Economic Growth Remains Sluggish in Q2 but Projected to Expand in Q3

Economic Growth Remains Sluggish in Q2 but Projected to Expand in Q3

The cost of living measure dropped to an 18-month low in September due to lower prices of food but a slowdown in agriculture saw the economy grow slower in the three months to June. This decline in agriculture also reflected the slowdown in private sector activity.

Inflation fell to 3.83 percent in September, from 5.0 percent a month earlier, according to the latest figures released by the Kenya National Bureau of Statistics (KNBS). The drop in the cost of living measure, the lowest since April last year, was linked to the fall in vegetable prices on improved weather in recent months. Delayed rainfall in the second quarter to June affected the key farming sector, which accounts for close to a third of economic output, and this, in turn, slowed down economic growth. In recent months, the slow growth of the economy has seen companies freeze hiring and pay increases while some have had to shed jobs.

Kenya’s economy grew by 5.6 percent in the second quarter of this year, down from an expanding 6.4 percent in the same period a year earlier, the bureau said, adding that manufacturing and transport sectors decelerated.

“Agriculture’s performance as well as that of electricity and water supply were mostly hampered by a delay in the onset of the long rains,” the KNBS said. “Transportation industry was negatively impacted on by rise in prices of fuel.”

Farming, which includes forestry and fishing, grew by 4.1 percent during the period, down from 6.5 percent a year earlier.

Central Bank Governor Patrick Njoroge in the month of September maintained a full-year growth forecast of six percent, citing robust bookings in the tourism sector. The bank reviewed its forecast after the release of the second quarter data, the governor revealed.

Manufacturing, which accounts for about 10 percent of GDP, saw a growth to 4.2 per cent from 4.7 per cent last year. This is in line with Kenya’s private sector performance report from Stanbic Bank, which reported reduced activities with cash-flow problems hurting performance.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) for manufacturing and services fell to 52.9 from 54.1 in July. Any reading above 50 indicates growth. In May, the index stood at 51.3.

The survey showed that activity was affected by cash-flow problems, partly arising from a backlog of bills from government departments. Companies have responded by freezing expansion plans and halting hiring while some have cut jobs to protect profits.

But easing inflation could ease workers’ pain.

“Between August and September 2019, food and non-alcoholic drinks’ index decreased by 0.40 per cent due to decrease in prices of some foodstuffs outweighing increases recorded in others,” said KNBS.

In September, prices of commodities such as tomatoes, cabbages, carrots, onions, Irish potatoes and sugar all eased. This cut food inflation from 7.9 per cent in August to 7.13 per cent.

The inflation figure is within government’s target range of between 2.5 per cent and 7.5 per cent.

CBK Maintains Benchmark Lending rate

The Central Bank of Kenya (CBK) has 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.

Kenya to experience economic diversification through oil exportation

Kenya commenced oil exports in the third quarter 2019. Kenya, whose President Uhuru Kenyatta in March signed into law a long-awaited petroleum bill that regulates oil exploration and production, recently joined the league of oil exporting nations after a cargo of 200,000 barrels of oil from Turkana was shipped from Mombasa.

Despite the fact that commercial production is still years away, the new development gives Kenya a chance to enhance its economic diversity and include oil exportation as a foreign exchange earner.

Mark MacFarlane, executive vice president for east Africa of Tullow Oil, said in a statement that in May the Early Oil Pilot Scheme (EOPS) production was increased from 600 barrels of oil per day (bopd) to 2,000 bopd and, to date, more than 200,000 barrels of oil have been delivered to the port of Mombasa.

In 2012, Tullow Oil discovered commercial oil deposits in the east African nation that are currently estimated at 750 million barrels.

The EOPS is being undertaken by the Kenya joint venture partners comprising of Tullow Oil, Africa Oil and Total Oil and the Kenyan government who own the Blocks 10BB and 13T in northwest Kenya.

MacFarlane said that in the first half of the year, front end engineering design (FEED) studies for both the upstream and midstream have been finalized.

He added that these studies, together with recent market soundings, have given the joint venture partners greater confidence in the project’s estimated capital expenditure and construction timetable that is expected to see first oil three years after the final investment decision (FID).

He noted that the upstream and midstream environmental and social impact assessments (ESIAs) are expected to be submitted to the National Environmental Management Agency by the end of the third quarter 2019.

Economy to grow in Q3

Kenya’s economy is expected to expand by 5.8 percent in the third quarter of 2019, an analyst predicted. Churchill Ogutu, senior research analyst at Genghis Capital said in a statement released in Nairobi that growth of the gross domestic product (GDP) for the second quarter was estimated at 5.4 percent which trails the five-year historical trend of 5.7 percent.

"We attribute this to the spillover effect of delayed rains on the agricultural sector coupled with sluggish demand pressure," Ogutu said.

For the third quarter, the analyst projects real growth will be driven by the service sectors.

"Notably, the accommodation and restaurant sector will be buoyed as we enter the high-peak tourism season," he added.

Ogutu said that the bullish tone on the private sector at the tail end of the second quarter will likely spill into third quarter of 2019.

According to the analysts, a cloud of uncertainty engulfs the parliament duel between the national assembly and the senate on the Division of Revenue Bill which decides the amount of budgetary transfers to the 47 counties.

The macroeconomic environment in Kenya has remained relatively stable in the first half of 2018, supported by (i) continued

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