"Wa_ithaka. I hadn't made my point yet...was hoping you'd answer the Qs. Nway polite. I wish economics was as simple as your illustration.

Fact: The savings rate dropped from 15.5% in 2008 to 11.1% in 2009. Why are people not saving. It hasn't been this low since 2003. Is it perception? The inflation rate just happened to drop during last year and this year it'll be even lower. So what does it matter? The correlation between saving and inflation is high, ~0.8, so the lower inflation goes the less people save. How will we fund future consumption? With debt? Something to think about considering the current inflation outlook is expected to remain stable in the medium to long term.

This week's CBK bulletin reveals gross liquidity in the banking system, over 32.2 billion in reserves, there are even excess of currency in circulation, but apparently that doesn't affect inflation (in our country). Debt Watch: Kenya's gross domestic debt just jumped from 660 billion to 694 billion in a week. Are you still keeping track or the numbers just a statistic to you?

Read more:

http://www.centralbank.g...n/2010/Sept/10092010.pdf

Kenya's public debt in December 2009 was 1,114.4 billion with external at 525.5 billion and 588.9 as domestic.

But by June 2010 public debt climed to 1,200.7 billion, 541.0 billion as external and 659.7 billion as domestic. By the end of Q3 the domestic debt has grown to 704.8 billion which bring public debt to 1,245.8 billion. In terms of q-o-q increases

Q1 - 62.8 billion
Q2 - 23.5 billion
Q3 - 45.1 billion

In terms of debt productivity the economy must grow by over 9.2% to match the increases in debt to the increase in revenue. The only good news is that some of Q1 debt will mature in Q4. Begs the question of whether external borrowing is now higher or not in Q3?

Yes our debt seems to be in control but in an economy driven by consumption, a savings rate that has dropped by 51% in one year, an apparently ultra-low inflation (also down by more than half) then some stats should be highlighted as serious.

Official statistics now show that the debt to gdp ratio has risen from 44.2% to 50.5% in the past year to July 2010 alone and this should no longer be "okay". More so it's risen from 45% to 50% in 2010 alone at a time when GDP is supposedly growing by leaps and bounds (or is it just the government spending as they monetized debt in Q1 and Q2).

It maybe okay from a interest payment or debt service prospective but leads to other crappy asset bubbles (read: real estate). Why would you want to do fixed income? Buy real estate and banking stocks.

Quite interesting this GDP ratio math. We're also fudging figures just like the west. The KE banks have refused to partake the fudged inflation rate drastic drop while in the west, banks have refused to lend. Seems a disconnect is happening btwn govt & financiers. This will be an interesting faceoff...

Sky 5,

There isn't a defined "limit" on how much the debt to GDP ratio can do. The financial markets (whoever they are) tend to prefer the ratio being an amount lower than 60%. It's one of the key considerations for determining a country's sovereign credit rating.

In reality however, you will notice that countries where the ratio is greater than 100% yet they have high sovereing credit rating.Am referring to countries like Japan, UK and USA where their outlook is even worse than ours.

It makes you wonder why there is so much hue and cry about our debt ratios.

Regards

Scubidu,

Am more comfortable that the recent borrowing by our government is aimed at increasing our productive capacity as a country. I have in mind the recent infrastructure bonds that were done in 2009/2010.

Also, given the ongoing realignment in our political environment, I believe that there should be better fiscal responsibility going forward.

Thus any borrowing in future would ideally be for catering for the mismatch between the receipt of tax revenues and expenses nlcuding emergency expenses like the drought.

The reason for my conclusion is that much of the borrowing in countries like the USA is to finance their out-of control expenses. Its only a matter of time before their financiers (read China) will be fed up with funding them. Just look at the comments made by China during the recent G-20 conference in South Korea as an example.

In short, am not condoning blanket increments in debt. What I will be comfortable with is the increase in borrowing be accompanied by prudent fiscal responsibility.

As regards the interest rate spread within the banking sector, this is a structural issue within the sector that needs to be addressed now rather than later. There isn't much level of competition within the industry (to drive down interest rates) and most banks have higher than normal fixed expenses that they are reluctant to address.

For your comparioson of debt with GDP, maybe you could try to use the "Real GDP" numbers that are contained in the CBK Annual Report. The GDP deflator that you are talking about tries to explain the extent to which the market GDP numbers compares to the real GDP numbers

Regards

Scubidu,

I have attached for you excepts of the 2010 CBK Annual Report that contains both GDP at market prices and real GDP. It also outlines how the GDP deflators have been arrived at i.e. GDP at current market prices divide by Real GDP.

From the two GDP numbers, it seems that the government is using GDP at market prices to compute its Debt to GDP ratio as indicated in the Monthly Economic Reviews. It would therefore mean that greater increments in the GDP (at market prices) could temper the increase in Debt to GDP ratio over time.

Hence, I had suggested that you recompute the debt to GDP ratio using real GDP numbers to make your comparison more meaningful. Let me know if my logic makes sense to you

Regards

http://www.2shared.com/d...010_Annual_Report_.html

@scooby. This is an interesting topic ... I'm glad we can discuss it thoroughly.

With regard to the debt gdp ratio, I looked at the issue in post 17, 19, 20 and 21. But what I’m addressing is the maths behind the figures that suggest no incremental increase in GDP, but in fact a decrease. Which implies debt productivity is zero. Do you agree? Look at the figures and ratios in the economic monthly page 39 below.

http://www.centralbank.g...ns/mer/2010/CSept10.pdf

If CBK is targeting a competitive rate for exporters then that’s what forex dealers are referring to as manipulation. The CBK would also need hard currency to make payments on their SDR allocations and Eurodollar purchases (both of which have gone up by over $320 million each).

If I recall correctly money supply is a function of net domestic assets and net foreign assets, the former being currently driven by domestic credit growth and the latter by CBK forex reserve accumulation. Yes interest rates play a factor but I believe CBK is trying to target a NFA/money supply target of 20%. That ratio has fallen from 30% to 22% over the last two years meaning that money supply is rising but foreign assets aren't. Does that make sense?

The World Bank is not buying gold; The 57 billion in Gold was a typo; we own only 57 million. To the best of my knowledge RAMP Africa is not buying gold but making eurodollar bond purchases most of which are probably issued by the World Bank themselves. What is the investor policy when the World Bank proposes to buy bonds its issuing?

From the CBK's point of view, all this is done to cushion reserves and make payments on government bills. By all fronts mentioned above the CBK is either managing reserves or making some sort of payment. So our reserve assets are diversified mostly into cash (diversified currency), bonds (US), SDR (IMF). Is there a risk to this strategy?

Scubidu,

Am not aware about CBK's plan to target a NFA/money supply target of 20%. Maybe you could shed some light on that...if that is Ok with you.

There was a time when CBK was pursuing an inflation targetting policy where they tried to "ensure" that inflation does not rise above 5%. They were therefore tracking the growth over time of M2 - which has been deemed by economists to be an indicator of inflation pressures. I have attached a table in the link below to explain what am referring to...

http://www.2shared.com/d...A/CBK_Money_Supply.html

I do understand your argument that CBK could be "purchasing" World Bank bonds which won't make sense in addition to be a conflict of interest. Hopefully, one day, our politicians will come round and request for more disclosure about the program. It could turn out to be a bad deal for the tax payers as what was discovered about the Federal Reserve and their bailout programs last week.