Highlights of International and Local Markets

Past few days have seen China devalue Renminbi by about 2% that caused quite some excitement in the markets. The depreciation is seen by some participants as a symptom of slowdown in Chinese economy especially in exports which comes as a strong reminder on the importance of maintaining robust domestic demand. Basing long-term growth model on exports alone means the economy becomes dependent on global growth. Devaluation and subsequent depreciation that followed the PBOC announcement had a wider effect on the currency market through safe haven flows. Swiss Franc and Japanese yen strengthened as emerging market currencies weakened. Speculation on the devaluation impacting on FOMC rate setting as well resulted in weakening of the US dollars across the board (yet to quite fully understand some of the exaggerated moves, seems to have been a combination of panic, short-covering and misconceptions behind China’s move).

US & UK markets

Its a bit surprising US dollar and British pound are still in consolidation with tightening cycles just a few weeks away(If Central Bank comments are anything to go by, likely the case). Market participants generally expect the US Fed to hike rates before year end and for the Bank of England to follow immediately after. Although currency appreciation in both instances may complicate situation, both central banks may have to accept stronger currencies since at the moment economic conditions do no warrant extra-ordinary measures.  Holding interest rates at ZLB carries significant risks on the economy since the market might become too accustomed to low interest rates and accumulate too much risks. Goldman Sachs have been calling for a buy in US dollar anticipating a 20% rally in the currency.

Chinese currency devaluation of 2% shouldn’t be a concern in my view, US still has an inflation differential advantage of about 1.5%(prices of goods and services rise faster in China than US, making US more competitive assuming both currencies are unchanged). This means that even though China devalued by 1.9%, the real devaluation was 0.4%. US only starts losing competitiveness once its inflation starts rising to levels at par with China and China continues to depreciate at similar rates.

I am anticipating significant rally in US dollar over coming months.


Swiss Franc

Inflation in Switzerland has dropped well into the negative territory. In order to counter deflationary spiral risk (Bad cycle where lower prices of goods cause firms profits to fall, falling profits reduce investments by firms, reduced expansion and investment leads to rise in unemployment, rise in unemployment reduces household incomes, reduced household incomes reduce demand for goods and forces firms to reduce prices of goods and the cycle begins all over again, Japan’s story) and support its industries. SNB imposed unprecedented negative rates on deposits balances exceeding specific thresholds taking into account liquidity in the banking system.

Currency market intervention and negative deposit rates in theory are supposed to work in the following way: Increase in liquidity (lots of cash in the market) increases interest burden on deposits(institutions hold more money in form of deposits). Interventions in foreign exchange markets increase liquidity in the banking system making negative interest rates and foreign exchange markets mutually reinforcing. Increase in cost of holding Swiss Franc deposits is supposed to force banks into diversifying into other currencies.

Interest rate differentials between US and Swiss Franc should ideally see USDCHF rally to parity, some significant rally as well in GBPCHF and other Swiss Franc crosses. Should depreciation cycle in the Swiss Franc begin, would expect declining returns from speculative capital investments in Swiss Franc to cause an unwind of present  accumulation of capital investment and at some point cause sharper falls. But should the unwind fail to get underway, expect more drastic measures from Swiss Central Bank as it will likely resort to desperate measures in weakening the Swiss Franc in order to support its exports and counter deflationary risks. Direct SNB interventions through EurCHF purchases could mess up the ultimate EurUsd short set up atleast in the short-term but it will be a big risk on SNB’s portfolio to have too much exposure to Euro, it might later begin unwinding when CHF depreciation is on course through Eurusd sales (Selling Euros and replacing with dollars).

Will keep tracking the fundamentals but account for margins on either side due to volatility but would advice either refraining or trading on the trend depending on your assessments of technicals(quite subjective).


Stock are still in bear market alongside the Shilling. The two could as well be mutually reinforcing, falling shilling is creating expectations of higher rates and expected higher rates creating expectations of slower growth in company earnings. It is also possible anticipation of decline in shilling against US dollar after possible rate hike is influencing foreign investor participation. It would be a great time to watch for the attractive counter before the market bottoms out.

