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Economic performance and outlook for Kenya

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Real GDP growth was a robust 5.8% in 2016, driven mainly by services (which accounted for 66% of growth) and industry (which accounted for 19% of growth). Agriculture accounted for 15% of growth, the lowest in recent years.

Growth in services was driven by real estate (which grew 12%) and transport and storage (which grew 10%), and growth in industry was driven by construction (which grew 8.2%) and manufacturing (which grew 6.2%).

Real GDP growth declined to an estimated 5% in 2017, due to subdued credit growth caused by caps on commercial banks’ lending rates, drought, and the prolonged political impasse over the presidential election. The half-year estimates show that the economy remained fairly resilient, growing 4.8%.

Services accounted for 82% of that growth, and industry accounted for 17%; agriculture’s poor performance continued. The economy is projected to rebound to GDP growth of 5.6% in 2018 and 6.2% in 2019.

Macroeconomic evolution

Overall macroeconomic fundamentals were stable in 2016. Authorities pursued prudent monetary, fiscal, and exchange rate policies. The central bank retained the policy rate at 10% to anchor inflation at the single-digit level (6.3%). Fiscal policy was expansionary and focused on financing infrastructure mega-projects. Higher government spending, coupled with weaker revenue mobilization, increased the budget deficit to 8% and the public debt–to–GDP ratio to 54%.

The December 2016 International Monetary Fund (IMF)–World Bank Debt Sustainability Analysis put the country at low risk of debt stress. The balance of payments deficit improved slightly to 0.6% of GDP for the year ending June 2017, from 1.7% for the year ending June 2016, on the back of improved current, capital, and financial account balances.

This progress increased foreign exchange reserves 0.8%, to a new high of $7.8 billion at end June 2016. The increase in foreign reserves, as well as the precautionary arrangement with the IMF amounting to $1.5 billion, contributed to exchange rate stability. Economic performance in 2017 was mixed. The drought and the presidential election crisis likely affected macroeconomic performance.

Inflation increased to an estimated 8.8%; the budget deficit remained high, at an estimated 7.8% of GDP; and the current account deficit increased to a 5.9% of GDP. The economy is projected to be stronger from 2018 onward.

An economic recovery is underway, after growth was derailed last year by elevated uncertainty during the prolonged election cycle, a crippling drought that damaged agricultural output, and the government’s ongoing cap on lending rates charged by commercial banks.

Economic activity expanded again in January against a backdrop of political stability, evidenced by a PMI reading above the 50-point threshold; the private sector returned to growth in December following seven months of contraction. At the same time, the economy’s public and external debt stocks have been piling up while revenue flows have declined, eroding debt affordability.

Data released by the Central Bank shows that both domestic debt and external debt jumped by double-digit figures over the previous year in 2017. A deteriorating fiscal position led Moody’s to downgrade Kenya’s credit rating from B1 to B2 on 13 February 2018.

The agency views fiscal trends worsening in the near-term, with greater reliance on commercial external debt. However, it assigned a stable outlook, given the economy’s relatively diversified structure, strong growth potential and mature financial sector.

Treasury CS Henry Rotich Kenya’s Finance Minister

Kenya’s finance ministry has predicted a similar growth to that of 2016 but warned that weather conditions and public expenditure are likely to affect growth.

Noting economic growth in 2017 slowed down to below 5%, from an average of 5.7% in the period between 2012 and 2016, Investment analysts are linking the decline to a protracted electioneering period.

Investment analyst Churchill Ogutu says: “There was a wait and see approach by the investors that had a great impact on the overall GDP in the economy.”

The agricultural sector, one of the backbones of the country’s economy grew just 0.81% in nine months of last year, compared to 4.97% in 2016.

The decline is attributed to erratic weather conditions and fall army -worm infestation, which affected produce in Kenya’s cereal growing regions.

Looking ahead, the economy is expected to rebound as normalcy resumes on the political scene.

“We are looking at 5.25% to 5.75% that will also involve a rebound in the private sector; we have seen that reflected between December and January.”

Analysts at Genghis, however, see risks in a protracted low private sector credit growth and public finance skewed to recurrent expenditure, carrying over from 2017 which saw growth slump to 5 percent from an average of 5.7 percent.

“This halted growth was on account of various factors including a protracted electioneering period, a slowdown in private sector growth and drought that hampered the agricultural sector”.

Genghis capital says credit growth to the sector was impeded, first by the structural banking weakness in the third quarter of 2015 and by the implementation of the interest rate cap.

As such, there were delays in significant payment in the manufacturing sector, building approvals and availability of alternative external financing for key private sector projects.

On the protracted electioneering period, the overall impact was a delay in government spending – absorption rate of national government funds trailed at 29.36 percent in the first 5 months then the county governments suffered delay setbacks in the same period.

Kenya’s growth is against a global growth which is forecasted at 3.90 percent driven by an uptick in activity and accommodative financial conditions.

