets has three components, spotting
the anomaly or opportunity, capturing it and then making away with
your profits.

I have digressed. The Point is we all live in the real time our Faces
pressed against a high-frequency screen but a ten year sweep and
perspective is not something we afford ourselves in this seriously
fluid and real time World. As we look back, we can appreciate that G7
Central Banks basically flooded the World with Free Liquidity. This
Liquidity Wave suppressed Bond Yields and markets world-wide surfed
higher from Emerging to Frontier markets, crypto-currency, African
Eurobonds [Over the past six years sub-Saharan governments have issued
$81bn in dollar bonds]. The markets have been ''Like a patient
etherized upon a table'' for a whole decade. Its as if the World
became a Lehman to rescue itself from Lehman. Its been a decade long

Since the beginning of 2018 the US has been reducing its balance
sheet, reducing the amount of Dollars and also increasing the interest
rate on those Dollars. The Dollar which had appeared like a Toy Gun
has suddenly metasized into an AK47. The Worry is what happens if it
metasizes even further? The Dollar is seriously weaponised. The US
economy is blowing hot. The risk is that US interest rates will go
higher than the market is currently predicting. Punch-drunk markets
need to sober up fast. Hyperbolic and populist responses are inversely
correlated to the state of the real economy, note Nicholas Maduro's
Venezuela and President Erdogan.

Now let me return to the Eurobond Markets where Africa issued $81b
worth of bonds over the last six years. These markets trade
continuously. Essentially these markets are a continuous score-card on
the creditworthiness of the Issuer. its a relatively recent phenomenon
and something many Policy-Makers will not have considered adequately.
Balance sheets are maxed out.

There are no more ''Quaaludes'' and Policy Makers will no longer be
able to pop them. -

''In prescribed doses, Quaaludes promotes relaxation, sleepiness and
sometimes a feeling of euphoria. It causes a drop in blood pressure
and slows the pulse rate. These properties are the reason why it was
initially thought to be a useful sedative and anxiolytic It became a
recreational drug due to its euphoric effect''

Bubbles are bursting just about everywhere.

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Trump 'likely' to announce new China tariffs as early as Monday: source @Reuters

U.S. President Donald Trump is likely to announce new tariffs on about
$200 billion on Chinese imports as early as Monday, a senior
administration official told Reuters on Saturday.
The tariff level will probably be about 10 percent, the Wall Street
Journal reported, quoting people familiar with the matter. This is
below the 25 percent the administration said it was considering for
this possible round of tariffs.
This year, imports from China through July were up nearly 9 percent
from the same period of 2017, according to U.S. Census Bureau data.

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09-JUL-2018 :: Tariff wars, who blinks first? @TheStarKenya

James Dean was an iconic American actor, who tapped into the universal
yearning and angst of nearly every adolescent human being with a raw
connection that has surely not been surpassed since. In one of his
most consequential films, Rebel without a Cause, two players (read,
teenage boys) decide to settle a dispute (read, teenage girl) by way
of near-death experiences. Each speeds an automobile towards a cliff.
A simple rule governs the challenge: the first to jump out of his
automo- bile is the chicken and, by universally accepted social
convention, concedes the object in dispute. The second to jump is
victorious, and, depending on context, becomes gang leader, prom king,

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Kenya's Eliud Kipchoge, 33, set a new marathon world record at 2hr 1min 39sec in Berlin, taking 1min 18sec off the previous best - #berlinMarathon

Kenya's Eliud Kipchoge, 33, set a new marathon world record at 2hr
1min 39sec in Berlin, taking 1min 18sec off the previous best - the
largest single improvement on the marathon world record since 1967

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"I believe in what I am doing in the last five months. I can run free. I can run free and that's what actually has helped me to be successful" @EliudKipchoge

“Personally, I believe in what I am doing. To run a big marathon and
win, it takes five months. When I am on the starting line, my mind
starts to think of what I have been doing for the last five months. I
believe in my training'' @EliudKipchoge I treat myself as the best one
on that line because my mind is telling me that I am the best & I
believe in what I am doing in the last five months. I can run free. I
can run free and that’s what actually has helped me to be successful”
@EliudKipchoge #BerlinMarathon #Mindspeak

