KenyaKenya’s Economic Growth Declines As Presidential Election Hangs Published 2 years agoon February 2, 2018By Vaultz Publisher Share Tweet Kenya’s economic ordeals continue to worsen following the Supreme Court’s decision on 1 September to nullify the results of the 8 August vote and hold an election re-run.Deferred focus on economic policy, overshadowed by prolonged political uncertainties, will exacerbate an already challenging economic situation, which has been under severe strain since the start of the year due to an ongoing drought in the north of the country. The country’s trials are likely to persist and weigh heavily on economic performance going forward.The re-run, scheduled for 17 October, followed a legal challenge to President Uhuru Kenyatta’s victory by the main opposition party led by Raila Odinga. In a ruling backed by four out of six judges, the Supreme Court found that irregularities and illegalities had botched the credibility of the outcome, with a mismatch found between the final vote count and the results declared at polling stations.In a decision that sets a historic precedent, the Court stated that Kenya’s national electoral commission—the Independent Electoral and Boundaries Commission (IEBC)—had “failed, neglected, or refused to conduct” the presidential election in accordance with the constitution.The unexpected verdict set off jitters in financial markets, and trading was suspended for a brief period after the Nairobi Stock Exchange 20 Share Index—which comprises the country’s most heavily traded stocks—saw more than 5% of its value wiped off in panic selling.Presidential Aspirants Uhuru Kenyatta (left) and Raila Odinga (right)With only a few weeks until the re-run, tensions are running high over the integrity of the upcoming vote, and if it will even proceed according to schedule, as the electoral commission is mired in infighting over who to pin the blame for the failure of the most expensive election in the country’s history.Moreover, the opposition party has vowed that it will not participate in the re-run unless major reforms are instituted in the electoral commission. Amid the unending political saga, the stock market has been hurled into a downward trend over the past month.While uncertainties prevail on the political front, the economy will continue to suffer. Economic activity in the private sector was hit by a slump in demand amid escalating concerns over prolonged instability, reflected by a plunge in the PMI, which dropped to a record low in August as unemployment continues to climb.Also, reduced economic activity due to falling domestic and external demand amid amplified political tensions, high inflation etc. are being compounded by the impact of the devastating drought and have already severely dented economic activity. The economy expanded at a weaker pace of 4.7% in Q1, down from 6.1% in Q4 2016, derailing the previous year’s strong growth momentum.Recent data indicates the economic picture becoming bleaker: The PMI contracted for a fourth consecutive month, slumping to an all-time low in August, as the worsening drought stokes fears of a famine. On 7 September, the United Nations and its humanitarian partners made an appeal for USD 106 million to step up relief efforts.Kenya Central Bank Maintains Policy RateIn the midst of the heightened political tensions from a protracted election period and worsening drought, the Central Bank maintained the main policy rate at 10.00% at its 18 September monetary policy committee meeting, in line with market expectations.Despite inflation having surpassed the Bank’s upper target bound of 7.5% in August, the Bank decided to hold the rate put. It was motivated by expectations of improved food supplies in anticipation of short rain spells and government aid measures, which are expected to reduce food prices going forward and hold off pressure on inflation.Central Bank of KenyaFood shortages due to a pre-election surge in demand and transport disruptions in the aftermath of the now-annulled 8 August presidential election triggered a rise in inflation to 8.0% in August from 7.5% in July. Demand pressures remain subdued, however, evidenced by a stable core inflation rate below 5.0%.Higher inflation is seen as a temporary phenomenon that is expected to ease in the near term and return to the target range, motivating the Bank’s decision to maintain its stance. However, recent reports of lower rainfall failing to offer respite to the severe drought, raising alarms of a potential famine, cast a shadow of doubt over the Bank’s optimism and suggest a continued rise in inflation as disruptions to agricultural output persist.The drought, combined with on-going tensions on the political front, has thrust Kenya’s economy into sustained turbulence.Despite optimism about the trajectory of inflation in upcoming months, with inflation remaining elevated and currently above the Bank’s target range of 2.5%–7.5%, the Bank is constrained and unable to lower rates to support a revival in growth, preferring an unchanged stance in order to anchor inflation expectations.The Bank’s statement did not contain substantive forward guidance, only stating that future measures will hinge on the close monitoring of domestic and global developments. It is predicted that rates will rise slightly towards the end of the year in order to keep inflation in check. An easing cycle is anticipated in 2018 as price pressures recede.Deteriorating prospects prompted panelists to downgrade their GDP growth forecasts for the eighth consecutive month in September. The panel projects growth of 4.8% in 2017, which is 0.1 percentage points below last month’s forecast, and expects growth to accelerate to 5.3% in 2018, which is down 0.2 percentage points from previous month’s forecast.The possibility of a recovery this year seems far out of sight as political uncertainties persist and social unrest is likely to linger. The U.S. recently issued a travel alert to Kenya over possible violence ahead of the election re-run, and other countries are likely to follow suit. Another contest to the results, with a further stretch in uncertainties, would be calamitous for the economy.Even in the event that the victory is upheld, measures to revive growth will take time to come into play and are unlikely to translate into a stronger economic course this year. Stéphane Colliac, Senior Economist at Euler Hermes sees “a protracted period of sub-potential growth led by weak leadership and policy slippages” as the main risk to a return to robust economic dynamics.Political tensions and social unrest are likely to persist after the election. Combined with the adverse effects of the ongoing drought, they will continue weighing heavily on economic activity and likely keep growth momentum muted into next year. Related Topics: Up NextKenya’s economy poised to bounce back and grow at 5.5% in 2018 Continue Reading Advertisement You may like Click to comment KenyaKenya’s economy to grow at 6% in 2019 amidst Q3 growth expansion Published 5 days agoon August 15, 2019By Vaultz Publisher Q3 to maintain growth pedalFor 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 RateThe 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 gearKenya’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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