Weekly Economic Overview and Commentary for

the period 6th February 12th February, 2017

Compiled By: Prince Muraguri Kanyingi

Email: princemuraguri@gmail.com
Contents
LOCAL NEWS ................................................................................................................................................. 3
Small banks struggle for cash as big peers maintain tight fist .................................................................. 3
Real estate sector cools down ahead of August elections ....................................................................... 5
How States all-time high debt burden limits private sector growth ....................................................... 8
Kenyan private sector growth indices flat as credit crunch persists ...................................................... 11
REGIONAL NEWS ......................................................................................................................................... 13
Retrenchment fears as East African economies slow down ................................................................... 13
Sub-Saharan Africa fast becoming hotbed of unemployment ............................................................... 16
Agriculture remains East Africas greatest source of jobs ...................................................................... 18
INTERNATIONAL NEWS ............................................................................................................................... 20
Brexit may cause UK labor gap, HR experts say ...................................................................................... 20
Draghi: Trump's bank deregulation "the last thing we need" ................................................................ 22
Greece's debts 'unsustainable' despite progress IMF.......................................................................... 23
The Fed already has a problem with its 2017 forecast ........................................................................... 25
China's foreign reserves fall below $3T threshold .................................................................................. 26
BoJ struggles to manage yield curve ....................................................................................................... 27
China Bitcoin Exchanges Halt Withdrawals After PBOC Talks ................................................................ 29
LOCAL NEWS
Small banks struggle for cash as big peers maintain tight fist
Small banks are still struggling for cash amid tighter liquidity in the market as their larger peers remain
cautious on lending to them in the interbank market, analysts at Dyer & Blair Investment Bank and
Renaissance Capital say.

The liquidity in the Kenyan banking sector remains skewed in favour of larger lenders. The collapse of
three lenders (Chase Bank, Dubai Bank and Imperial Bank) between August 2015 and April 2016 was a
major factor that led to the defensive position adopted by the larger banks in the interbank market.

Latest Central Bank of Kenya (CBK) data shows that lenders reserve cash position has been in the
negative since mid-January. As at the end of last week, the banks had a deficit of Sh5.6 billion on the
5.25 per cent average reserve requirement, while in the previous week the deficit stood at Sh1.2 billion.

The commercial banks excess reserves chart is as below:

The interbank rate, at which the lenders borrow from each other on short- term basis, averaged eight
per cent last month, having gone up progressively from 4.9 per cent last October.

The imposition of the rate cap law has also robbed the smaller lenders of the opportunity to attract
deposits by offering higher interest rates, given that they cannot raise their lending rates in tandem to
maintain margins. Skewed liquidity distribution between the three tiers of banks has in the last one
year been compounded by flight to safety of deposits following the placement of Chase and Imperial
banks under receivership as well as the introduction of a floor on interest paid to deposit accounts
under the rate cap law, said Dyer & Blair analyst Edwin Chui in the February fixed income update.

Liquidity shortages

As a result, tier two and three banks are experiencing liquidity shortages. Moreover, a number of top
tier banks are by policy no longer lending directly to tier two and three banks, choosing instead to lend
via CBK through Term Auction Deposits, which in turn lends to the smaller banks.

The smaller lenders tap into the CBK cash pool through the reverse repo market, where the interest is
10 per cent, and average monthly flows have risen significantly in the past six months.

Analysis done by Renaissance Capital shows that between August 2016 and January, reverse repo
purchases at the CBK totalled Sh97 billion, working out an average of Sh16.2 billion per month over the
period. On the other hand, in the period between March and August 2016, the repo market moved Sh45
billion, averaging about Sh9 billion per month.

Looking at the CBKs intervention in the interbank market, we find that liquidity injections into the
market were highest in April (post Chase Bank being placed in receivership), August (shortly after the
announcement of the implementation of the rate cap law) and December. There appears to be no short-
term respite for the smaller Kenyan banks, in our view, said Renaissance Capital banking sector analyst
Olamipo Ogunsanya in a note on Kenyan banks.

Bank executives interviewed by Rencap said that the larger lenders have not seen liquidity stress, and
have therefore been able to channel some deposits into government securities.
Real estate sector cools down ahead of August elections
The looming elections have depressed the real estate sector with investors adopting a wait-and-see
attitude after experiencing flare-ups that disrupted businesses in 2007. A survey by integrated real
estate services provider Ark Consultants shows that most local and foreign investors are waiting for the
August 8 General Election to pass before making a decision on whether to invest.

Our investment cycles tend to start after a general election and end with the next general elections. Its
an election year and the slowdown in uptake, drop in prices and the increasing number of vacancies are
tell tale signs that the market is adopting a wait and see attitude, says the survey report.

The companys commercial services director, Reginald Okumu, said the challenges for the residential
and commercial sub-sector are further compounded by the governments move to introduce Capital
Gains Tax (CGT) on rental income.

While the housing deficit has elicited an insatiable demand among investors, CGT demands have seen
many plot owners hike rents thereby forcing tenants to stay away depressing growth in the two sub-
sectors, he said. Mr Okumu added that capping of interest rates had also adversely affected banks
appetite to lend money to mortgage applicants since it was no longer attractive to dish out loans at a
maximum of 14.5 per cent.

While investors see lush opportunities in warehousing and logistics, a lot activity is expected in the sub-
sector once the Nairobi-Mombasa standard gauge railway is commissioned. The study adds that towns
experiencing a population boom will also see an upsurge of warehouse developments by companies
seeking ways to mass distribute processed products.

Devolution, it says, has reduced demand for space in major towns that served as provincial
headquarters leaving many government offices unoccupied.

Analysis: How an election may affect the commercial real estate industry

The presidential election has the country riveted and divided on several fronts. When it comes to the
real estate front, the upcoming election is likely to affect the commercial real estate and residential real
estate industry. The economy is still in one of the slowest recovery periods of the past five decades and
this has economists scrambling to analyze the outlook for the economy in the long-term. Economic
factors and political turmoil can affect the real estate industry in various ways and understand these
ways can help create an effective strategy for the changing real estate landscape.