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HRH King Salman awarded the highest medal in the Kingdom to H.E. Prime Minister Abiy Ahmed and H.E. President Isaias Afeworki
Law & Politics

HRH King Salman in the presence of HRH Crown Prince Mohammed bin
Salman & UN SG H.E. Antonio Guterres has awarded the highest medal in
the Kingdom to H.E. Prime Minister Abiy Ahmed and H.E. President
Isaias Afeworki

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Corruption Is Wasting Chinese Money in Africa @ForeignAffairs's @Salem_Solomon H/T @hofrench
Law & Politics

From the 1960s on, China supported anti-colonial and anti-apartheid
movements across Africa. When countries like Algeria, Sudan, and South
Africa fought for liberation, Beijing supplied financial assistance
and logistical support. As the decades passed, ideological ties
morphed into shared economic, security, and strategic interests,
resulting in one of the world’s most complex, and controversial,
arrays of international partnerships.

Today, some see China as a neocolonial power eager to plunge African
nations into debt, stripping their resources and their sovereignty.
They point to cases such as Djibouti, where China owns about 80
percent of its public debt, which, in turn, has exceeded 86 percent of
GDP, or Zambia, where some reports suggest unsustainable lending will
soon lead to a Chinese takeover of the public electric company, ZESCO.
(The Zambian government has refuted the claims.) In August, 16 U.S.
senators voiced their concern about China’s efforts to “weaponize
capital” in Africa and Asia in a letter to U.S. Treasury Secretary
Steven Mnuchin and Secretary of State Mike Pompeo.

Others, especially African leaders, see China as a flexible partner
willing to engage, with parity, where no one else will. Chinese loans
for infrastructure projects, a significant part of overall financial
ties, have historically come with interest rates far lower and
repayment terms far more flexible than those offered by the
International Monetary Fund and other multilateral lenders, to whom
many African countries owe the bulk of their public debt. Through
Chinese lending, construction, and project management, Africa has
gained bridges, roads, railways, dams, hydropower plants—the kinds of
large-scale projects that can jumpstart industrialization and
invigorate economies for years to come.

But two decades of financial data, evolving business and cultural
ties, and the latest news from the just-concluded Forum on
China-Africa Cooperation in Beijing suggest that the China-Africa
relationship defies simple characterization. There may be an
overarching Africa policy. But on the ground, China is engaged in a
diverse set of bilateral ties, with the benefits for African countries
driven in large measure by how well their leaders defend national

And there’s good reason to be concerned about whether those interests
have been well served. Opaque deals, reports of large-scale corruption
and mismanagement, doubts about project feasibility, and a stark trade
imbalance raise serious questions about how well African leaders are
managing the opportunities they receive.Opaque deals, reports of
large-scale corruption and mismanagement, doubts about project
feasibility, and a stark trade imbalance raise serious questions about
how well African leaders are managing the opportunities they receive.

After 20 years of expanding cooperation, China has emerged as Africa’s
largest trade partner, one of its biggest foreign direct investors,
and its most prolific financier of infrastructure projects. Data
compiled by the China Africa Research Initiative at Johns Hopkins
University reveal the extent of these ties. China-Africa trade topped
$128 billion in 2016, China has extended more than $140 billion in
debt financing throughout the continent, and its foreign direct
investment stock in Africa reached almost $35 billion in 2015. Beijing
has also created incentives for Chinese businesses to set up shop in
Africa. McKinsey & Company, a global consulting firm, estimates that
about 10,000 Chinese firms operate in Africa, the bulk of which are
privately owned, resulting in hundreds of thousands of new jobs across
the continent.

China has also built some of Africa’s most prominent buildings. Its
presence is visible on the skylines across Africa’s largest cities,
and a number of these structures have been gifted. In 2012, for
example, China financed and built the $200 million African Union
headquarters in Addis Ababa, Ethiopia. This year, it gave the Economic
Community of West African States an interest-free, $31.6 million grant
to build its new headquarters in Nigeria. Only in official development
aid and FDI does the United States continue to outpace China in
Africa, but that too may change.

