Kenya’s 2017-18 budget worsening in fiscal deficit – Analysts
By David Indeje / September 12, 2017
Kenya’s budget deficit for the fiscal year 2017/2018 is likely to hit 8 percent of gross domestic product (GDP) from the initial National Treasury estimate of 6.30 percent according to financial analysts.
Genghis Capital Ltd in their ‘MacroEconomic Note: Impact of Supreme Court Ruling’, they project ‘a worsening in fiscal deficit’.
“2017 growth is expected to be dismal owing to the lacklustre economic demand pressure. This has been reflected by the easing in Purchasing Managers Index (PMI) which has averaged 48.53 in the first eight months of 2017 against 53.91 in a similar period last year due to output slowdown,” part of the note reads.
The analysts further are of the view that with a slowed consumption they estimate an overall effect to knock 50bps off our initial growth forecast and thus revise our 2017 GDP growth rate to between 4.25 percent – 4.75 percent.
“The expected GDP slowdown will stifle revenue collection target (in our view, ambitious at KES 1.55Tn).”
In 1Q17, growth slowed to 4.7 percent year on year, as the agricultural sector contracted 1.1 percent due to drought conditions.
In the current fiscal year, the budget deficit stands at KSh 524.6 billion (6 percent) of GDP. It is expected that the deficit will be financed through external borrowing of up to KSh 256 billion, and domestic borrowing worth KSh 268.6 billion.
Cytonn Investments in their weekly markets’ brief note that the government is behind its domestic borrowing target for the current fiscal year, having borrowed Kshs 18.4 bn, against a target of Kshs 61.1 bn (assuming a pro-rated borrowing target throughout the financial year of Kshs 317.7 bn budgeted for the full financial year), the deficit has been covered by an overdraft from the Central bank now currently at Kshs 21.2 bn.
However, Cytonn is optimistic that the government is expected to meet its domestic borrowing target for the fiscal year, as banks and institutions channel funds more actively towards government securities following the capping of interest rates.
The 2016/2017 Fiscal Year that ended in June 2017, the government’s deficit widened to 8.3 percent of GDP, above its revised target of 6.9 percent due to an increase in execution of capital expenditure to fund ongoing infrastructure projects and election-related current expenditure.
In July, Fitch Ratings estimated the fiscal deficit to narrow to 6.4 percent of GDP in FY18, as expenditure falls closer to average historical levels and improvements to revenue administration and collection begin to show results.
However, in August Fitch said in terms of the Kenyan economy, “Failure to consolidate budget deficit and stabilise government debt/GDP would be negative for Kenya’s credit profile, while effective implementation of a fiscal consolidation plan and stabilisation of government debt/GDP could lead to a positive rating action.” “Risks to our forecast include slower-than-expected growth and lower revenue collection.”
Genghis notes that sentiment in the equities market was mostly bullish in the year to election date, with the YTD (on 7th August) performance of NSE All Share Index up 19.1 percent.
“In the penultimate week to the election, the index eased 1.6 percent before advancing in the five sessions post-election by 6.3 percent. The Supreme Court ruling came as a surprise to the markets with KES 129.6Bn in market capitalization diluted in the two consequent sessions. In that same period, foreign investors accelerated their selling with net selling position of KES 688.5Mn (an abnormally high exit),” they note.
“The biggest hurdle we foresee in the first half of the fiscal year is meeting the borrowing target with the Treasury currently at KES 10.01Bn net borrowing position,” Genghis state.
In the current uncertain environment, the analysts expect the market to continue managing risk by staying short, forcing the Central Bank to continue issuing short term debt.
“We do not believe this is sustainable and believe pressure will pile on CBK to begin accepting more expensive money as: they fall further behind the borrowing target and revenue collection falters due to the ongoing economic growth slowdown, which in turn will push up yields on the short end of the yield curve.”
The Supreme court, in a 4-2 majority decision, determined that: the election held on August 8th was not in accordance with the Constitution rendering the election null and void and President Uhuru Kenyatta was not validly declared as President elect by the Independent Boundaries and Electoral Commission (IEBC).
In addition, the Supreme Court ordered IEBC to organize and conduct fresh presidential elections within sixty days in strict conformity with the Constitution.