Underproduction in single-family housing sector - Since the start of the latest economic recovery period
in 2010, the gross domestic product (GDP) has only increased by under 15%. The GDP is a strong
indicator that measures the health of the countrys economy and that under 15% recovery is the
weakest in many years. One of the factors contributing to this weak recovery is the underproduction in
the single-family housing sector. Although the sector has bounced back in the past and helped drive
economic growth, thats not happening this time. This issue in residential real estate can influence the
commercial real estate as property ownership struggles to recover. While people still want to own
homes and commercial properties, the low-interest rate makes it difficult to save for a down payment.

Positives for the industrial sector - Despite the weakness in the single-family housing sector, the
commercial real estate market is doing slightly better. The industrial sector of commercial real estate
has been an improvement in the first half of 2016 as rent values rose above average, construction grew
and the demand remained strong. A key investment that led to this boost for the commercial sector was
the Panama Canal improvements and this bodes well for real estate in the southern area of the country.
The industrial sector of commercial real estate may reach new peaks in value with this high level of
construction.

The presidential election factor - The upcoming presidential election and the uncertainty and
controversy surrounding it cast a shadow over the real estate market. Predictions dont see negative
growth from the vote, but its likely that there will be less positive growth. This positive growth
diminishment could lower the GDP growth to .25-.5% and this will affect real estate in some manner.
Commercial real estate may experience some changes in the office sector as companies wait to sign new
leases until the final votes of the election come in and the country has a new president. Multifamily and
retail sectors may see even less effect, as regardless of the presidential outcome, income and jobs will
remain to support demand in those markets. Another factor supporting demand in the retail and
multifamily commercial real estate sectors is lower rates of unemployment. Good economic strength is
indicated by an all-time low of weekly unemployment insurance claims. This low number of claims
indicates a stronger economy as does the highest employment rate since the Second World War

Scrutiny of real estate business - The long-term outcome of the presidential vote has a direct link to
Donald Trump. His real estate business involvement may bring more interest in the effect of tax
regulations on real estate. The tax situation after the election wont change much until 2018 as the new
president uses 2017 to develop and implement new policies and adjustments. This may have a negative
impact on small businesses that specialize in the commercial real estate if they dont have the income to
invest in tax specialists that can aide their understanding and adaptation of new regulations. Any new
rules set out by the president may influence current office projects and developments as this
commercial sector have longer construction times.

Believing in the markets - Regardless of who wins, both presidential candidates believe in the markets
and will likely bring changes to real estate. The pro-market beliefs of Clinton and Trump can be good for
the economy and are different from Obamas essential distrust of the markets. No matter the
presidential outcome, the United States doesnt have to worry about a real estate impact of the
magnitude of the United Kingdoms Brexit as they have one of the strongest economies alongside
Australia and Canada. Effects on small to medium business property owners

The election may have a significant impact on residential real estate, but its unlikely that commercial
real estate will experience a direct impact. One of the reasons for this is that commercial real estate
uses local government to determine zoning taxes and regulation changes. From the time of the most
recent recession, property values continue to increase while employment continues to recover,
although slowly. Commercial real estate markets and business owners could be vulnerable to the initial
instability of a new president. The election is currently negatively affecting growth due to the
uncertainty of the economic impacts. Statistically, businesses reduce leasing activity during election
years and hesitate to make decisions about renegotiating or renewing leases. This caution on the part of
property owners is understandable as the time of the election approaches and the political turmoil
remains. Property owners and renters are waiting to see how the election plays out before making any
big decisions and this has caused a temporary leveling off of sale prices and rental rates. Tenants and
property owners of commercial real estate may seek to lock-in long-term leases in the case of a possible
recession after the election but the candidates belief in the strength of the markets casts doubt on such
a downturn.

Despite the uncertainty of the presidential election and its possible effect on commercial real estate,
there has been significant growth in the economy since the time of the recession. Even slow growth
indicates a recovery for the U.S. economy and that makes analysis hopeful that political changes wont
have a detrimental impact on commercial real estate. At this point, analyzing date from past presidential
election years can only paint a partial picture of what will happen after the country elects a new
president.

***
How States all-time high debt burden limits private sector growth
Kenyas domestic debt currently stands at Sh1.9 trillion, an all-time high, which is 50.8 per cent of the
countrys total public debt of Sh3.76 trillion. In the past five years, the domestic debt load has grown by
Sh1.1 trillion, having stood at Sh802.5 billion in December 2011.

To finance the large budget deficit in the current fiscal year, the government plans to borrow an
additional Sh294.6 billion from the domestic market, higher than the Sh287.6 billion it plans to take up
from external lenders.

Essentially, the stock of domestic debt is likely to hit the Sh2 trillion mark before the end of the fiscal
year, given that by mid-December the government had made Sh155 billion in new borrowing from the
domestic market. In the 2015/2016 fiscal year, the government raised Sh349.6 billion in new borrowing
from the domestic market, which was way past its target of Sh191 billion.

The States appetite for domestic borrowing has made fixed income the investment of choice for many
investors in the country, attracted by the relatively high interest rates on offer as well as the risk free
status of government debt.

It is a no-brainer therefore for an investor to put in money into a government bond at the rate of about
12.5 per cent, compared to investing in a share at the stock marketwhose risk is also inherently
higher where the return this year is at a negative 23 per cent.

The secondary bonds market, of which 98 per cent is government securities, has as a result seen its
volume of traded capital grow at the expense of the equities market this year. Equity turnover at the
Nairobi Securities Exchange this year is set to come in below the 2015 total, standing at Sh145 billion
with just two trading weeks left in the year. Last year the market traded Sh209.4 billion.

At the same time, the turnover in the secondary bonds market has gone up significantly, hitting Sh411.3
billion since the beginning of the year. Last year this segment traded Sh305.1 billion. Banks have been at
the forefront of lending to government this year, with their holdings of public debt currently standing at
Sh998 billion, representing 52.3 per cent of the total debt.