But China doesn’t invest evenly across the continent, based on our
analysis of data compiled by the China Africa Research Initiative.
Between 2000 and 2017, China made no loans to eight countries and less
than $200 million in loans to another 10 countries. Meanwhile, just
five recipients—Sudan, the Democratic Republic of the Congo, Kenya,
Ethiopia, and Angola—accounted for more than half of all loans.
Similarly, six countries accounted for all FDI stock in 2015, and just
two countries—Angola and South Africa—accounted for more than half the
continent’s trade exports to China in 2016.

And not every pledge from China gets disbursed. When there is a gap
between what China promises and delivers, the common thread has been
African nations’ struggles to close deals and manage contracts. Both
Ghana and Zimbabwe, for example, have received less than 10 percent of
the money pledged to them, Bright Simons reported this month in
Quartz. That’s partly due to stipulations imposed by China—the
requirement for an African nation’s government to be involved even in
private loans, for example. But it’s also tied to mismanagement of

One example is a water and sewer project in Harare, Zimbabwe.
Officials secured a $144 million loan from China to perform
much-needed upgrades to modernize the public works system, making
potable water safer and more widely available. But local media
reported in March that China declined to disburse half the loan, and
an independent audit revealed budget inconsistencies and concerns over
kickbacks tied to funds that had been spent.

In his 2015 book, The Looting Machine, journalist Tom Burgis cataloged
how endemic corruption has fueled theft in Africa’s most resource-rich
states. Burgis focused on the activities of China Sonangol
International, a multinational group that has acted as a middleman in
myriad oil, gas, mining, and real estate deals between China and
Nigeria and Angola, often in ways that encouraged secrecy and made the
details of transactions difficult to track.

A 2017 report by the Carter Center, an international nongovernmental
organization, concluded that more than half of $1.163 billion in loans
from China to Congo in exchange for minerals, a project dubbed
Sicomines, had gone missing, with no evidence that the money had been
disbursed for infrastructure projects.

But concerns about corruption aren’t confined to countries with
abundant natural resources. This August, Reuters reported that 14
officials connected with Kenya’s Standard Gauge Railway, a $3.2
billion infrastructure project that was financed, built, and managed
by China, had been arrested over concerns of corruption tied to land
acquisition. The officials, including the Kenya Railways Corporation’s
managing director and the National Land Commission’s chairman and
chief executive, have been charged with defrauding the government.

Also worrying are Chinese-funded projects targeted at elite comfort
instead of public good. Chinese President Xi Jinping has disavowed
such “vanity projects,” invoking a phrase common in China to describe
the white elephants built by ambitious local officials. Despite Xi’s
words, Chinese funders often seek out such projects, perhaps in part
because they fit a model of de facto bribery found in China’s local
politics. A presidential office complex in Mozambique, a parliament
building in the Republic of Congo, and buildings to house the
president and ministers in Uganda are just a few examples of projects
that make leaders’ lives more comfortable but do little for ordinary
people. And these examples point to a larger trend. In a review of
some 3,000 Chinese-funded projects in Africa, researchers with
AidData, a research lab at the College of William & Mary, found that
the projects China funds tend to appear in the regions where African
leaders—and their spouses—were born. This phenomenon isn’t unique to
Chinese-funded projects, but Beijing’s noninterference polices appear
to intensify it.

After years of rapid growth, China’s ambitions in Africa may be
contracting. After commitments at the Forum on China-Africa
Cooperation grew from $5 to $60 billion between 2006 and 2015, the
promise after the 2018 summit stayed at $60 billion, with a new
allocation of funds that de-emphasizes government loans and grants.
Imports from Africa dropped sharply in 2015 and 2016 after rising 11
of the previous 13 years. Exports to Africa also fell in 2016, after
rising 20 of the previous 21 years.

