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Kenya’s Economic Growth Declines As Presidential Election Hangs



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 Rate

In 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 Kenya

Food 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.

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Kenya’s Economy to Experience Moderate Slowdown In 2019



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.


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