[Post will be updated with more information]

Need for Support of SMEs in Kenya

As much as one would want to believe in free markets where businesses require no support from governments, in a world where there are governments that are already actively supporting their businesses to give them competitive advantages in local and international markets, those ones that fail to support their own businesses are bound to lag behind in terms of growth, or worse, experience exaggerated economic imbalances. These imbalances are in form of widening deficits or a situation where an economy becomes too reliant on specific exports commodities rather than being diversified. Reliance on specific exports means that when those exports under-perform in international markets, the economy weakens which is usually accompanied by rise in unemployment and unrest.

Low unemployment levels are critical in all economies. Employment not only provides necessary accumulation of skill but goes to an extent of even impacting on the next generation through people’s ability to finance their children’s education (that allows for increase in human capital), health services as well as passing on good values. Small and Medium Sized Enterprises (SMEs) are widely recognized on their role in fast jobs creation. In advanced economies, they account for over 95% of enterprises, 60% of total employment and 50% of value added (BIS study paper).

Developing economies especially in Africa have lagged behind on support for SMEs and have instead focused energies on specifics groups especially the youth. Although this is also important in development, neglecting SMEs in general regardless of age groups prevents these economies from harnessing the power of mass talents in the development of the economies. Innovation is not limited by age but rather by ideas and sometimes skill levels. There is great need to extend as much support as possible to these groups.

Some of the barriers that SMEs face when embarking on production of goods and services especially for those involved in exports are well known and are not exclusive to developing economies. These include lack of foreign markets knowledge and the resources that should be devoted to search for markets, being financially unable to wait for delayed payments by buyers of exported goods and services or those ones sold in local markets and need for developing customer base in foreign markets. Advanced economies have country specific export/import banks that fund both buyers in foreign markets and the SMEs, what about developing economies? Are continent specific Exim banks sufficient?

SMEs which report finance as their greatest constraints receive smaller new loans and high interest rates that further constrain their profitability. Policy initiatives that ease these constraints could play a pivotal role in balanced stable long-term growth characterized by high employment rates.

Some of the following measures implemented by the US in support of SMEs should be replicated or debated on their improvement as opposed to current strategy of giving banks funds without onward lending incentives or rate advantage for SMEs.


  • Government establishes a team/department/ministry that specifically focuses on SMEs rather than industry in general to study it and give it special attention separate from other enterprises. This team should ensure that SMEs for instance access efficiency enhancing services for free or at very low costs since it might take time before entrepreneurs address this gap. It should also ensure that they are able to access foreign markets and can group small enterprises such as those involved in farming to access external markets that it has negotiated on their behalf collectively.


  • Establishment of a rule that prioritizes SMEs that source their goods and services from domestic markets ahead of other contractors as long as price is within reasonable range. This can be in form of target percentages of say 30% of contracts rather than restricting support to youth and women enterprises. Civil servants also need to be educated on the importance of supporting SMEs and the process be made as transparent as possible with easy to use online tendering/contracting platform.


  • Special tax treatment for SMEs that gives them a competitive advantage. These may also include employment incentives such as the one in US that gives tax relief to SMEs that employ those who have been unemployed for more than a year and lower taxes.


  • Guarantee of risk on loans issued to SMEs by banks without or with insufficient collateral to reduce spreads on savings and lending rates to a level near rates at which established firms obtain financing. These guarantees can be capped at say sh35Billion. Guarantees mean that the government only gets to pay if the SME defaults. If there are a large enough number of new enterprises in an economy where government is aggressively spending and thereby stimulating demand, it will significantly reduce the risks. Extension of funds being in the hands of private banks will ensure more efficient distribution of funds.


  • Special funds from government to micro-lenders in form of interest loans. Rate on funds to be inversely correlated amount of lending to SMEs such that the more the micro-lender lends, the lower the rates they have to pay on the special funds. Micro-lenders can be extended to include deposit taking institutions who ordinarily charge high rates on loans.


  • Establishment of county level venture funds that match private investors investments in SMEs in counties. This may restrict funding to second stage small businesses such as farming enterprises or those involved in value addition and should offer other support services.


  • Special support for exporters that includes guarantees of close to 100% of export loans so that they are not too adversely affected by delays in payments.


While encouraging innovations vocally, reducing bureaucracies might actually inspire some people to come up with new concepts or develop on already existing ones, I don’t think that is sufficient to support desired levels of growth. It would be more ideal if we not only harnessed the talent pool of huge numbers of people but also provided support that is at par with competitor SMEs in advanced economies in order to achieve greater levels of growth.