China also appears poised to take a more cautious approach to its
investments. In both Ethiopia and Kenya, it has held back on releasing
funding for planned expansions to the countries’ respective railway
projects, the initial phases of which were completed in the last two
years. And in Kenya, China has asked for a feasibility study of the
entire project after President Uhuru Kenyatta requested China cover
half the cost of an expansion, about $1.9 billion, via a grant.

But even if Beijing’s investments in Africa have peaked, its financial
outlays remain significant, and its “hands-off” approach to African
partnerships will continue to loom large. When he spoke at the 2018
China-Africa forum, Xi said that China endeavored to neither prescribe
how Africa develops, nor meddle in African internal affairs, nor
attach strings to the opportunities Africa receives. Yet, within this
framework, China has pursued its own opportunities to acquire
much-needed resources, amplify its soft power, flex its military
muscles, and create markets for its goods.

Implicit in China’s laissez faire approach is the assumption that
African nations will determine what’s in their best interests and,
crucially, that governments will work to serve those interests. As
long as corruption colors deals and citizens are unable to monitor
their governments’ actions, however, those may be faulty expectations.
China’s presence in Africa could ultimately be a force for tremendous
good, liberating nations through industrialization, but only if the
opportunities it creates aren’t diverted by the greed of elites or the
whims of corrupt leaders.

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"We've come to render homage to the Great Helmsman Mao Zedong. I feel very moved remembering one of the great founders of our multipolar 21st century, without hegemonic empires that blackmail, that dominate"
Law & Politics

Maduro toured Mao's mausoleum on Friday. "We've come to render homage
to the Great Helmsman Mao Zedong. I feel very moved remembering one of
the great founders of our multipolar 21st century, without hegemonic
empires that blackmail, that dominate’’

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Currency Markets at a Glance WSJ
World Currencies

Euro 1.1631
Dollar Index 94.91
Japan Yen 111.975
Swiss Franc 0.9669
Pound 1.3084
Aussie 0.7160
India Rupee 72.555
South Korea Won 1127.88
Brazil Real 4.1741
Egypt Pound 17.9035
South Africa Rand 14.9398

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Investors count on central bank decisions in some hard-hit emerging markets this week for reprieve from rout @business
Emerging Markets

After Turkey and Russia surprised traders last week with more
hawkish-than-anticipated policy moves, there’s an outside chance the
South African Reserve Bank may follow in their footsteps by raising
interest rates on Thursday after the rand slumped to a two-year low.
Brazil’s policy makers decide rates Wednesday following a month in
which the real was the worst-performing developing-nation currency
after Argentina’s peso.

“The pressure to hike will be particularly strong for Brazil and South
Africa, both of which have seen their currencies plunge this year,”
said Per Hammarlund, chief emerging-market strategist at SEB AB in

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Goldman says India's world-beating stock-market run is over
Emerging Markets

Goldman Sachs Group Inc. has called time on the world-beating surge in
Indian stocks.

The nation’s equity market looks less favorable amid elevated
valuations, a potential slowdown in economic growth and upcoming
elections, according to Goldman Sachs analysts, who cut India to the
equivalent of a hold rating from buy. The firm has been bullish on
Indian stocks since March 2014 and the market has nearly doubled since
then, returning more than twice that of global equities.

Frontier Markets

Sub Saharan Africa

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President Isaias Afwerki departed to Saudi Arabia in late afternoon hours today.

President Isaias Afwerki departed to Saudi Arabia in late afternoon
hours today.  President Isaias & Prime Minister Abiy will attend
official ceremony in Jeddah tomorrow where z Peace Agreement of 9 July
will be graced by the presence of the Saudi King, UNSG & AU Commission

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Fish shortage sparks conflict on Africa's Great Lakes @AFP