The enactment of the law capping customer loan interest rates at 400 basis points above the prevailing
Central Bank Rate (CBR) has seen banks increase their lending to government, given that they are now
unable to price in risk on customer loans. Faced with the option of lending to government at 12 per cent
or to a customer at 14 per cent, a bank would always go for the State debt, which is risk free and easier
to administrate.

In pricing their customer loans therefore, banks have to keep an eye on the rate the government is
paying for money. Under the Kenya Banks Reference Rate (KBRR) loan pricing regime, the base cost of
customer loans was computed from a moving average of the 91-day Treasury Bill and the CBR, meaning
that it would largely go up or down with the cost of government debt.

Even though KBRR is now not in use given the new rate caps, banks lending trends will still be
influenced by the rates on offer on government paper. There was a spread of six to seven percentage
points between the average banks lending rate and the rate on the one- year Treasury bill in the
months leading to the signing of the rate cap.
The rising preference by banks to lend to government is a risk to the economys growth, given that it
would starve the private sector of much needed credit to power their economic activities.
The annualised growth of credit to the private sector has dropped significantly this year, falling from 17
per cent in January to 4.5 per cent in October.

Academic Theory: Crowding out

Definition of crowding out when government spending fails to increase overall aggregate demand
because higher government spending causes an equivalent fall in private sector spending and
investment.

Question: Why does an increase in public sector spending by the government decrease the amount the
private sector can spend?

If government spending increases, it can finance this higher spending by:

1. Increasing tax
2. Increasing borrowing

Impact of higher government spending on aggregate demand

1. Increasing tax. If the government increases tax on the private sector, e.g. higher income tax,
higher corporation tax, then this will reduce the discretionary income of consumers and firms.
Ceteris paribus, increasing tax on consumers will lead to lower consumer spending. Therefore,
higher government spending financed by higher tax should not increase overall AD because the
rise in G (government spending) is offset by a fall in C (consumer spending).
2. Increasing borrowing. If the government increases borrowing. It borrows from the private
sector. To finance borrowing, the government sell bonds to the private sector. This could be
private individuals, pension funds or investment trusts. If the private sector buy these
government securities they will not be able to use this money to fund private sector investment.
Therefore, government borrowing crowds out private sector investment.

Financial crowding out

This is the term used to describe how government borrowing can cause higher interest rates. If
government needs to sell more securities, it may have to increase interest rates on its bonds to attract
people to buy. For example, in the EU, bond yields rose in 2011 because markets were worried about
levels of EU debt. Therefore, the increased government borrowing was at the expense of higher interest
rates on government debt. These higher interest rates on bonds lead to higher interest rates elsewhere
in the economy and are likely to discourage private sector investment and spending.

However, in a recession, the government can often borrow more without interest rates rising.
For example, in the UK 2009-13, bond yields fell because people wanted to save money in bonds
rather than invest. Also Keynes argued that in a recession, the private sector has idle resources.
Therefore, government borrowing is effectively making use of these idle resources. Financial
crowding out is more likely to occur when the economy is growing and is close to full capacity
already. When the economy is growing strongly, the government will have more competition
from other private sector investments, therefore government bonds yields will have to rise to
attract savings from other investment projects.
Resource crowding out

The second type of crowding out is simply the fact that if the private sector lend money to the
government they have less money to invest in private sector projects.

Furthermore, it is argued that the private sector investment tends to be more efficient than the public
sector investment. Therefore, the economy is worse off for government borrowing.

Crowding out doesnt always occur

It is important to bear in mind crowding out doesnt always occur it depends on the state of the
economy.

Keynesians again argue that in a recession and liquidity trap, there is no crowding out because the
government is merely spending unused resources. Keynesians argue that in a liquidity trap the LM curve
is elastic. This means increased government spending doesnt increase interest rates.

Another way of thinking about a recession is that the rise in government borrowing is merely to offset
the rise in private sector saving.

This graph shows that in 2008-2012, there is a sharp rise in private sector saving. This is matched by an
equivalent rise in government borrowing.

***
Kenyan private sector growth indices flat as credit crunch persists
Kenyan business growth indices were flat in January as credit crunch persisted with one showing slight
improvement among firms and the other a marginal drop.

According to the Purchasing Managers Index (PMI) survey released by Stanbic Bank and HIS Markit on
Monday, the private sector growth improved slightly, underpinned by a sharp expansion in new work,
which was supported by a steep increase in new export orders.

The survey shows firms raised payroll numbers slightly while there were signs of ongoing pressure on
operating capacity. The seasonally adjusted index stood at 52, as output increased at a modest pace,
compared to Decembers 54.1 points.

On the price front, it rose for the fourth successive month amid a further increase in input costs. The
Stanbic Bank PMI fell to a three-month low in January starting the New Year more sluggishly after a solid
close in 2016.

In fact, since the legislation to cap interest rates came into effect in September 2016, we can now see
signs of distress within the private sector as presented by lament about cash shortages, said Jibran
Qureishi, regional economist East Africa at Stanbic Bank. A further slowdown in private sector credit
growth and poor weather conditions will most likely lead to a downward trend in the PMI over the
coming quarter, more so as costs for firms will most probably rise.

According to a separate poll, however, business sentiment in Kenya fell in January, pointing to a
relatively soft start to the year.