Sub Saharan growth is expected to hit 3.30 percent in the year propelled by a few one-off drivers such as the recovery in Nigeria oil production.

On the flip side, delays on implementing policy adjustments pose a major risk on the sub Saharan region.

Tailwinds

Kenya’s economy remains resilient due to its diversity; services contributed the highest proportion to GDP growth. This is expected to continue as the country remains the leading regional hub for information and communication technology, financial, and transportation services.

Recent investment in rail and road and planned investment in a second runway at Jomo Kenyatta International Airport are potential growth drivers. Macroeconomic stability continues, with most fundamentals projected to remain healthy.

The business-enabling environment has improved as well; Kenya moved up 12 places to a ranking of 80 in the World Bank’s 2018 Doing Business report.

Headwinds

Continued drought in 2016/17 hindered agricultural productivity and resulted in high inflation for food prices. Prolonged political activities and the presidential election impasse hurt private-sector activity.

Although not conclusively assessed, interest rate caps have reportedly constrained credit expansion, leading to reduced private sector investment. Continued high public consumption expenditure keeps the budget deficit at close to 10% of GDP, while the expected maturity of public debt could lead to debt distress.

 

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Kenya

Kenya’s economy to grow at 6% in 2019 amidst Q3 growth expansion

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Q3 to maintain growth pedal

For the third quarter of 2019, Kenya’s real economic growth is likely to bounce back to 5.8 percent, above the trend of 5.3 percent. Analysts from Genghis Capital suggests the economic growth of Kenya for Q3 to be driven by the service sectors. “We doubt the going concern of the counties in the near-term. What was a tail risk situation at the start of Q2, 2019 has morphed into a base case; the unresolved Division of Revenue Bill, 2019,” said Genghis in their latest outlook. The bullish tone on the private sector at the tail end of last quarter will likely spill into Q3 2019.

A slow start of the budget cycle will offset this high degree of exuberance. The inflation rate in July touched a 3-month high of 6.3 percent from 5.7 percent in June highlighting increased pressure on the consumer spending ability.

The hike in inflation has been attributed in great part to the acceleration in the pricing of key agricultural commodities including maize and sifted grain flour and the implementation of new taxes under tax amendments by the National Treasury.

While the overall food and non-alcoholic beverages index has retreated by a single percentage point since the last review, with a slide to the pricing of commodities such as milk, potatoes and sukuma wiki, biting maize grain shortages has countered hopes for further relief to the costing of food.

“The decline in price of these commodities outweighed the observed increase in the cost of other commodities like maize grain, maize flour-loose, carrots and onions which increased by 0.52, 1.33, 6.81 and 1.19 per cent, respectively, over the same period,” noted the Kenya National Bureau of Statistics (KNBS) in its end month (July) inflation publication.

New taxes targeted at the ‘sin’ alcohol and cigarette industries which were made operational on July 1, 2019 to include a Ksh18 and Ksh24 hike of excise duty charged on wine and whisky respectively and a raise of a Ksh.61 tax on a packet of cigarettes have seen the index jump by 0.8 percent during the month.

At the same time, the impact of fluctuating petroleum prices has seen the cost of housing, electricity and transport rise in spite of a hold in the increase of diesel and kerosene prices by the Energy and Petroleum Regulatory Authority (EPRA) in mid-July.

While the impending harvest season will further support recourse in the rise of food prices; taxes, fuel costs and a depreciating shilling are, when combined, expected to anchor further shocks to the consumer disposable income represented in the Consumer Price Index (CPI).

The Kenya Revenue Authority (KRA) is expected to implement new excise taxes on non-alcoholic beverages and cosmetics beginning September 1, 2019 to effectively eat into the level of disposable income available to consumers.

Meanwhile, the pricing of petroleum commodities in the international market is set to remain unpredictable in the near-term irrespective of its recent cool down as tensions in the oil-rich Persian Gulf persists.

The recent devaluation of the Kenyan shilling against the US dollar will however make for the gravest concern on inflation, given the dollar’s impact on major purchases of imports and pricing of essential services including the electricity billing’s fuel-cost charge.

The shilling has been on a free-fall in the past couple of months, hitting both the two and five-year low in a matter attributed mainly to increased foreign currency demand by investors and heightened liquidity in the financial markets.

The over-supply of money in the economy has brought forth real risks of more money chasing fewer goods in a build-up which when held in the long-run poses the risk of hyper-inflation.

The shilling touched a low Ksh.104.20 valuation against the dollar at the close of trading on 23rd July before recovering marginally on the following day.

While inflation is once again on the rise, the rate holds within the government targeted range of 2.5 to 7.5 percent aligned to the ongoing medium term III plan, with the range being most recently retained for the eighth consecutive year by the National Treasury.

On the maize debate that is ongoing, analysts say they do not foresee maize supply shock to either give headline or food inflation a lift in Q3 2019. The CBK Monetary Policy Committee (MPC) reaction function signals a stable CBR at 9.0 percent in Q3 2019. Investors say they expect the local currency to be at 102.5 – 103.5 levels in Q3 2019.