Rwenshama (Uganda) (AFP) - Ugandan navy speedboats sliced through
murky Lake Edward towards a fleet of wooden canoes carrying illegal
fishermen from the Democratic Republic of Congo, hightailing it back
to their own waters.
"Stop the boat, hands up, surrender any weapons," yelled Lieutenant
Deogratius Kato as the soldiers surrounded a motorised canoe after a
20-minute chase, pointing guns at two terrified fishermen.
The rest of the boats escaped to the safety of Congolese waters,
leaving a trail of fishing nets in the water, some tight mesh drift
nets that trap everything, including juvenile fish and feeding birds.
Kampala has stepped up patrols in recent months to crack down on
illegal fishing on Lakes Edward and Albert, straddling Uganda and
The missions have led to the arrest of hundreds of Congolese fishermen
and sent tensions soaring between the two countries whose armed forces
engaged in deadly clashes on Lake Edward -- the smallest of the Great
Lakes of eastern Africa -- in July.
Both lakes lie mostly in Congolese territory where uncontrolled
fishing has depleted stocks driving fishermen into Ugandan waters
where officials are now clamping down on overfishing.
"Since we started our campaign against illegal fishing, we have seen
fish stocks increase on our side, hence the influx of fishermen from
the Congo," said Brigadier Michael Nyarwa, head of Uganda's navy.
The lakes are home to catfish, tilapia and Nile perch, which are
consumed locally and exported.
Landlocked Uganda's fishing industry accounts for three percent of GDP
and employs more than 700,000 people, according to official figures.

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Zambia slumps towards another debt crisis @TheEconomist

THE cars in Lusaka are moving even more slowly than usual: hidden
speed cameras have spooked drivers in Zambia’s capital. The government
is desperate for cash, so motorists who speed are being fleeced. The
regime has also announced taxes on boreholes, internet calls and even
weather reports. “The pressure is falling on the ordinary people,”
complains John Phiri, a taxi driver. “All because the state has run up
too much credit.”

Concern on the street is mirrored in markets. Of the 75 countries
whose bonds make up the Bloomberg Barclays Emerging Markets Index, a
basket of sovereign debt, none has performed as badly in 2018 as
Zambia (see chart). Given crises in Argentina and Turkey, that is some
achievement. “The market is pricing in a default,” notes Gregory Smith
of Renaissance Capital, an investment bank. Zambia is therefore a
warning for other African countries which also received debt
forgiveness in 2005-06 but today find themselves on the verge of
another crisis.

Zambia’s economy made a good start to the century. Growth averaged
more than 7% a year from 2000 to 2010, buoyed by high prices for
copper, which makes up 80% of exports. (The top destination for
Zambia’s exports is Switzerland—home to Glencore, a commodities
trader.) The boom meant that aid, which amounted to 57% of national
income in 1995, was just 5% by 2010.

The boom ended in about 2011. Copper prices fell and growth slowed.
The Patriotic Front (PF), which still rules Zambia, was elected that
year. It soon embarked on a spending splurge. As well as new roads,
hospitals and airports, the PF has almost doubled the civil-service
wage bill in real terms and expanded the number of districts from 72
to 115 so as to dole out more patronage.

Extra spending has been funded by borrowing. Public debt increased
rapidly, from 21% of GDP in 2011 to 59% at the end of 2017. Roughly
two-thirds of that borrowing is denominated in foreign currency and
owed to Chinese creditors or Western investors who bought its
Eurobonds: $3bn worth of dollar bonds issued in Europe.

Paying back these debts is putting huge pressure on Zambia’s finances.
The biggest item in the budget used to be education. Today it is debt
service, with nearly a quarter of government spending going to pay
back loans. The fiscal deficit for 2018 is set to be more than 9% of
GDP. Civil servants were not paid on time last month. When pay was
delayed last year a government spokesperson helpfully recommended that
bureaucrats start breeding chickens. Arrears for government
contractors are mounting. This in turn is hurting businesses. The
share of bad loans on banks’ books has increased to 13% from 8% two
years ago.

Zambia is one of 18 African countries the IMF says is at risk of “debt
distress”—double the number in 2013. A further eight are already in
distress (meaning they are delinquent or in default). Yet Zambia is
resisting the fund’s call for restraint and relations with it have all
but broken down. Talks over a bailout are on ice and, under pressure
from Zambia, the IMF has reassigned its representative.

It is not as if the money has been well spent. Much has been spent
haphazardly—or, in some cases, stolen. “People are asking: where did
all the money go?” says Geoffrey Chongo of the Jesuit Centre for
Theological Reflection, a local charity.

