Kenya Macroeconomic Review -Cytonn Investments

By Soko Directory Team / July 4, 2016 | 6:56 am




Kenya’s macroeconomic environment has improved compared to 2015, prompting Cytonn Investments to maintain their projections for the full year GDP growth at 5.8 percent. This is expected to be underpinned by:

  • High government expenditure on infrastructure,
  • The energy sector growing at 6.5%,
  • Real estate and construction growing at 11.1%,
  • Agriculture growing at 4.0%,
  • The recovery of tourism, growing positively at 3.3%.

Q1’2016 GDP figures were released, posting an impressive 5.9% growth, up 90 bps from the 5.0% recorded in Q1’2015. The sectors that supported the growth include:

  • Agriculture (4.8%),
  • Construction (9.9%),
  • Tourism (12.1%)
  • Financial Intermediation (9.8%).

Key to note is that tourism is firmly on the path of recovery, posting a growth of 12.1%.

Read: Kenya’s economy expands by 5.9 percent  in Q1 2016

Kenyan Treasury released their largest ever budget for the country, at Kshs 2.3 trillion with the split between recurrent and development expenditure at Kshs. 1.2 trillion / 52.2% and Kshs. 1.1 trillion / 47.8%, respectively. The funding of the budget is as follows:

  • Tax collection (Kshs. 1.4 tn) / 60.9%,
  • Net domestic borrowing (Kshs. 241.1 billion) / 10.5%,
  • Foreign borrowing (Kshs. 459.4 billion) / 19.9%, with the balance of 8.7% from grants and aid.

The budget is based on a GDP growth assumption of 6.0%, and having achieved 5.9% already in Q1’2016, the prospects of achieving this budget’s GDP growth assumption is higher than for fiscal year 2015/16, which budgeted 6.9% GDP growth but achieved 5.8% GDP growth.

The reliance on debt funding continues to grow and, as much as it is concerning to the market, we think the current levels are still sustainable. The projections as at the end of the next financial year show that the debt-to-GDP shall be at 48.6%, well within the emerging markets tolerance levels of about 50%.

Historically, The Kenya Revenue Authority (KRA) has missed their tax collection targets and despite the improvements in tax efficiency, we think that KRA will still miss tax collection targets in the 2016/17 fiscal year, due:

  1. The high target they have,
  2. The inability to effectively tax the informal sector in Kenya.

However with the improvement in economic growth this shall translate to better earnings for companies and improve the employment status of the country and this would translate to better collections.

The economy is expected to do well, however, Government needs to address the issue of:

  • Corruption and mismanagement of public funds
  • Efficient allocation of budgetary resources, for Kenya to realize double-digit GDP growth as outlined in Vision 2030.

The Kenya Shilling has been stable during the year having appreciated 1.2% during the year supported by:

  • The high levels of foreign exchange reserves currently at USD 7.6 bn, equivalent to 5.0 months of import cover,
  • Improved diaspora remittances, with cumulative 12 months’ inflows to March 2016 increasing by 10.2% to USD 1.6 bn from USD 1.5 bn in March 2015.

Inflation has been on a steady decline during the year from the 8.0% recorded in December 2015, owing to relatively lower food and fuel prices in the first quarter of the year. It however picked up in June 2016, to 5.8% from 5.0% in May 2016 due to an 8.9% increment in the Food and Non-Alcoholic beverage Consumer Price Index.

 





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