We See Resilience in A Challenging Environment – Barclays Kenya

Global growth prospects remain uncertain having an impact on spending and investment falling between 3-3.5 percent.

Central Bank of Kenya says this is on account of ‘uncertainties in part due to the impact of Brexit and political developments in the US.’

“Uncertainty relating to the tightening of the US monetary policy and its implications for the global capital flows remain a concern,” read the CBK monetary policy Committee meeting in November.

The US Federal Reserve’s Open Market Committee (FOMC) already met on 14th December increased the US monetary policy rates to between 0.50 – 0.75 percent from 0.25 – 0.50 percent previously.

This is likely to have a direct impact to the US dollar strengthening and consequently weakening of other currencies including the Kenya Shilling, which is likely to come under pressure especially in the short to medium term; higher debt obligations for countries with US dollar denominated debt as their debt service and debt repayments will cost more with the strengthening dollar and a reduction in prices of commodities, especially gold. With the CBK expected to step in to protect the shilling, we expect to see a reduction in our foreign exchange reserves with the months of import cover moving further below the 1-year average of 4.9 months.

In the recent Barclays Africa Forum in Nairobi, Kenya, Barclays sees more depreciation in 2017 of the Kenyan Shilling. “We expect a continued depreciation into 2017 with biggest risks related to Kenya’s 2017 General Elections and USD strength,” Barclays projected.

On the other hand, Sub-Saharan Africa (SSA) economic performance has slowed with an expansion of 1.1 percent on an annual basis, below the 1.2 percent increase recorded in the previous quarter and was the lowest expansion in over six years. This was mainly driven by weak dynamics in South Africa and Nigeria.

“Growth is projected to improve from this year’s timid expansion on the back of a gradual pickup in the world economy and a recovery in commodity prices, however growth will remain weak. Economic progress will also depend on how fast governments implement reforms aimed at promoting growth and re-establishing macroeconomic stability. Moreover, prudent fiscal policies coupled with tighter monetary policy should tackle sharp increases in inflation and keep public fiscal balances in check,” according to Focus Economics Sub-Saharan Africa Report.

However, Kenya has shown resilient growth so far this year and its economy remains one of the fastest-growing in the region. The economy in the second quarter of 2016 was ‘strong, growing by 6.2 percent compared to 5.9 percent in a similar period of 2015 noted CBK.

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In contrast, Barclays says a slowdown in private sector credit growth has been witnessed, an impact after the government’s decision to limit commercial banks’ interest rates. “The controversial interest rate caps introduced in September has ensured lower lending rates though the long-term impact remains a concern.”

Barclays notes that commodity prices remain a challenge for Africa, but opportunities are emerging in Kenya and Africa at large that are projected to provide long-term growth prospects include:

Demand for commodities in emerging economies in the Middle East and Asia.  Mckinsey says ‘it gives African governments more bargaining power, so they are negotiating better deals that capture more value from their resources.’

Kenya is addressing its macroeconomic aspects with the CBK in its last MPC meeting stating that its foreign exchange market has remained stable, reflecting a narrower current account deficit due to lower import bill, improved tea and horticulture exports and stronger diaspora remittance.

With the Treasury projecting a budget deficit amounting to Ksh 398.1 billion with an aim of bringing it below 4 percent of the GDP, it is confident it will bring it down by mobilising domestic resources and increasing tax revenues, which will allow it to control deficits while financing developmental projects to benefit Kenyans.

To withstand the global markets volatility, Kenya is diversifying its dependence on commodity exports by establishing more favorable environments for private investment in downstream agricultural processing, manufacturing, and services to help expand job creation, accelerate long-term growth, reduce poverty, and minimize vulnerability to price volatility.

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