One answer is tarmac. Since 2011 Zambia has announced plans to build
9,000km of roads. Few doubt the need for better infrastructure. But
the country has overpaid. A study by the World Bank in 2017 found that
Zambia paid $360,000 per kilometre, which is more than twice the
African average. And since upkeep has been neglected, many new roads
are already potholed.

Other deals have been similarly wasteful. Zambia bought 42 fire
engines for $1m each—a 70% mark-up. And it has regularly paid over the
odds for infrastructure built by state-owned Chinese companies. Take
the contract for the new airport terminal in Lusaka (known locally as
“the hamburger” though it looks more like a bao sandwich), which has
been designed to accommodate a rather improbable ten-fold increase in
passenger traffic.

These deals are opaque. Typically loans are agreed between Zambian
government departments and China’s Export-Import Bank, which then
lends directly to the Chinese contractor. Only later, if at all, are
the true costs revealed. Many worry that some deals remain
undisclosed, and that President Edgar Lungu will hand over state
assets such as ZESCO, the energy utility, to China in exchange for
debt relief. A Zambian delegation returned last week from Beijing,
where it attended the triennial summit of Chinese and African leaders.

Many Zambians resent the Chinese influence. Businessmen, for instance,
complain that they are locked out of the best contracts. Privately,
though, Zambia’s elites are more likely to blame their government than
the Chinese. Under the PF, governance is weak and venal. Reports from
Zambia’s Auditor-General and the Financial Intelligence Centre, an
ombudsman, suggest that corruption has increased markedly under Mr
Lungu’s regime. One economist who has studied road deals estimates
that 5-10% is skimmed off the top.

Corruption goes hand in hand with repression. After the election in
2016, which he won amid allegations of rigging, Mr Lungu jailed the
opposition leader, Hakainde Hichilema, for the crime of not yielding
to the presidential motorcade. A critical newspaper was shut down and
journalists have been harassed. Mr Lungu has packed the constitutional
court with his hand-picked judges and threatened chaos if they do not
allow him to run for an unconstitutional third term in 2021. “I have
been here for 21 years and never seen so many people afraid to speak
out,” says an academic in Lusaka. “Zambia has become an authoritarian

Defenders of Mr Lungu reckon that Zambia has time on its side. The
principal on the first of its three Eurobonds is not due until 2022.
China may extend the terms of its credit. But given the rising debt
burden, Zambia cannot go on as it is. Later this month the government
will outline its budget for 2019; investors and the IMF will be
watching to see if there is any sign of change from Mr Lungu and his
cronies. If not, 12 years after the world forgave its loans, Zambia
will keep heading towards another debt crisis.

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OP-ED Between the hammer of the markets and the anvil of politics: Mr Kenyatta, in debt distress @DavidNdii in the The East African Review

A few weeks ago the CS Treasury was kind enough to publish and gazette
the government’s income and expenditure statement for July, the first
month of the current financial year.  They are only a few numbers, but
they are quite revealing.

The government opened the year with KSh 102.8 billion in the bank. It
raised KSh 99 billion from taxes, and borrowed KSh 30 billion locally,
that is, total inflows of KSh 129 billion during the month. How was
the money spent? Debt took KSh 68 billion, just under 70 percent of
the tax raised.  The counties and development budget got no money at
all. The Treasury closed the month with KSh 110.7 billion, KSh 8
billion more than the opening balance.  Why did the Treasury hoard
money when the counties and development projects were starved of cash?
I will come back to that question shortly.

It is tempting to think that this was only the first month of the
financial year, and things will look up. Not quite. Treasury puts
revenue for the full financial year at KSh 1.34 trillion which
translated to a KSh 112 billion monthly average, so the July revenue
figure is low but not far off the mark.  The debt service budget for
the year is KSh 870 billion, which works out to KSh 72.5 billion per
month so the July figure of KSh 68bn is also consistent. The domestic
borrowing target for the year in the budget is KSh 270 billion, which
works out to KSh 23 billion per month, so the July borrowing of KSh 30
billion is well above target.

