The FT‘s Kenya oriented pullout from late October underscored the contextual dichotomy present between those investors [rightfully] weary of the country’s NSE Index, down 44.6 percent YTD at the time compared with the benchmark MSCI Frontier Markets Index’s -20.1 showing (though it was SSA’s best performer in 2010, up 28.3 percent), versus an ever burgeoning brigade of “public money, alternative asset managers, funds of funds, family offices [and] public and private pension funds coming onstream almost every month” into private equity, a phenomenon whose efficiency will only be enhanced, per Edward Burbidge, a Nairobi-based corporate finance advisor, by both an SME exchange (geared towards smaller-to-medium sized firms in lieu of the generally not practical costs and regulations associated with public listing) as well as a proposal to raise capital limits allowed to be invested (currently only 5 percent) by domestic institutional investors such as pension funds and collective investment schemes.  While long-term investors such as Templeton’s Mark Mobius continue to correctly emphasize the economy’s inherent potential, we noted this summer that the Central Bank of Kenya’s (CBK) dovish dithering in the face of increasingly entrenched inflation (core inflation more than doubled to roughly 13% from March-September) left it continuously behind the curve, perpetuating a vicious spiral whereby declining fundamentals exacerbated a deterioration of the balance of payments (analysts estimate the country’s CA deficit in H1 2011 doubled y/y to approximately 12% of GDP), eroded by an ever-wobbly schilling (KES, down 23% YTD against the USD to mid-October and now at ~97/dollar).  Lo and behold, headline inflation printed 18.9% y/y in October-the highest rate in three years-driven chiefly per the CBK by food inflation fueled in part by over-zealous domestic credit expansion.  Finally, however, the response seems apropos: Tuesday’s 550bp hike by the monetary policy committee to 16.5% (following a 400bp bump in early October) surpassed consensus expectations and may help temper yields (Tuesday’s 91-day treasury yield was at 15.31% versus 9.71% at end-August and 3% at end-March 2011, per Absa Capital) and schilling weakness alike, especially if the government’s request to further tap the IMF’s Extended Credit Facility (ECF) is obliged (Kenya has hitherto withdrawn USD170mm from the USD509mm, 3y program agreed to with the Fund last January).  Regardless, however, the underlying macro-theme to remember about Kenya remains the growing,  negative net export contribution to growth, which will counteract whatever monetary policy exists to try to stabilize the schilling–stability that should ultimately be of interest to public and private investors alike.

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