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Economic performance and outlook for Kenya

Economic performance and outlook for Kenya

The 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 the 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 a 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 the end of 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 5.9% of GDP. The economy is projected to be stronger from 2018 onward.

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 armyworm 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 – the 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 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 in implementing policy adjustments pose a major risk in 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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