In essence, the July statement is a good snapshot of the state of
government finances. Unless revenue increases dramatically, the only
way the government will be able to stay afloat is by excessive
domestic borrowing.  Borrowing more than it is doing already will put
paid to any chances of recovery of credit to the private sector, which
stalled three years go.  And one does not have to be an economist or
finance expert to appreciate that a person, business or government
spending 70 percent of income to service debt is distressed. How did
we get here? Binge borrowing.

As at end of June 2018, our total public debt was KSh 5.2 trillion, up
from KSh 1.8 trillion five years ago, an increase of KSh 3.3 trillion

The stock of debt has increased 187 percent but debt service outlays
are up 230 percent, from KSh 264 billion to KSh 870 billion. The
standout figure here is foreign interest, which has increased
sevenfold from KSh 14 billion to KSh 114 billion. This in turn, is
explained by two factors, foreign commercial and China debt.  Five
years ago, foreign commercial debt was inconsequential— we owed only
one syndicated loan and that was an exception. We were not in the
habit of taking on foreign commercial debt. Five years on, commercial
debt is the single largest item on foreign debt accounting for 36
percent of it.  We owed China KSh 63 billion accounting for seven
percent of foreign debt. Debt to China is now up to KSh 550 billion
accounting for close to 30 percent.  Commercial debt and China
combined account for 80 percent of the increase in foreign debt.

Chinese debt is not cheap either.  Last year’s debt service figures
show that we owed China 21 percent of foreign debt, but we paid them
32 percent of the interest. Multilateral lenders account for 33
percent of the debt but only 15 percent of the interest payments (See
chart). The interest rates implied by these payments, although only a
rough approximation, show that China’s debt is the most expensive at
4.8 percent, followed by commercial debt at 3.9 percent, other
bilateral lenders at 2.4 percent and multilateral lenders are the
cheapest at 1.4 percent. But as I said, these are implied rates, not
the actual ones, as they do not reflect the debt movements within the

Different components of debt affect the budget differently. Interest
comes out of the recurrent budget, and in effect from revenue. Working
with a realistic figure of KSh 1.4 trillion revenue, the interest
burden this year takes 29 percent of revenue up from 14 percent five
years ago. In fact, interest cost is now equivalent to 90 percent of
the wage bill as compared to 40 percent five years ago.

Our political class seems not to have understood the paradigm shift
that becoming a sovereign borrower in international markets entails.
Going to the market is analogous to a business going public. When a
company is private, its affairs are dealt with behind closed doors.
The only way unhappy investors can express their views is with their
voices, or voting out directors during the annual general meetings,
and this is usually quite difficult as typically, the insiders usually
have more shares than outsiders. When a company gets listed on the
stock exchange, investors don’t have to wait for AGMs. They
communicate with the company every day by either buying or dumping the
stock. Facebook’s share price fell 11 percent (US$134 billion) in the
wake of the Cambridge Analytica scandal—and that’s all the
shareholders needed to say.

The markets do not send missions. They dump your bonds.

The low-down: Mega projects are off the table, as is the “Big Four.”
The SGR is not going past Naivasha anytime soon. The only order of
business is crisis management – that is, if the government survives.
Looking around, the odds are not good.  The Greek crisis consumed five
governments. Argentina went through five presidents in two weeks
following imposition of the “corralito” (small enclosure) austerity
measures in December 2001. The EPRDF autocracy in Ethiopia, erstwhile
poster child of Africa’s new breed of authoritarian developmental
regimes, did not run out of bullets or prisons. It ran out of money,
and unravelled. Sri Lanka, Pakistan and Malaysia have ejected the
mega-project mega-corruption governments that corralled them into
China’s debt trap. Earlier this week Sudan’s President Omar al Bashir
dissolved his government and appointed a new prime minister tasked to
form a leaner government “as part of austerity measures to tackle
economic difficulties.”

