Optimism in Kenya’s economy rises on fall in inflation, interest rates

SHAKY PATH: Kenya’s economy, which hit its lowest ebb in 2008, is quickly recovering. While growth is still slightly above half the 2007 levels, optimism is rising. How far will it reach? FILE| TEA Graphics  Nation Media Group

By JOINT REPORT The EastAfrican

Posted  Saturday, May 11  2013 at  16:23

In Summary

• A survey conducted by the Central Bank of Kenya last month showed a majority of business executives polled expect the economy to grow by between 5.6 per cent and 6 per cent this year, the highest level of optimism over the past one year.
• Banking executives — 54 per cent of those polled — said lending rates could come down by at least one to two per cent while 14 per cent of the respondents see rates coming down by more than two per cent.
• The survey included 60 firms in Nairobi, 24 in Mombasa, Kisumu and Eldoret and 23 firms in Nakuru, Nyeri and Meru regions.

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A projected fall in the cost of living as well as in interest rates has lifted business leaders’ confidence in Kenya’s economy to an all-time high this year.

A survey conducted by the Central Bank of Kenya last month and released on Friday showed a majority of business executives polled expect the economy to grow by between 5.6 per cent and 6 per cent this year, the highest level of optimism over the past one year.

The peaceful General Election has injected fresh optimism into the business community, which had been banking on a smooth political transition to restore investor confidence in Kenya and put the economy on a strong growth path.

ALSO READ: Kenya eyes Ksh28bn in new investments

As such, borrowers can expect a drop of up to two per cent in lending rates in the next two months.

Banking executives — 54 per cent of those polled — said lending rates could come down by at least one to two per cent while 14 per cent of the respondents see rates coming down by more than two per cent.

Last week, the Central Bank slashed its indicative interest rate for the first time this year by one percentage point to 8.5 per cent in a push to force commercial banks to follow suit. On Friday, CFC Stanbic announced it had cut its lending rate from 17 to 16 per cent, a move more lenders are expected to follow in the coming weeks.

READ: Kenya cuts key lending rate to 8.5pc

“Although it will take some time for the full impact of this easing to feed through into the real economy, we expect a continued recovery in private sector credit over time, although this may well be the last CBR easing in this financial year,” said Razia Khan, the head of Africa research at Standard Chartered.

Inflation is expected to remain stable or fall on the back of falling food prices for the remainder of 2013, mainly on account of improved weather conditions, leaving Kenyan households with more disposable income in their pockets.

Energy prices are projected to remain stable, helping businesses manage their spiraling operational costs.

The manufacturing sector consumes 60 per cent of the country’s electricity and is vulnerable to unreliable power supplies and high energy costs.

“Ideally, we should work towards getting our energy cost to below $0.05/kwh if we are to remain competitive on the international market,” said Betty Maina, Kenya Association of Manufacturers chief executive.

Inflationary pressures

There are expectations of higher demand for goods and services as business picks up in coming months, with the CBK projecting this could however trigger fresh inflationary pressures.

“The economy is expected to continue benefiting from the stability of interest rates at lower levels than those experienced in the first quarter of 2012. The peaceful elections, the improvement in weather conditions,


continued prudent macroeconomic and fiscal management will result in improving business confidence. This should see GDP growth in Kenya accelerate to at least the five per cent forecast by the World Bank, “ said James Mwangi, the chief executive at Equity Bank.

At least 60 per cent of banking executives polled see the economy growing by at least 5.6 to six per cent while six per cent of the respondents see it expanding by above six per cent. Among non-banking executives, nearly a half — 44 per cent — see the economy growing by 5.6-6 per cent while 23 per cent are projecting expansion of above 6 per cent.

“Optimism over strong growth in 2013 is attributed to increased business confidence and foreign direct investment; a stable macro-economic environment; a pick-up in economic activity; an expected pick-up in credit growth with increased economic activity; expected decline in lending rates; increased regional trade with countries within the EAC region, which are projected to grow faster,” said CBK in the report of the survey.

