RICH THINKING

Strategies For Kenya’s Financial Sector In The Current Global Meltdown

ALY-KHAN SATCHU

www.rich.co.ke

INFOMEDIARY SERVICES

WHAT HAPPENED?

Outsize build up in sub prime Real Estate correlated risk. Loans packaged as Bonds.

LBOs, Credit card debt. Late cycle risk build up. Self Certified Loans.

Teaser rates etc.US Regulatory lite touch. Greenspan relaxed the rules.

Quants were the new Economic Wizards of this new age. Merrill Lynch sold Loans for about 20 cents in the $ and lent Funds to the Counterparty

to purchase. GAME WAS UP.

Banks had been using up to $35 on leverage on $1.00 of capital - on balance sheet. Off Balance sheet I have to believe Banks had a further multiple of same.

Do the Maths. You will note an optically baffling number.

Iceland example. United Kingdom. Average debt per household = 170,000 British pounds.

Ripple effects reach the entire Globe.

                                                                                                                            

EFFECTS ON KENYAShilling Sell-Off

REMITTANCES SLOWED UP TO 35% LOWER.

2007 $1.3b.

THE NSE SELLS OFF

TEA ,COFFEE PRICES SLUMPED

FLORICULTURE

No Lehman Brothers At Liverpool Street = LOWER DEMAND

TOURISM

Affected in January/February – No real Bounce coming

DEFICIT LOOMING LARGER

Eurobond avenue knocked out

PUBLIC EQUITY MARKETS

No real appetite post Safaricom and post CO-OP.

This pipeline was supremely attractive but was premised on selling shares at a steep discount. It was not in the vocabulary for Investors to be taking losses.

We have squeezed the lemon and left the domestic shareholder base with the pips.

How much elasticity is there?

‘WHO ARE YOU GOING TO BELIEVE ME OR YOUR OWN EYES?’

- GROUCHO MARX

The value and even premium placed on joined up policy making has never been so high.

Buy Brown sell Paulson.

AT THE MACRO –LEVEL WHAT NEEDS TO BE DONE?

We need to draw down a safety net? That net needs to be between $1b-2b? And it needs to be done yesterday. The world is more multipolar than ever and there are plenty of places to go. We represent a better credit than the $bs that have been thrown at the Banks. However, we live in an accelerated world.

Our rhetoric needs to match the reality.

We need to step up our Infrastructure spend. Multiplier effect.

Interest rates need to remain steady.

The NSE needs to get back on track and become a large Domestic demand base as it was before.

Follow through needed in ensuring that Commodity price benefits flow through the economy.

THE POSITIVE MACRO STORY REMAINS INTACT

Just because those elsewhere bought a fancy Mercedes on borrowed money and drove it off the road does not mean that we [who are at the bicycle stage] are set to slump. Slump we will though if we don’t take coordinated action.

I believe that the story of Kenya is that of a late cycle convergence with the Global Economy. That convergence for the likes of Kenya is driven by plugging the majority of the Population into the Global economy via the Internet at a wholesale price. It’s a Labour Arbitrage. I feel that convergence will gain real traction post 2nd half 2008.

FINANCIALSECTOR IN KENYA IS CLEARLY HEADED FOR CONSOLIDATION

Compare Nigeria where the Central Bank’s perspicacity in raising capital thresholds [when Oil was firm and capital plentiful] meant that 6 of the 100 best capitalized Banks are Nigerian!

Big Picture is that the Banking System is relatively straightforward. It’s a plain vanilla borrowing and lending business for the most part. Spreads are enormous, in the global scheme. There has not been an excessive reliance on short term money to fund the expansion.

We are surely in a Darwinian world now where undercapitalized niche players are going to find the going very tough. We need to encourage the Winners and cull the losers. A long winded drip drip process will magnify losses and sap confidence.

The Banking Sector needs to leverage new relationships and grow and leverage geographically adjacent markets. Maintain the conduit position.

China = CFC Stanbic = ICBC ChinaGulf African = Middle EastEcoBank. = West AfricaReorientate Foreign correspondent relationships.

ALIGN BANKS WITH A SUB SAHARAN INTER AFRICAN FOOTPRINT

Investment Banking and Capital markets need to be alert to the emerging threats especially from Rwanda and the risks that a prolonged bear market put on our dominance.

Nairobi = Zurich.