Analysis: Below is a snippet from the Standard Bank PMI Outlook for January 2017

The Kenyan private sector improved further during January, although to the least extent in three
months. Underpinning the latest improvement was a sharp expansion in new work which was supported
by a steep increase in new export orders. Firms raised their payroll numbers slightly, while there were
signs of ongoing pressure on operating capacity. Output increased at modest pace that was the weakest
since mid-2016. On the price front, charges rose for the fourth successive month amid further increase
in input costs. The headline figure derived from the survey is the Purchasing Managers Index (PMI).
Readings above 50.0 signal an improvement in business conditions on the previous month, while
readings below 50.0 show a deterioration. At 52.0, the seasonally adjusted PMI was consistent with
modest improvement in the health of the Kenyan private sector at the start of 2017. The respective
index slipped back from the eight-month high of 54.1 in December and was below the series average
(54.5).Having accelerated in the previous two months, output growth softened to a moderate pace in
January. Anecdotal evidence linked the increase to improved market demand. However, growth was
reportedly restricted by cash shortages. January saw a sharp albeit softer rise in new business. Number
of firms mentioned that promotional activities had boosted demand. Another factor supporting growth
of total new orders was a robust expansion in new business from abroad. Reflective of increased output,
firms raised their staffing levels in January, but at the weakest rate in six months. Concurrently, capacity
pressures continued to build, with backlogs accumulating for the fifteenth successive month. A number
of companies indicated that greater workloads was the primary factor behind the latest increase in
outstanding business. Also, some firms mentioned financial constraints. On the price front, higher raw
material costs were reported to bathe primary factor behind another steep increase in overall input
costs, with wage inflation softening in January. Average prices charged rose for the fourth month
running, but the rate of inflation was at a three-month low. Firms were reportedly restricted in their
ability to fully pass on increased cost burdens to clients as they faced intense market competition. In
response to increased production requirements, purchasing activity rose at a steep pace in January. As a
result, preproduction inventories rose at the start of the year. Finally, average vendor performance
improved at the start of the year despite pressure on suppliers capacity. The degree to which delivery
times shortened was sharp.

***

The Standard Chartered-MNI Business Sentiment Indicator (BSI) fell 4.5 per cent month-on-month to
59.6, leaving it down 6.8 per cent year-on-year. Four of the five components of the headline indicator
dropped as companies reported slower activity, said the poll.

Firms were concerned that price pressures have picked up both input and product prices and they
expect them to continue to rise in the months ahead. While domestic demand, production and
productive capacity have fallen, respondents noted that foreign demand had improved.

Companies experience seems to confirm that some of their future concerns in December are being
realised, said Razia Khan, Standard Chartered chief economist for Africa.

Of the five components of the headline indicator, four new orders, production, employment and
supplier delivery times which together account for 85 per cent of the headline indicator fell. Only
order backlogs increased.

Companies reported slower production and demand in January: production fell by 9.9 per cent month
on month while productive capacity dropped 3.4 per cent.

Companies were also concerned about the inflation outlook.

REGIONAL NEWS
Retrenchment fears as East African economies slow down
As the regions economic fortunes continue to wane, several companies keen to cut costs and return
profits have turned to retrenchment, rendering at least 6,000 employees jobless in the past three years.

The high cost of credit, reduced spending power, a high cost of living coupled with non-performing
stocks due to low investor appetite, have seen companies rethink their strategies, with employees
becoming the easy targets. The Kenyan banking sector, with several operators having a regional
presence, has been in the lead in shedding jobs for the third year in a row, with 2017 likely to witness
even more job losses as the country heads into elections, in a market where investors are already jittery.

The shift by most businesses to digital platforms has seen an uptake of mobile and online banking,
which in retrospect has now been a key contributor to the job cuts. In 2015 alone, the banking sector
recorded 711 job losses, data from the Central Bank annual survey report shows.

Equity Bank led the others, including Standard Chartered Bank, Co-op Bank, Bank of Africa, NIC, National
Bank, sharia-compliant First Community, Family and Sidian Bank, in cutting their workforce. There will
be continuation of the reorganisation of banks where institutions will be looking at their business
models to ensure they are operating sustainably in the new environment, said Kenya Bankers
Association chief executive Habil Olaka.

Outlets shutdown

In the first quarter of this year, Bank of Africa, National Bank and Co-operative Bank will be carrying out
retrenchment as they seek to adopt digital platforms in provision of services. Already, Bank of Africa has
announced the shutting down of 13 branches in Kenya.

This move is not linked to the rate cap law, but we are trying to save up to nine per cent of our Ksh2.5
billion ($25 million) in operational costs. We took this move as we saw over the years fewer traffic in our
halls as customers embraced digital banking, Bank of Africas chief executive Ronald Marambii said.

National Bank has opened a second window for exits beginning this month to all staff who have worked
with the bank for more than a year, while Consolidated Banks announced that it would cut jobs in the
first quarter of 2017.

In a previous interview, Federation of Kenya Employers boss Jacqueline Mugo said employers had
resorted to the retrenchment in a bid to stay afloat. What we are seeing are employers trying to limit
their operational costs. Sadly, this involves loss of livelihoods for the workers but the firms are just trying
to stay afloat, Ms Mugo said.

Within the manufacturing sector, data from the Kenya National Bureau of Statistics shows that about
2.2 million small enterprises have closed shop over the past five years, with the wholesale, retail, motor
vehicles and motor cycles repairs sectors accounting for three-quarters of these losses.

Most of the closures were as a result of high operating costs, diminishing income and incurred losses.

Profit warnings
On the corporate scene, Sameer Africa in September announced it had closed its Yana tyres
manufacturing factory in Nairobi, citing increased competition from cheaper imports, mostly from
China.

The board of directors resolved to cease the manufacture of tyres and allied products at the Sameer
Africa in Nairobi and commence offshore production by tyre manufacturers domiciled in China and
India, the firm said.

The operating environment for most firms has been harsh, with 18 of them, among them Sameer,
issuing profit warnings in 2016. Already this year, five firms, of the 20 listed at the Nairobi Securities
Exchange have issued profit warnings.

Deacons East Africa, Sanlam Kenya, Family Bank, Sameer Africa and Sasini have warned their investors
of possible lower net corporate earnings for last year, with Family Bank blaming the one-off costs of its
retrenchment programme for its margin dip.

Most of the closures were as a result of high operating costs, diminishing income and incurred losses.

