Banking woes dim economic prospects

Over the recent past a host of analysts and respected global institutions have been painting a rosy projection of the Kenyan economy.

A Chase Bank branch in Nairobi. The collapsed bank is Rafiki’s parent company. PHOTO | SALATON NJAU 

In Summary

• He however counsels caution in view of the latest twist: “We had given a projection of 5.7 per cent and I believe there is need to remain conservative looking at the fact that banks have been badly affected and the repercussions abound.
• With evidently tough times for businesses, this optimistic outlook is not persuasive. Economic analyst Gitau Githogo said the results filtering into the public domain from listed firms and other corporates reveals that the situation is far from rosy.
• The lauded growth in real estate sector is yet to yield much for the taxman who is yet to bring on board thousands of land lords who have traditionally remained out of the tax net.

By EDWIN OKOTH
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Over the recent past a host of analysts and respected global institutions have been painting a rosy projection of the Kenyan economy. Invariably local growth has been featuring in various reports as one of the fastest in Africa and even in the world.

However the latest news of turmoil in the banking sector and stagnated profitability in listed firms have forced economists to the drawing board in a bid to re-calibrate growth figures to reflect the current reality.

It is now emerging that the undercurrents of poor performance in the banking industry run deep. Bad loans have mounted and many of the listed lenders have declared stagnated growth in profitability. Some of them have sank into losses. Three of the banks have since gone under and the fourth is struggling under the weight of toxic loans.

These omens do not inspire confidence not only in the banking industry but the entire economy.

What happened to the bright projections that had inundated the country just the other day? Analysts are now casting doubts on the authenticity of the method used to arrive at these figures. They have particularly taken issue with World Bank’s recent prediction that Kenya’s economic growth could reach just under 6 per cent this year.

According to the global lender, the jump from the previously predicted expansion rate of 5.6 per cent is due to a cocktail of low oil prices, good agricultural performance, supportive monetary policy and ongoing infrastructure projects.

Its latest Kenya Economic Update says the country’s economy is projected to grow at 5.9 per cent in 2016 and the gross domestic product (GDP) is expected to surpass 6 per cent next year.

Domestic risks

“Kenya has experienced strong economic performance in 2015 and has exceeded the average growth for sub-Saharan Africa countries consistently since 2009,” World Bank noted but warned that the economy remains vulnerable to domestic risks that could dampen growth prospects.

With evidently tough times for businesses, this optimistic outlook is not persuasive. Economic analyst Gitau Githogo said the results filtering into the public domain from listed firms and other corporates reveals that the situation is far from rosy.

He told Smart Company that even the growth being recorded in the real estate sector has had a detrimental effect on the agricultural sector as real benefits from the infrastructure projects remain unrealised for now. The real estate has been encroaching on land fertile for agricultural production as developers seek to cash in on the sector that has been booming.

“It will be very interesting to know what the World Bank is using to draw these conclusions because when you look at these declines in profits reported since last year especially in the banking sector then you know that the economy is struggling,” Mr Githogo said.

“If banks have growing bad loans then that is a symptom that businesses in various other sectors are in financial hardship.”

He said the government has been delaying payments to the private contractors even as most forecasts of stronger growth is pegged on the boom in the construction sector.

As a result of the delayed payments, the contactors are equally delaying to pay for the materials and failing to repay their loans. Indeed the effects of the economy’s shockwaves are being felt across government and the private sector. The government debt levels have gone up with the World Bank recently warning the country to go slow on further borrowing from China.

There are founded concerns that the Kenya Revenue Authority (KRA) may not collect enough revenue to fund the more than Sh2 trillion budget.
KRA has cited decline in revenues from Pay-As-You-Earn (PAYE) as most corporates reduce their human capital and freeze on new hiring.

It is already clear that the taxman is likely to miss its full-year collection target after realising only Sh687 billion with just four months to the end of the fiscal year.

Treasury data released last week showed that the KRA’s collection for the eight months to February left it with a deficit of Sh527.88 billion against a target of Sh1.21 trillion set by the Treasury for the year to June. The latest poor revenue collection run is a continuation from the successive quarters when the KRA did not meet its target.

The revenue authority missed its half -year tax collection target by a significant Sh47.6 billion, with the Treasury indicating that the shortfall mainly arose from a dip in payroll taxes and delayed application of the Excise Duty Act 2015.

“Ordinary revenue collection was below target by Sh47.6 billion while A-I-A collection fell short of target by Sh20 billion,” the Treasury says in its recently released Budget Policy Statement.

The shortfall in revenue performance over the half-year to December was a continuation from the first quarter when the KRA reported Sh300 billion collection against a target of Sh328 billion.

Cautious lending

CFC bank Regional Economist Jibran Qureishi said the positive projections had relied on the prospects from the largely offshore-funded infrastructure projects and good agricultural performance.

He however counsels caution in view of the latest twist: “We had given a projection of 5.7 per cent and I believe there is need to remain conservative looking at the fact that banks have been badly affected and the repercussions abound.

There will be more cautious lending as investors will also be keenly watching what will happen in the financial sector which is a major contributor to the GDP and makes one of the most popular stocks in the market,” Mr Qureishi told Smart Company.

“It is a worrying state of events and it is not easy to remain all that upbeat about the high growth numbers.”

The lauded growth in real estate sector is yet to yield much for the taxman who is yet to bring on board thousands of land lords who have traditionally remained out of the tax net.

Kenya’s private sector expansion slowed in March as firms reported possible loss of clients and a reduction in new orders, according to the Markit CFC Stanbic Kenya Purchasing Managers’ Index (PMI).

The PMI fell to 52.6 per cent in March from 55.2 per cent in February, but remained above the 50.0 mark that denotes growth. The reading for March being the third lowest since the index was started 27 months ago adds to the grim truth about the market situation.

Firms responding to the survey said they may have lost clients during the month while others cited sluggish incoming orders.

Mr Githogo said the worrying statistics coming year before elections is of great concern that adding that polls have deleterious effects on the economic performance.

“You do not expect any vibrant investments moths before elections, so if things look like this now then it is hard to paint a better outlook next year when everyone will be cautious to spend, let alone invest,” Mr Githogo said.