Kenya’s Economy Shows Resilience and Growth Potential

Kenya’s Economy Shows Resilience and Growth Potential

Kenya’s economy is expected to move faster in 2018 after slowing down due to the impact of the prolonged election process on supply and demand and the effects of drought in the first half of the year.

Despite these troubles, Kenya managed to hold steady. And it maintained a stable exchange rate throughout the prolonged electioneering period, World Bank economist Allen Dennis remarked with admiration in December. This resilience is likely to keep investor sentiment positive in 2018.

Adewale Okunrinboye, FX specialist at Ecobank Transnational, believes growth in 2018 will be hinged on improvements in agricultural output (25% of GDP) as better rainfall drives a recovery from drought in the first half of 2017.

“Outside agriculture, growth prospects revolve around Kenya’s ability to unlock gains from improving transport links and construction of the SGR [standard gauge railway] extension”, he adds.

At a presentation in December, the governor of the Central Bank of Kenya (CBK), Patrick Njoroge, shed more light on this, asserting that Kenya’s SGR would not only hasten the transportation of freight offloaded from the ports to warehouses but also reduce costs by about 50%.

Ecobank believes that even though growth will probably accelerate in 2018, it is likely to be subdued and perhaps come out at about 5.2%. This could be improved if reforms on the growth-stifling interest rate caps are carried out. Financial sector GDP expanded at its slowest pace in six years in 2017 because of the caps.

And then there is oil. Production in the two blocks in Turkana County could start at about 2,000 barrels per day in 2018. Considering how little oil may be produced and the challenging logistics required to transport it by road and rail until a pipeline is constructed, its effect on economic growth is not likely to be significant.

Monetary policy should be easier in 2018. “A high drought-induced base in the first half of 2017 implies that inflation is likely to decelerate strongly in the first half of 2018”, says Okunrinboye of Ecobank.

Consequently, the CBK will probably cut its benchmark interest rate from 10% at end-2017. However, there is a complication for the CBK in this regard. “Given the rate cap in place, such a move is likely to induce further bank demand for government securities, which has driven a compression in short-dated yields in 2017 despite the ‘tight’ monetary stance by the CBK,” says Okunrinboye.

This a scenario the CBK would be keen to avoid, so a rate move may be dependent on how much progress is made with the hoped-for legislative amendment of the interest rate cap law.

On the fiscal front, Kenya’s debt burden is concerning. It is expected to be almost 60% of GDP in 2017, with debt servicing expected to climb to about 35% of revenue, and likely higher in coming years, as the authorities plan to borrow even more. For instance, in late 2017, the authorities asked for bids for a proposed $2bn eurobond in early 2018.

 

With warnings coming from the World Bank, IMF, rating agencies and others, the authorities may do well to take heed.