Profit warnings

On the corporate scene, Sameer Africa in September announced it had closed its Yana tyres
manufacturing factory in Nairobi, citing increased competition from cheaper imports, mostly from
China. The board of directors resolved to cease the manufacture of tyres and allied products at the
Sameer Africa in Nairobi and commence offshore production by tyre manufacturers domiciled in China
and India, the firm said. The operating environment for most firms has been harsh, with 18 of them,
among them Sameer, issuing profit warnings in 2016. Already this year, five firms, of the 20 listed at the
Nairobi Securities Exchange have issued profit warnings.

Deacons East Africa, Sanlam Kenya, Family Bank, Sameer Africa and Sasini have warned their investors
of possible lower net corporate earnings for last year, with Family Bank blaming the one-off costs of its
retrenchment programme for its margin dip.
Sub-Saharan Africa fast becoming hotbed of unemployment
Sub-Saharan Africa is fast becoming a hotbed of unemployment, vulnerable jobs and poor workers, a
reality that is making the aspiration of most countries to transform into middle-level economies a
mirage.

Despite massive investment in infrastructure to drive economic growth, research has shown that sub-
Saharan Africa is not only grappling with run-away unemployment but the majority of the jobs are in the
informal sector and the few employed people are actually living in poverty. The International Labour
Organisation (ILO) reckons that the informal economy contributes 50-80 per cent of gross domestic
product, 60-80 per cent of employment and 90 per cent of new jobs.

Worse, about nine out of 10 workers in both rural and urban areas hold only informal jobs, leaving the
majority of the population living from hand to mouth. The informality of employment is exerting
pressures on economies because only a few people can afford vital services like medical cover or saving
for retirement.

The problem of poor quality jobs is endemic in sub-Saharan Africa, where over 70 per cent of workers
are in vulnerable employment against the global average of 46.3 per cent. In sub-Saharan Africa, poor-
quality employment rather than unemployment remains the main labour market challenge. This
problem is compounded by rapid population growth, specifically growth of the working-age population,
states the ILOs World Employment Social Outlook 2017 report.

It adds that across most of sub-Saharan Africa, the lack of productive opportunities for the youth and
adults alike mean that 247 million people were in vulnerable employment in 2016, equivalent to around
68 per cent of all those with jobs.

Over the next four years, the region will pump an additional 12.6 million youth into the same precarious
labour force market.

Working poverty

The reality of vulnerable employment is worsened by working poverty, considering that 33.6 per cent of
all employed people in sub-Sahara Africa were living in extreme poverty that is living on less than
$1.90 per day in 2016. An additional 30.1 per cent were living in moderate poverty at between $1.90
and $3.10 per day, which corresponds to over 230 million people living in either extreme or moderate
poverty. The rate of moderate working poverty is rising and is projected to be 30.5 per cent in 2017,
representing an increase of approximately five million people in one year.

The challenge is particularly dire for youth considering that almost 70 per cent of them in 2016 were in
jobs characterised as working poverty.

The fact that the informal sector is the one creating jobs is dangerous for the sustainability of the
economy, Jackline Mugo, Federation of Kenya Employers chief executive told The EastAfrican.

Worsening crisis

She added the crisis in the job market is bound to worsen as long as countries fail to generate quality
jobs and people who are employed continue to clamour for more wages.
East Africa is a study in contrasts as there is rising economic growth amid massive job losses and a
growing informal job market. According to Kenyas Education Cabinet Secretary Fred Matiangi, a
skewed education system that has been glorifying university degree instead of focusing on technical
courses is largely to blame.

The CS contends that the assumption that Technical Vocational Education and Training (TVET)
programmes are less prestigious is contributing to the growing informal market because university
graduates, the majority of them in arts and humanities, cannot secure decent jobs.

We need to graduate more students from TVET institutions, he said.

The challenge of unemployment and low quality jobs is worsening in East Africa despite the regions
being expected to post economic growth of 5.4 per cent in 2017 against a continental average of 2.5 per
cent. In Kenya, there are over 520,000 students enrolled in public and private universities while only
about 80,000 students are in TVET institutions.

Data by the World Bank show that the youth unemployment rate in Kenya currently stands at 17.3 per
cent but at six per cent in both Tanzania and Uganda.

In recent months, the five East African Community countries have been hit by a spate of job losses as
companies resort to job cuts to rein in rising operating costs and shrinking profits.

The financial services and manufacturing sectors have been the worst hit. Commercial banks like Bank of
Africa, Equity Bank, Co-operative Bank, Standard Chartered and KCB which have regional operations and
companies like Sameer Africa, Eveready East Africa and Cadbury have shed hundreds of jobs.

In Kenya, it is estimated that over the past 12 months at least 10,000 people have lost their jobs.
Tanzania, Uganda and Rwanda are no better.

According to the ILO report, sub-Saharan Africas unemployment rate is forecast to stand at 7.2 per cent
in 2017, unchanged from 2016.

The report says while the unemployment rate remains stable, the numbers of the unemployed are
expected to increase from 28 million in 2016 to 29 million in 2017.
Agriculture remains East Africas greatest source of jobs
Despite East Africas increased public investment in infrastructure, an area long considered a sure source
of employment for locals, the region continues to depend on the agricultural sector for jobs.

But experts warn that the agricultural sector fuels underemployment, which is a common feature in
many countries in East Africa. In Uganda, underemployment is just 9.3 per cent, while in Rwanda, this
figure is even lower at two per cent.

The United Kingdoms Department for International Development (DfID) in its economic development
strategy for 2017 notes that the high under-employment rates in these economies create many jobs
that are highly unsafe and offer no scope for progress.

In Uganda, Minister of Finance Matia Kasaija said the agriculture sector employs 73 per cent of the
population but contributes just 24 per cent of the gross domestic product. This suggests that the
population outside the formal labour force engages in some kind of work for a few hours and at low
wages.

A similar problem exists in other East African countries, with Tanzanias Finance Minister Dr Phillip
Mpango telling parliament that agriculture and trade, the two sectors that employ the largest
percentage of the population, also contribute the least to the countrys economic growth.

