Economic Growth Lower than Expected

Economic growth has been lower than expected, as can be seen by the 4.9% p.a. economic growth in the first quarter, which led to the IMF revising downwards Kenya’s growth rate expectation to 6.0%, from 6.9% previously. Given the weak start to the year, combined with a less than conducive operating environment due to high interest rates and currency weakness, we reiterate our view, as first mentioned in our H1’2015 report, that the 7% growth projection by Treasury is highly ambitious and is not achievable.

This has been brought to the forefront by the recent slower than expected earnings growth, especially in the financial services sector, highlighting that the macroeconomic environment in Kenya continues to face challenges. We are currently updating our GDP projection for this year and we shall be releasing it in the course of the month.

The Kenya Shilling continues to remain under pressure against the dollar, having depreciated by 14.5% YTD on the back of

• global US Dollar strength as a result of the impending rate hikes by the US Federal Reserve,

• a worsening current account deficit, driven by increased imports for manufactured goods, while exports remain low,

• increased appetite by the government for dollar denominated debt which makes the countries performance highly correlated to the global market performance, and adds additional strain due to the demand to service debt,

• increased fiscal deficit leading to more debt uptake by the government, and

• decline in the forex reserves hence lower ability to support the shilling. Overall, the mop-up activities by the Central Bank of Kenya (CBK) may help stabilise the currency in the short-term, but we expect it to remain under pressure.

Increased domestic borrowing by the government has led to a challenging interest rate environment, which has led to investors shying away from longer-dated securities. Government debt has been on the rise with the total Debt/GDP standing at 51.5% as of August, compared to a target of 45.0%. This increase in domestic borrowing may lead to crowding out of the private sector, leading to a decline in private sector credit to GDP, which currently stands at 32.6% as at March 2015. Due to the high demand for money by the government to finance the budget, we expect interest rates to remain high.

Inflation rates continue to remain range bound within the CBK’s target range of 2.5% – 7.5%, with the August figure having come out at 5.8%, a drop of 79 bps from the July figure of 6.6%. We maintain our view that inflation will remain in check despite the depreciation in the currency, due to:

• CBK’s market activity to tame the weakening shilling,

• low global oil prices which will offer some cushion as Kenya is a net oil importer, and

• sufficient food stuffs in the short term due to good rainfall experienced in the second quarter.

Excerpt from the Cytonn Monthly Report – August 2015