Austerity, slowing credit growth and new accounting rules spell perfect storm for Kenya
Nairobi — Kenya is facing an economic storm in 2018 in the aftermath of two disputed elections.
Saddled with the triple threat of austerity measures to pay for those votes, slowing credit growth and new accounting rules for banks, Kenya now risks missing the government’s forecast for 6% economic growth next year, according to lenders including Nairobi-based Stanbic Bank Kenya. Investec Bank strategist Chris Becker says expansion could slow to as little as 1%.
"With growing headwinds, there is no longer any room for complacency," said Ronak Gopaldas, an independent analyst, formerly at FirstRand’s investment banking unit in Johannesburg. The new administration should "refocus its attention to the economy, which has been on the back-burner for the better part of the year," he said.
The country’s treasury has already cut this year’s growth target to 5% from 5.9% as the protracted election furore dampened investment and a drought curbed farm output.
Now key indicators for East Africa’s largest economy, the regional hub for multinationals including IBM and Toyota, are flashing warnings signs, with the latest purchasing managers index (PMI), a measure of private-sector activity, falling to a record low and bank loans growing the slowest in more than a decade.
After a court annulled an August 8 election, Kenya held a rerun of the vote on October 26, that was boycotted by the main opposition coalition. President Uhuru Kenyatta’s Jubilee Party also won the second ballot, which is now being challenged in the Supreme Court.
The nation’s 2.6-trillion shilling ($25.1bn) budget was amended to include "austerity measures" for the current fiscal year to accommodate unplanned expenditures such as the rerun of the election, treasury secretary Henry Rotich said in September. The treasury has revised its 2017-18 budget deficit forecast to 8.5% of GDP from 6.8%. The government recorded a 9.2% shortfall in year to end-June 2017.
Any reduction in government spending was likely to stunt growth, unless alternative sources of investment were found, said David Willacy, a foreign-exchange trader at London-based INTL FCStone in London. Investors "are already weary of the country’s economy after the disastrous presidential election, which is still open to further turmoil", he said.
A government-imposed a cap on commercial lending rates has weighed on economic expansion, with lending to the private sector growing at the slowest pace in more than a decade. This could worsen in 2018 as new accounting rules for banks may double impairments next year, according to KPMG. This meant banks would probably be more selective on where their available capital went, resulting in even less money being lent to certain sectors of the economy, Willacy said.
While lifting the rate cap could boost lending, it would also raise the cost of domestic borrowing, said Mark Bohlund, an economist at Bloomberg. The treasury plans to raise 256-billion shillings from external creditors in this fiscal year to help finance the budget deficit.
A new Eurobond issuance by Kenya in 2018 "would likely do well, even if the economy settles at a slower pace, 4%-5% real GDP growth", Bohlund said. "But potential investors will likely want to see a credible fiscal consolidation plan."
The yield on Kenya’s $2bn of Eurobonds due June 2024 fell three basis points to 6.28% by close of Tuesday trade in London.