For example, between January and September last year, agriculture grew by just 2.1 per cent and trade
by 5.6 per cent. This compares poorly with minings 15.8 per cent, transportation and storage at 15.5
per cent, information and communications technology at 13.4 per cent and financial services at 11.5 per
cent.

Youth unemployment

This incongruence between the number of people employed by the agricultural centre against its
contribution to the economy, according to Ramathan Ggoobi, an economics lecturer at Makerere
University Business School, speaks volumes about the failure by many African countries to transform the
structure of their economies to create productive jobs for young people.

Experts say that instead of aiming for transformation of their economies, countries in the region go for
stable macroeconomic indicators.

Dr Patrick Birungi, the planning director at National Planning Authority, says that with the economic
growth afforded by stable macroeconomic indicators, there wont be as many jobs since the
investments attracted to such economies are few and small in nature.

According to Rwandas Ministry of Labour and Public Service, the failure by investors to grow
employment opportunities is causing job insecurity.

In Rwanda, 125,000 young people are estimated to join the labour force a year; while the economy is
able to generate 146,000 jobs on annual basis, according to the latest Integrated Household Living
Conditions Survey.
Analysts in Rwanda say that since the jobs generated are less than the number of unemployed,
employers are laying off workers in the name of cutting costs. DfID notes that job insecurity and poor
labour rights are widespread in low-income countries like Uganda, Rwanda and Tanzania.

To solve these problems, Dr Birungi says countries need to focus on production investment, which
would include industrialisation. The other alternative is to focus on getting jobs through investment in
the public sector.

Increased investment

East African countries have been investing in infrastructure, but a lot of the money is exiting these
countries because of the failure to negotiate an adequate local content component.

We must improve contract negotiation to allow for better local content, Dr Birungi said.

He suggests that countries must negotiate specific local content ratios.

We could have in our contracts that for every foreign engineer a contractor hires, 20 locals should be
given jobs, he says.

This would take advantage of the heavy investments the region has made in the infrastructure sector.

Ugandas energy and roads sectors have in the past 10 years seen increased investment. By the end of
this financial year in June, the roads and energy sectors will have received Ush6.2 trillion ($1.7 billion).

These two sectors have been receiving the largest share of Ugandas budget for some time and this
investment is expected to continue with the Ministry of Finance promising to allocate Ush7.9 billion
($2.2 billion) for the coming financial year.

Audit firm PricewaterhouseCoopers notes that Tanzania has in recent years invested heavily in
infrastructure, a trend that is expected to continue for a while. The audit firm says that Tanzania has put
$19 billion in pipeline, transport and utility projects.

According to Dr Birungi, the demand for local content will only work if the population has the required
skills.

DfID points out that this is not yet the case and that countries in the region need to invest more in
human capital, nutrition, family planning and infrastructure for a healthy and educated population, and
better access to assets such as land and finance.
INTERNATIONAL NEWS
Brexit may cause UK labor gap, HR experts say
Problems facing the British labor market including skills shortages and an aging population are likely to
be exacerbated by Brexit, according to Mercer. Those gaps will no longer be filled by foreign workers,
which are set to decrease in number as the U.K. negotiates a new relationship with the European Union,
the consulting firm said in a report. The U.K. faces slow growth or even contraction of its working
population as net migration roughly halves from current levels to 185,000 per year from 2020 onwards,
it said. It could fall further depending on how much the government plans to restrict migration from the
EU.

Prime Minister Theresa May is set to start formal divorce talks with European leaders by the end of next
month. Shes indicated the U.K. will leave the single market in order to restrict immigration from the
bloc. With immigration likely to fall in coming years, particularly from the EU, the veil is lifted as we
face a shrinking U.K. workforce, said Gary Simmons and Julia Howes, the authors of the report.

The report strikes a different tone than the Bank of England, which said last week that theres more
supply in the labor market than it had anticipated, and that wages are unlikely to accelerate as a result.
Mercer said a labor shortage could put upward pressure on wages, as well as hit growth. Its analysis is
more long-term than that of the BOEs, whose forecasts go until 2019.

Brexit Beginning

While the central bank upgraded its growth forecasts and kept policy on hold, Governor Mark Carney
said that the Brexit journey is really just beginning and that there will be twists and turns along the
way.

Below is the UK GDP growth chart for the past few months:

Companies should try to increase employment of those currently under-represented in the workforce
including women, the disabled and the long-term unemployed, invest in automation and improve
productivity, Mercer said.
According to the Bloomberg Sunset Index -- which shows the number of workers per retired person --
the U.K. currently has a ratio of 3.57, better than European countries including France, Sweden, Poland,
the Netherlands, and Belgium. It still fares worse than Canada and the U.S., though, which both have on
average over 4 workers per older person outside the labor force.

A separate report from Lloyds Bank published Monday showed that businesses want the U.K. to
prioritize skills and trade in EU negotiations.
Draghi: Trump's bank deregulation "the last thing we need"
ECB president Mario Draghi has rejected a plan by Donald Trump to soften US banking regulation
adopted in the wake of the financial crisis, saying laxer rules are "the last thing we need" in financial
markets.

European Central Bank (ECB) president Mario Draghi said on Monday that financial regulations
implemented since the 2007-08 global financial crisis have underpinned stability, and any effort to relax
the rules was "very worrisome."

Speaking before the European Parliament's Committee on Economic Affairs in Brussels, Draghi called
President Trump's plan to review and likely unwind US banking regulation as "the last thing we need."
"The fact that we are not seeing the development of significant financial stability risk is the reward of
the action that legislators and regulators and supervisors have been undertaking since the crisis
erupted," Draghi noted.

The Trump administration last week ordered a review of major banking rules that were put in place after
the 2008 financial turmoil, signaling that looser banking regulations are coming. While the regulations
succeeded in stabilizing the American banking industry, European banks are still struggling to adapt to
tougher rules. Therefore, any relaxation in the US would give the industry a competitive advantage over
their EU rivals.

