Slump hits Kenya’s private sector on weak shilling

Money Markets

Kenya Tents Ltd factory in Ruiru. The weak shilling has raised raw material imports slowing private sector growth, a CfC Stanbic survey shows. PHOTO | FILE 

By ALLAN ODHIAMBO, aodhiambo@ke.nationmedia.com

In Summary

• The weaker exchange rate has increased import costs for most firms which have consequently suppressed their profit margins.
• The shilling has weakened by about 14 per cent against the dollar this year, causing imports to be expensive.

High import costs resulting from a weak shilling slowed private sector activity by the end of September, a survey by CfC Stanbic Bank showed.
This signals that the slump in overall economic growth witnessed in the second quarter may have continued into the third quarter.

The headline CfC Stanbic Purchasing Managers’ Index (PMI) for September was 51.9, down from 55 in August. The September PMI was the lowest since the launch of the index last year, further underlining the difficulties experienced by the economy this year.

“The PMI has fallen to its lowest level in September since data collection began back in January 2014. The weaker exchange rate has certainly increased import costs for most firms which have consequently suppressed their profit margins, perhaps also leading to the significant slowdown in workforce growth,” Jibran Qureishi, an economist at CfC Stanbic Bank said.

Rates of expansion in output and new business were both the slowest on record in September, according to the bank’s survey, reflecting the overall trend signalled by the headline index.

“Activity rose only modestly, with data pointing to a sharp easing in new orders growth. New business gains were reportedly undermined by a number of factors including currency weakness and teachers’ strikes. Meanwhile, new export work increased at a faster pace, with panellists commenting on expansions into new foreign markets,” CfC Stanbic said.

The shilling has weakened by about 14 per cent against the dollar this year, causing imports to be expensive.

“The slowdown of the Kenyan private sector as a whole was reinforced further by the weakest rise in employment in the series history. Payroll numbers increased only marginally in September, with the majority of respondents (83 per cent) noting no change since August,” it further said.

READ: Banks lower growth forecasts on high interest rates

The bank said due to the weak shilling, buying of inputs rose at the slowest pace since the survey began in January 2014 because of lower demand for more expensive finished products.

“On the price front, total input costs rose sharply in September. The latest increase was the most marked in a year and a half, driven by a steep hike in purchase prices. Higher costs stemmed from the weakness of the shilling versus the dollar, and a number of firms were able to pass on these pressures by way of raising output charges,” the bank said.

Mr Qureshi said the shilling is likely to appreciate in the coming months due to a rise in real yields in the Kenyan money markets and boost in the balance of payments, easing the pressure on the private sector performance.

“Nonetheless, economic growth, which expanded by a healthy 5.5 per cent year-on-year in quarter two 2015 from 4.9 per cent year-on-year in the previous quarter, will probably subside in the third quarter this year judging by the activity of the CfC Stanbic PMI. Higher interest rates will stifle growth in the private sector. However, this may only be temporary as rates eventually move lower,” he said.

Data released last week by the Kenya National Bureau of Statistics showed growth slowed to 5.5 per cent year-on-year in the second quarter as manufacturing, construction and financial services weakened.

GDP expanded six per cent year-on-year in the same period of 2014. Growth in construction slowed to 9.9 per cent year-on-year from 16.6 per cent.

Manufacturing grew 4.5 per cent compared with 8.3 per cent in the second quarter of 2014. Financial services grew by six per cent, down from 7.9 per cent, data showed