At the macro level, the reduced big-ticket needs in FY2019/20, increased remittances (5.2 percent y/y to USD 1.45 billion in 1H19) and lower ADNOC Murban crude price will support the local currency.

The maturity of the 2-year bond (FXD1/2017/2Yr) in the current depressed yield environment will likely nudge its refinancing (a 2-year primary bond paper) in the month of August.

“We believe the issuance of longer tenor bonds will remain the baseline scenario although net domestic borrowing target in FY2019/20 (KES 289.2Bn) is higher than FY2018/19 (KES 255.4Bn).”

Investors should expect interbank rates to average 4.0 percent at the end of Q3 2019 from the current sub 2.0% levels. In the event a modification of the interest rate cap comes to pass at the tail end of Q3 2019, “we expect a normalization at the long end of the yield curve beginning Q4 2019.”

CBK Maintains Lending Rate

The Central Bank of Kenya (CBK) on 24th July maintained the benchmark lending rate at 9 percent due to the relatively stable inflation rate.

Patrick Njoroge, CBK governor, who chaired the Monetary Policy Committee (MPC) meeting in Nairobi said that the inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential.

“The MPC will continue to closely monitor developments in the global and domestic economy, including any perverse response to its previous decisions, and stands ready to take additional measures as necessary,” Njoroge said in a statement issued in Nairobi.

The monetary policy organ met to review the outcome of its previous policy decisions as well as the recent economic developments against a backdrop of domestic macroeconomic stability, increased optimism on the economic growth prospects, and increased global uncertainties.

Njoroge said there is need to be vigilant on the possible effects of the recent increases in fuel prices, the ongoing demonetization, and the increased uncertainties in the external environment.

The committee noted the gradual demonetization through the withdrawal of the older 1,000 shilling notes (10 U.S. dollars) and the close monitoring by CBK will ensure that the process is not disruptive to the economy.

The governor noted that month-on-month overall inflation remained relatively stable and within the target range in May and June 2019.

“The inflation rate stood at 5.7 percent in June compared to 5.5 percent in May. However, food inflation rose to 6.6 percent in June from 6.0 percent in May, reflecting increases in the prices of non-vegetable food crops particularly maize, due to uncertain supply,” Njoroge said.

According to the MPC, non-food-non-fuel inflation remained below 5 percent, indicative of muted demand pressures and spillover effects of the recent rise in fuel prices.

“Overall inflation is expected to remain within the target range in the near term largely due to expectations of lower food prices following improved weather conditions, and lower electricity prices with the reduced reliance on expensive power sources,” Njoroge observed.

The governor added that the economy remained strong in the first quarter of 2019, despite the effects of the delayed long rains on agricultural production.

The MPC noted that the leading indicators of economic activity point to stronger growth in the second quarter of 2019.

“Consequently, growth in 2019 is expected to remain strong, supported by agricultural production, strong growth of micro, small medium enterprises and the service sector, foreign direct investment, and a stable macroeconomic environment,” he added.

The apex bank said that the real GDP growth stood at 5.6 percent, reflecting a stronger than expected performance of agriculture and a resilient services sector, particularly information and communication, accommodation and restaurants, and transport and storage.

Njoroge added that the alignment of the 2019/20 financial year government budget to the Big 4 priority sectors is expected to boost economic activity in manufacturing, agriculture, construction and real estate, and health sectors.

Growth on right gear

Kenya’s gross domestic product (GDP) is likely to expand by at least 6 per cent this year, the country’s finance minister said, sticking to rosy government forecasts despite delayed rains that could hit agriculture, a mainstay of the economy.

The Kenyan economy grew 6.3 per cent in 2018, the statistics office said, helped by adequate rainfall, which spurred farming, which contributes about a third of output. Growth had slumped to 4.9 per cent the previous year in 2017.

“The Kenyan economy remains resilient. It is expected to perform better in 2019, growing by at least over 6 per cent,” the minister, Henry Rotich, said at an event to disclose last year’s economic performance.

The World Bank trimmed its forecast for Kenyan growth in 2019 to 5.7 per cent this month from an earlier forecast of 5.8 per cent because the main rainy season was delayed. Food shortages and water scarcity could worsen if the rainy season – from March to May — fails entirely, the country’s meteorological department said just days after the World Bank’s move.

“Uncertain rainfall may act as an inadvertent drag on growth,” said Razia Khan, the head of research for Africa at Standard Chartered in London.

The government, however, which expects the economy to grow by at least 6.3 per cent in 2019, according to President Uhuru Kenyatta in a speech earlier in the month of July, stuck to its optimism.

“Though the onset of the long rains have delayed, it is still early to predict on its impact on agricultural production,” Rotich said.

Last year’s recovery in growth was driven by agriculture, excluding fisheries and forestry, which expanded by 6.6 per cent, up from 1.8 per cent in 2017, said Zachary Mwangi, director general of the Kenya National Bureau of Statistics.

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