Casino banking revisited

Post-crisis US banking regulation adopted under the so-called Dodd-Frank Act aimed to curb the actions
of the finance sector that led to the "Great Recession" in the United States. The rules required banks to
demonstrate their solid financial grounding in annual "stress tests" as well as refrain from certain risky
transactions, and significantly expanded the role securities regulators play in overseeing the investment
industry.

Before signing executive orders to review the regulation on Friday, Trump said he wanted to "cut a lot
out of Dodd-Frank." "I have friends who can't start businesses because the banks wouldn't let them
borrow because of rules and regulations and Dodd-Frank."

Trump's directives were quickly denounced by the minority Democrats in the upper house of Congress,
who vowed to fight to prevent the law's undoing. "If we allow Wall Street to go unchecked again, it's
only a matter of time before history repeats itself," Democratic Congresswoman Chellie Pingree said on
Twitter.

Trump's decrees came on the heels of his meeting with business leaders, including chiefs of the largest
banks and investment firms, such as JP Morgan Chase, Blackstone and BlackRock, which may stand to
gain from looser rules.
Greece's debts 'unsustainable' despite progress IMF
Greece is making progress towards reducing its massive budget problems and restoring economic
growth, but its debts remain "unsustainable" over the long term, the International Monetary Fund has
said.

The IMF predicts Greece's economy will reach long-run growth of just under 1% a year - unimpressive,
but an improvement on years when the economy was shrinking.

Below is a graph showing Grece GDP growth till October 2016:

And it will meet the IMF's target by reporting primary annual budget surpluses, which do not include
interest payments, equal to 1.5% of economic output. Since the financial crisis left it buried in debt,
Greece has made painful budget cuts that caused a deep recession, with unemployment currently at
23%.

Most IMF directors said Greece did not need any more austerity, but the country should reduce pension
payments and make more people pay taxes to raise money to help the poor and cut overall tax rates.
The country's debt is unsustainable at around 180% of gross domestic product, the broadest measure of
economic output, the IMF said.
Most IMF directors say the country will probably need debt relief to pay its bills over the long term.

Greece is under pressure to conclude its latest bailout negotiations in time for a scheduled February 20
meeting of eurozone finance ministers.

That would allow the country to join the European Central Bank's bond-buying programme, which would
boost market confidence and make it easier for Greece to return to the bond market later this year.
The Fed already has a problem with its 2017 forecast
Federal Reserve officials, including central bank chair Janet Yellen, have kicked off the year by again
indicating their intention to raise interest rates several times in 2017, even though the same suggestion
last year turned into barely a single rate increase at the very end of the year.

But there are signs that financial markets dont believe the central bank this time. For one, traders
arent pricing in the next interest rate increase until June. The way things are moving in Washington
these days, who knows what the economy will look like by then. More notably, big Wall Street banks are
already second-guessing the Feds recent guidance about the number of rate hikes that are likely this
year.

Jabaz Mathai, head of US rates strategy at Citigroup, and his team point out that inflation expectations
as measured by the gap between inflation-protected bonds and regular Treasury notes, which are seen
as a harbinger of future price rises, may not be recovering quickly enough for the central banks liking.

In a policy statement last week following its decision to leave rates on hold, the Fed said, "Market-based
measures of inflation compensation remain low; most survey-based measures of longer-term inflation
expectations are little changed, on balance." "This is a problem for the Fed. If the current level is
unsatisfactory, we see it as less likely the Fed will go even twice this year (the official view from our
economists is two rate hikes this year), because we simply dont see long end inflation expectations
moving much higher from here," Mathai writes in the note. US inflation has remained below the Feds
official 2% target for much of the recovery, underlining its weakness as wage growth has remained
elusive.

Deutsche Bank economist Joseph LaVorgna seems to be of a similar mind: We do not see much
evidence of meaningful upward wage pressures; just look at the trends in average hourly earnings,
compensation per hour and the employment costs indexthey do not point to an imminent pickup in
underlying inflation.

The Fed has raised official interest rates only twice since it started to tighten monetary policy in
December 2015, to their current range of 0.50% to 0.75%. It reduced them to zero during the financial
crisis and left them there for years after, in addition to purchasing trillions in government bonds to
support lending and consumption. Below is a graph showing the federal funds rate:
China's foreign reserves fall below $3T threshold
Chinas forex reserves have fallen below $3 trillion for the first time in nearly six years in January. The
rate of contraction has slowed as China closes up its capital account, but for a country obsessed with
symbolic numbers, targets, quotas and index levels, a worrying line in the sand has been crossed.

The ongoing shrinkage in Chinas foreign cash stash is partly due to attempts to defend another line in
the sand, namely keeping the exchange rate above 7 Yuan per dollar. Having intervened heavily offshore
to hold this line in January, the Peoples Bank of China is now compelled to defend it whether it makes
sense or not. In the background is a U.S. Treasury report due April in which China could be labelled a
currency manipulator.

Much depends on the dollar itself. If the long-running dollar rally is nearing its peak, Beijing can relax.
Losing less than $13 billion a month from foreign reserves isnt threatening; China has almost $400
billion to burn through before it closes on the critical $2.6 trillion level roughly the minimum China
would require under International Monetary Fund guidelines.

Unfortunately few economists believe the yuan is anywhere near market bottom, calling for further
slides of 5 percent or more this year. Were China to leave the yuans value entirely to market forces, it
would probably result in a sharp drop. That would in turn accelerate capital flight, and invite U.S.
retaliation. The absolute level of Chinas reserves is not yet concerning but the direction of travel
might be.
BoJ struggles to manage yield curve
The Bank of Japan board pointed to the difficulty of maintaining its yield curve control framework amid
global uncertainty, calling for flexible management of the easing program and close communications
with markets, the summary of opinions expressed at its latest meeting on Jan. 30-31 released
Wednesday showed.