The implementation of a devolved government system is also expected to spur growth in the counties. The clearest indicator of how the economy is likely to perform this year has also come from earnings reports unveiled by Nairobi Securities Exchange-listed companies in the past one week.

Equity Bank said on Tuesday its profit after tax rose 21.8 per cent to Ksh3.2 billion ($37.5 million) as at the end of March this year compared with Ksh2.6 billion ($31.7 million) as at the end of March 2012. KCB’s net profits rose to Ksh3.03 billion ($35.4 million) compared with Ksh2.4 billion ($29.2 million) over the same period last year.

READ: Equity Bank unseats KCB as most profitable lender

“Kenya has witnessed a smooth leadership transition in the past three months, good rains, a stable inflation rate and a favourable exchange rate; an indication that as we look ahead into the next nine months, the economic prospects look strong,” said Joshua Oigara, KCB chief executive.

But despite the positive outlook, Kenya’s economic policymakers face a balancing act as they seek ways of taming surging public debt and raising funds to run public expenditure.

The government hopes to spend at least Ksh1.6 trillion ($19.1 billion) in the coming fiscal year, which begins in July. The latest debt status report released by Treasury last week shows Kenya has nearly reached its domestic debt target of Ksh137.2 billion ($ 1.6 billion) for the current fiscal year.

This narrows the options Treasury has to raise funds to run government operations in the remaining one and a half months of the current fiscal year.

Heavy borrowing by the government tends to crowd out the private sector as commercial banks prefer to lend to the Treasury, which poses lower default risk than individuals and companies.

Treasury data shows that as at the end of March, local debt stood at Ksh981 billion ($11.46 billion) compared with Ksh859 billion ($10.10 billion) in June, while external debt rose to Ksh818 billion ($9.6 billion) from Ksh763 billion ($8.9 billion).

Two-thirds of bank executives in April said that the currency would strengthen compared with 45 per cent of non-bank executives who held the same view.

They cited among other things increased tourist arrivals, resilient diaspora remittance inflows, a build-up of CBK foreign exchange reserves and regular foreign exchange interventions. The Kenyan shilling was on Friday exchanging at an average rate of Ksh83.5 to the dollar compared with Ksh86 in January.

Remittances
 

In February, only 34 per cent of bank executives and 21 per cent of non-bank executives said that they expect the exchange rate to strengthen.

In the first three months of 2013, remittance inflows rose marginally by 2.94 per cent to $308.7 million compared with $299.9 million in the first three months of last year.

“Risks remain from an expected rise in imports with the pick-up in economic activity, high current account deficit from a high import bill and continued strain in the Eurozone, which has constrained tourist arrivals from Europe,” said the CBK.

CBK data shows that the current account deficit increased by 41.5 per cent to $4.8 billion in January this year from $3.3 billion in January 2012. Perceptions on the outlook for inflation changed with a larger portion of company executives expecting the rate at which prices of basics rise to either stay the same or decline.

Nearly a half — 43 per cent — of bank executives polled said that they believe inflation rates will stay the same while 31 per cent said they expect them to drop.

This was a significant change from February, before the general election, when 32 per cent of bank executives believed that inflation levels will remain the same compared with 15 per cent who believed that the inflation rate would drop.

CBK said that business executive pointed to improved food supply and lower energy costs due to favourable weather conditions, stable international oil prices, stability of the exchange rate due to increased confidence and the monetary policy measures as factors that influenced their projections on inflation.

The Kenya National Bureau of Statistics data shows the rate of inflation has been on a slightly upward trend in the first four months of this year, having risen to 4.14 per cent last month from 4.11 per cent in March.

The CBK said there was a general perception of adequate liquidity levels — how much money there is to spend and invest — in the market across small and medium size bank categories. None of the banks perceives the liquidity in the market to be low.

At least 50 per  cent of large banks said liquidity is high attributing this to higher maturities of Treasury securities, foreign exchange inflows through equity, sale of foreign exchange, and slow uptake of credit by the private sector.

The survey included 60 firms in Nairobi, 24 in Mombasa, Kisumu and Eldoret and 23 firms in Nakuru, Nyeri and Meru regions.

By Mwaura Kimani and David Mugwe