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How Kenya’s economy will perform in 2019

Chacha Mwita by Chacha Mwita
January 18, 2019
in Economic Growth
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Stanbic Bank has projected a six per cent GDP growth rate for Kenya in 2019 with headline inflation set to average 4.9 per cent. This comes after a slow 2018, a year characterized by recovery of the Kenyan economy after a fraught 2017 marked by the spectre of drought and of course the political uncertainty fostered by protracted elections. US-China trade wars, Brexit and the interest rate capping law have been seen as challenges which could affect the economy.

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NAIROBI, KENYA, JAN 18 — Stanbic Bank has projected a six per cent ( 6%) GDP growth rate for Kenya in 2019 with headline inflation set to average 4.9 per cent.

This comes after a slow 2018, a year characterized by recovery of the Kenyan economy after a fraught 2017 marked by the spectre of drought and of course the political uncertainty fostered by protracted elections.

Not surprisingly, GDP growth expanded by an estimated 6.0 per cent year-on-year in 2018. Complimentary base effects underpinned GDP growth in 2018; however the diversity of growth drivers and endurance of the economy should not be discounted according to Stanbic.

 “That being said, reforms would need to be sustained over the next couple of years to maintain this impressive GDP growth. We expect the Kenyan economy to expand by around 6.0 per cent year-on-year in 2019 supported by a continued improvement in the tourism and agrarian sectors,” said Jibran Qureishi – Stanbic Bank Regional Economist, East Africa.

“We also see output from the industrial sector gaining momentum in 2019,” he added, during the banks’ Kenya 2019 Economic Outlook update in Nairobi.

 However, the downside risks to the GDP estimates are quite notable, the lender notes.

 Firstly, enhanced political risks and economic challenges facing high quality tea buyers such as Pakistan and Iran could weigh demand down for Kenya’s tea exports. Secondly, the Brexit process and what that portends for Kenya’s horticulture and floriculture industry is also a risk.

However, this concern could be counterbalanced by recent efforts to diversify exports towards other markets for cut flowers. Also, perennial delays by both local and national government in making payments to the private sector had substantially weighed down economic activity in 2018.

“Thus, it will be imperative for authorities to honour these payments more frequently going forward so as to ensure that the private sector doesn’t face further cashflow problems,” Qureishi  said.

The impact of the interest rate capping law has also been identified as a factor that is highly likely to affect the economy, especially noting that since it came in place, it has evidently made life difficult for the private sector especially SMEs who have continued to be locked out of the credit market.

 “This may not be readily evident by merely looking at banking sector profits, however closer scrutiny of commercial banks’ balance sheets reveals that banks are predominantly making profits from non-banking activities such as investing in government paper. While it is clear that SMEs were the first to bear the brunt of the rate cap law, it would appear that the contagion has also spread to larger corporates in no small part due to their reliance on SMEs,” Qureishi said.

 Lenders in the country, led by Stanbic believe that a repeal of the rate cap law should be a top priority for authorities in 2019 in order to unleash the otherwise, scuppered potential of the private sector and more importantly SME’s which will continue to underpin the resilience of this economy.

 Furthermore, owing to relatively elevated public debt levels and the urgent requirement to consolidate public finances, now more than ever, Stanbic believes it will be paramount to inject private stimulus into the economy.

This should lend credence to the proposal to repeal the interest rate capping law and thereby unleash the private sector to become a dominant engine of growth.

GDP growth will be less inclusive if the rate cap persists and hence the rosy GDP figures will not be widely felt on the ground, Qureishi noted.

External forces and markets

Meanwhile the government has been advised to renew its relationship with the International Monetary Fund (IMF) and arrange for a fresh standby kitty, to cushion the economy as the country moves to honor high-debt obligations this year.

This is after IMF withdrew the US$1.5 billion stand-by loan last year, after it expired on September 14, 2018. The facility had been in place since 2016 to cushion the economy in case of unforeseen external shocks.

Last year in March, the government secured a six-month extension on the facility but IMF refused further extensions. National Treasury and Planning Cabinet Secretary Henry Rotich came out to say the country was well-prepared for any economic shocks, hence did not necessarily need the IMF facility.