It is fair to say that Mr. Kenyatta is now caught between the hammer
of the markets, and the anvil of politics. That comes with the

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It's now been two months ..and this is not normal. The Article IV IMF reports are the benchmark overview of the economy that usually occur every two years @RencapMan

It’s now been two months ..and this is not normal. The Article IV IMF
reports are the benchmark overview of the economy that usually occur
every two years. We’ll find out in Nairobi next week #Kenya

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.@KCBGroup @KeEquityBank @StanChartKE @Coopbankenya and @DTBKenya have been granted a period of two-weeks to seal the loopholes that aided the occurrence of the fraud

Five banks implicated in the National Youth Service (NYS) Scandal,
where Kshs 9.0 bn was lost in a graft scandal that saw several
companies receive payments for goods not delivered, have been fined a
collective Kshs 392.5 mn. The banks, which include KCB Group, Equity
Group Holdings, Standard Chartered Bank of Kenya (SCBK), Co-operative
Bank and Diamond Trust Bank (DTB), have been granted a period of
two-weeks to seal the loopholes that aided the occurrence of the fraud
without notice to the relevant authorities. The Central Bank of Kenya
ordered the banks to submit an action plan aimed at thwarting such
lapses within the two-weeks. KCB Group has been levied with the
highest penalty for allegedly channeling money stolen from the
Government through the NYS scam. The bank will be required to pay Kshs
149.5 mn for processing amounts of up to Kshs 639.0 mn. This is
despite the bank processing lower amounts than its peers. Standard
Chartered Bank processed Kshs 1.6 bn, but was fined Kshs 77.5 mn,
while Equity Bank processed Kshs 886.0 mn, and was fined Kshs 89.5 mn.
Co-operative Bank was found culpable for helping divert Kshs 263.0 mn
and will have to pay a fine of Kshs 20.0 mn. Diamond Trust Bank will
pay Kshs 56.0 mn for transferring Kshs 162.5 mn to NYS suspects’
accounts. The banks seemed to have done little to no due diligence on
the customers they handed cash to and sometimes handed over large sums
of money without appropriate documentation. This comes after it was
revealed that some of the companies under investigation opened
accounts a few hours before the NYS money was credited.  Banks, which
are required to report large transactions, contravened their mandate
by not reporting transactions that exceeded Kshs 1.0 mn to the
Financial Reporting Centre. The CBK Governor indicated that the
investigation would now be handed to the Directorate of Criminal
Investigations and the Office of the Director of Public Prosecutions
to pursue criminal culpability where, if an individual is found guilty
of contravening the Crime and Anti-Money Laundering Act, they face an
imprisonment term not exceeding 14-years or may be fined Kshs 5.0 mn.
This comes after the Kenya Bankers Association (KBA) introduced
stringent rules where bank customers planning to withdraw or deposit
Kshs 10 mn and above in cash will now be required to give a
three-days’ notice and get clearance from branch managers. The KBA, in
a circular, directed bank managers to ensure customers also provide
supporting evidence for their source of cash when depositing and its
use while withdrawing. These rules are aimed at combatting any money
laundering and financial crimes that have become increasingly
prevalent. We are of the view that increased emphasis on due diligence
on customers conducting bank transfers of significant amounts,
supported with appropriate documentation, will aid in combating the
vice that has bedeviled the country.

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.@KenGenKenya rallied +5.79% on Friday to close at 6.40 share price data here

Closing Price:           6.40
Total Shares Issued:          6243873667.00
Market Capitalization:        39,960,791,469
EPS:             1.37
PE:                 4.672

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"I believe in what I am doing in the last five months. I can run free. I can run free and that's what actually has helped me to be successful" @EliudKipchoge

“Personally, I believe in what I am doing. To run a big marathon and
win, it takes five months. When I am on the starting line, my mind
starts to think of what I have been doing for the last five months. I
believe in my training'' @EliudKipchoge I treat myself as the best one
on that line because my mind is telling me that I am the best & I
believe in what I am doing in the last five months. I can run free. I
can run free and that’s what actually has helped me to be successful”
@EliudKipchoge #BerlinMarathon #Mindspeak

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by Aly Khan Satchu (www.rich.co.ke)
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September 2018

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