"Under yield curve control, the amount, timing, and frequency of the JGB purchases are determined in a
practical manner so as to achieve the target level specified by the guideline for market operations," one
board member said. "The bank should make clear to the markets that the daily conduct of market
operations has no implications for the monetary policy stance going forward." Another member warned
that global events could have a significant impact on yields, and so on the implementation of BOJ policy.

"Given heightened uncertainty in global financial markets, a small event could trigger a substantial
change in the perception of the markets regarding the level of long-term yields," the member said. "In
such situations, market concerns over the BOJ's ability to control the yield curve tend grow," the
member continued. "It is therefore important to give some discretion to the Market Operations Desk to
conduct market operations in a flexible manner."

A different board member called for a review of the current policy framework adopted in September. "If
long-term interest rates in the United States rise substantially while the inflation rate in Japan remains
low, it will be more difficult for the bank to control the long-term interest rate at the target level. In this
situation, a reconsideration of the framework of yield curve control would have a substantial benefit,"
the member said.

Another member repeated opposition to the current 10-year JGB yield target level of zero percent: "It is
my belief that the yield curve that would be most appropriate for achieving favorable conditions in
economic activity and prices should be a little steeper. "In theory, the downward pressure on yields will
increase due to the stock (inventory of JGBs to buy) effects as the bank continues JGB purchases.
Therefore, the bank should reduce the amount of purchases by carefully monitoring market reactions,
so as to facilitate the formation of a yield curve that is consistent with the guideline for market
operations."

At its January meeting, the BOJ board decided to stand pat on monetary policy in a seven-to-two vote,
retaining the yield curve control target while continuing to estimate 2% inflation would be achieved
"around fiscal 2018."

In its quarterly Outlook Report released after the meeting, the BOJ board revised up slightly its
economic growth forecast for the next two years but left its projection for consumer inflation under 2%,
given the stubborn deflationary mindset among households and businesses. Among the opinions on
monetary policy, one said, "Although economic and price developments in Japan have been improving
steadily, the BOJ should be prudent in changing the monetary policy hastily, considering such factors as
uncertainties surrounding overseas economies. For the time being, it should monitor the policy effects
under the current framework with patience."

Said another, "Some market participants speculate that the BOJ might consider raising the target level of
the long-term interest rate in response to such factors as a rise in the U.S. long-term interest rates;
however, since there is still a long way to go to achieve the price stability target of 2%, firmly
maintaining the current monetary policy stance is of the utmost importance." A different member said,
"The degree of uncertainty regarding the U.S. economy is likely to remain high."

On the price outlook, one said that "it would take some time for the inflation rate to accelerate, as the
formation of inflation expectations is adaptive." A different member said, "It is disappointing that the
underlying trend in the monthly CPI inflation rate has been more or less flat, despite an improvement in
economic developments. I believe that the inflation rate will remain largely below 2% during the
projection period of the Outlook Report (to March 2019)."

"It is very unlikely that inflation expectations will increase significantly within the projection period of
the Outlook Report," said another.

On economic development, one member noted the BOJ's supply-side Consumption Activity Index shows
that private consumption has been rising, having hit the bottom in mid-2016.

"The propensity to consume, which had been declining continuously, is expected to bottom out in due
course. This is attributable to higher replacement demand for durable goods, stability in stock prices,
and an improvement in consumer sentiment," the member said.

A different member was less upbeat, saying, "Consumption has been picking up but still lacks
momentum. I am closely watching whether it will continue to recover steadily after the pent-up demand
dissipates. The scheduled decline in pension receipts next fiscal year may affect consumer sentiment."

The Consumption Activity Index fell a real 1.0% on a seasonally adjusted basis in December for the
second consecutive drop after -0.1% in November and +0.4% in October. But the index edged up 0.1%
on quarter in October-December for the second consecutive quarterly rise following +0.7% in July-
September.

The BOJ's consumption indicator reflects a wide range of sales and supply-side statistics on goods and
services and helps capture a short-term consumption trend, and it has a close correlation to final gross
domestic product figures.

The Cabinet Office will release preliminary GDP data for the October-December quarter on Monday.4
China Bitcoin Exchanges Halt Withdrawals After PBOC Talks
Chinas three biggest bitcoin exchanges took steps to prevent withdrawals of the cryptocurrency amid
pressure from the nations central bank to clamp down on capital outflows.

BTC China subjected all bitcoin withdrawals to a 72-hour review, while Huobi and OKCoin suspended
them completely, the three venues said in separate statements on Thursday. They all said the measures
were in response to central bank requirements. Conversion to and from the yuan is not affected and the
curbs will be dropped after updates to compliance systems, the exchanges said.

The Peoples Bank of China told nine bitcoin venues at a meeting in Beijing on Wednesday that it will
close exchanges that violate rules on foreign exchange management, money laundering, and payment
and settlement. Chinese authorities are scrutinizing the cryptocurrency amid concerns its being used to
spirit money out of the country, undermining official efforts to clamp down on capital outflows and prop
up the yuan. Demand from investors in Asias largest economy, home to most of the worlds bitcoin
trades, has fueled a 160 percent rally versus the dollar over the past year.

Huobi and OKCoin said it will take about a month to upgrade systems in line with new PBOC guidelines.
BTC China did not give a timing for when any upgrade would be completed.

The Chinese government is worried about capital flight, said Arthur Hayes, a former market maker at
Citigroup Inc. who now runs BitMEX, a bitcoin derivatives venue in Hong Kong. Bitcoin is seen as
another way to move money out of China, even though most people trade it for onshore capital
appreciation and as another asset in their portfolio.

Bitcoin dropped 7.8 percent on Thursday to $977.39 after the exchange statements. It rose 0.8 percent
at 1 p.m. in Hong Kong.
China has taken a central role in the bitcoin market in recent years as its citizens became leading traders
and miners, who deploy the vast computing power needed to make transactions with the
cryptocurrency possible. Their interest was fueled by the hunt for alternative assets, zero exchange fees
and the low cost of electricity to run mining computers. Volume in China took a hit in January after the
biggest exchanges started charging transaction fees, deterring automated traders.