Central Bank of Kenya (CBK) Governor Patrick Njoroge also said the economy was well protected against capital outflows and does not need the precautionary credit facility.

However, the government is understood to be in talks with the IMF for a new facility.IMF has been pushing for reforms in the country among them a review of the interest rate cap to increase credit access to private sector.

“Also, given the upcoming external debt refinancing obligations in the first half of 2019, it will be key for the authorities to rekindle their relationship with the IMF and sign on to a new Facility programme. Of course, this is certainly not because we foresee a balance of payment crisis, however the seal of approval and confidence attached to an IMF programme is important to the investment community especially Eurobond investors,” Qureishi said.

In the event that Kenya takes on a new non-funded programme, refinancing external debt will probably be less expensive than would have otherwise been the case.

This would also be incredibly helpful due to the growing concerns associated with a potential recession in the US over the coming year. The US economy is expected to slow as the weight of the US Administration’s aggressive trade policy creates overseas economic weakness and financial market nervousness.

“We see US growth slowing as the boost to the economy from last year’s tax cuts wears thin. A recession is certainly possible over this time, but not because the Fed tightens too much causing the economy to simply roll over due to falling domestic demand,” Stanbic said in its outlook report.

This was how recessions formerly occurred; but these days, they are more about financial market collapse and, while stocks and corporate credit have softened, the lender says it does not feel that there’s been a sufficient hit to household wealth in the US to push quarterly GDP growth below the zero line.

 Still, financial catastrophe cannot be described as a distant threat given issues such as central bank policy normalisation, which is starting to include other central banks as well as the Fed, and the US’s aggressive trade action.

Of course, this coupled with Brexit concerns and a further slowdown in the Eurozone will inevitably weigh down GDP growth in advanced economies over the coming years.

Certainly, this is not good news for the rest of the world, although the diversified nature of Kenya’s economy will somewhat underpin growth, according to Stanbic.

 International oil prices could remain stable on the back of weaker global growth and this should be supportive of inflation domestically.

However, a slowdown in global growth should not be rejoiced by any African sovereign even if it means lower international prices for net oil importers such as Kenya,  Qureishi cautioned, saying the slowdown and risk of recession in the US will most likely increase risk aversion and thus result in portfolio outflows from stock markets in addition to increasing dollar borrowing costs for African sovereigns.

“However, we see this as a bigger risk for 2020. We see headline inflation averaging 4.9 per cent year-on-year in 2019 as food prices could edge down from May 19 while lower international oil prices should also keep a lid on fuel inflation counterbalancing the impact of the second-round effects from the 8.0 per cent VAT on fuel,” Qureishi said.

“Also, we don’t think the economy is performing above its growth potential and hence we see minimal risks of an overheating that would result in higher inflation,” he added.

Based on these developments, the Monetary Policy Committee (MPC) could be tempted again to ease the policy stance as inflationary pressures remain subdued. However, doing so with the rate cap still in place will probably disrupt the recovery and momentum in Private Sector Credit growth.

READ:kenyas-economy-to-grow-by-5-9-in-2019

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Tags: AfricaBrexitCentral Bank of Kenya (CBK)ChinaEast AfricaEuropeEuropean UnionInternational Monetary Fund (IMF)iranKenyaMonetary Policy Committee (MPC)PakistanStanbic BankUS
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Sanlam Kenya PLC, Non-bank financial services firm in Kenya, has outlined elaborate growth plans focusing on its insurance businesses. The firm which is also listed at the Nairobi Securities Exchange (NSE) will be seeking to accelerate growth from its Sanlam General Insurance and Sanlam Life Insurance subsidiaries by leveraging on local, regional, continental and multinational opportunities. Last March 2018, the Sanlam Group announced the completion of a US $1billion corporate acquisition of the North Africa headquartered insurance firm, SAHAM Finances.

Sanlam Kenya reveals secret weapon for 2019

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The Exchange

The Exchange is a financial journal published by Mediapix Limited, a public relations, news and communications organization with its African headquarters in Tanzania and sister operations in Canada, the United States and The United Arab Emirates. The company‘s founders have been instrumental in the media and communication industry in East Africa and have been operational in the region.

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Recent News

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February 22, 2019
Water- blogs.oracle.com- The Exchange

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