Connect with us

Kenya

Economic performance and outlook for Kenya

Published

on

 

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.

 

Continue Reading
Advertisement
Click to comment

Kenya

Kenya’s Economy to Experience Moderate Slowdown In 2019

Published

on

Kenya’s economy entered the year on a less promising note, with weaker domestic demand causing a notable slowdown in private sector activity. That said, a buoyant tourism sector and solid remittance inflows, which have helped narrow the current account deficit, likely cushioned the impact of the decline. Unfortunately, the country aimed to raise up to KES 50 billion (USD 500 million) through auctioning a tax-free 25-year amortized infrastructure bond on 20 March, with proceeds expected to fund the “Big Four Agenda” development projects and the bond was to some extent undersubscribed and resulted to a total of KES 16.3billion bonds accepted by the Central Bank of Kenya (CBK) as against the KES 50billion bonds anticipated.

The government’s appetite for spending, however, is at loggerheads with the need for fiscal consolidation. Reining in the country’s escalating public debt burden is a necessary condition to securing a new IMF standby credit facility; discussions with the IMF are currently underway.

 

Highlights of Kenya’s Economic Performance

  • It is expected that headwinds to growth in private consumption, investment and exports will see Kenya’s economy expand at a slower pace in 2019.
  • The ongoing cap on bank lending rates – which will continue to dampen credit growth – and rising inflation will constrain growth in private investment and household consumption.
  • Public investment directed under the ‘Big Four’ agenda will support GDP growth, but is likely to fall short of government expectations.
  • Moreover, export growth is likely to decelerate in 2019 due to reduced production of tea, the country’s main export.
  • It is forecasted real GDP growth of 5.2% will be experienced in 2019 and 5.5% in 2020 respectively, down from an estimated 5.8% in 2018.

 

 

Subdued Credit Growth to Hurt Trade Sector and Households In 2019

It is expected that the harmful banking sector regulations and rising inflation will temper the pace of growth in private investment and private consumption in 2019. Credit growth will continue to be constrained by an interest rate cap introduced in 2016, which limits bank lending rates to 400 basis points above the central bank policy rate. It is forecasted credit growth will remain in single digits in 2019, growing by 7.5% by year-end, compared to a 2010-2015 year-end average of 20.4% (prior to the cap).

This will continue to affect business investment in the wholesale and retail trade sector (the largest recipient of private credit) as well as private consumption, given that household credit represents the second largest share of total private credit. Moreover, these effects will be compounded by an acceleration of inflation to a forecast of 6.0% in 2019 from 4.7% in 2018, given normalizing weather conditions which are likely to boost food prices. It is expected rising inflation will further weigh on private investment and consumption growth in 2019 by increasing firms’ input costs and weakening households’ purchasing power.

 

Meanwhile, public investment as a driver of growth will fall short of the government’s ambitions. It is noted that overall, fixed investment in 2019 will benefit from a healthy infrastructure project pipeline, which includes the Standard Gauge Railway (Phase 2A) and the Lamu Port, scheduled to reach completion in 2019 and 2020 respectively. A forecast on the construction sector is expected to grow at a robust 8.6% in 2019, from 7.5% in 2018, to then tail off from 2020 given project completions.

Public investment will also be directed under President Uhuru Kenyatta’s ‘Big Four’ agenda, which aims to boost healthcare coverage, affordable housing, food security and the manufacturing sector. That said, we believe that implementation of the agenda’s objectives will face structural constraints stemming from administrative inefficiencies and funding shortfalls.

Moreover, several tax measures introduced in the 2018/19 fiscal budget to fund the various programs encountered resistance from lawmakers, including a value-added tax on fuel that was imposed at half the initially proposed rate (8.0% instead of 16.0%). Therefore, it is believed that public spending under the Big Four agenda will have a lesser impact on growth than the authorities expect.

Lower Tea Output to Weigh On Total Export Growth In 2019

Furthermore, weaker tea production is likely to weigh on export revenue growth. In February 2019, the Tea Directorate of the Agricultural and Food Authority estimated a 12.0% y-o-y reduction in tea exports for the full year, owing to lower output in the tea-growing regions of the west. Kenya is one of the world’s main producers of tea, which accounted for 25.6% of total exports in 2018 – the largest share of the country’s export revenue.

Therefore, it is believed that this will drag on total export growth, further contributing to a slowdown in headline growth. Moreover, it is highlighted the possibility that normalizing weather conditions after favorable agricultural yields in 2018 could also weigh on production growth of horticultural goods, the second largest export component (accounting for 19.5% of Kenya’s exports), posing further downside risks.

 

It is believed that risks are tilted firmly to the downside. Kenyatta’s inability to push many economic policies through parliament have in the past hampered implementation of key initiatives, including proposals to remove or modify the interest rate cap on commercial banks. It is believed that, should Kenyatta’s position weaken further, this could slow policy-making and progress on the Big Four agenda. Moreover, weaker-than-expected global economic activity could see the return of risk-off sentiment to financial markets and renewed pressure on emerging market currencies later in the year (although it is stressed that this is not a core view).

Since more than half of Kenya’s government debt (which stands at 61.3% of GDP) is denominated in foreign currency, pressure on the Kenyan shilling would significantly increase debt servicing costs, posing further headwinds to public investment and clouding the country’s short-term growth outlook.

While risks are weighted to the downside, it is to be noted that the removal of the interest rate cap on commercial banks in 2019 would pose an upside risk to our view. Indeed, on March 14 2019 a Kenyan court ruled that the cap is unconstitutional, though judges suspended the implementation of the ruling for 12 months to allow legislators to review the law.

 

Continue Reading
Advertisement
Advertisement

Trending