2016 Characterized by Stable Macroeconomic Environment -#CytonnReport

The year that just ended, 2016, was characterized by a stable macroeconomic environment, which saw GDP growth for the first three quarters average 5.9 percent from 5.4 percent same time in 2015.

The growth was supported by low oil prices, given Kenya is a net importer of oil, stable performance in agriculture as a result of favorable weather conditions, accommodative monetary policy, ongoing infrastructure projects being undertaken by the government, and recovery of tourism sector, which grew 13.8 percent y/y during the third quarter of 2016, with tourist arrivals into the country increasing significantly by 25.8 percent y/y over the same period.

The improved macroeconomic environment led to a couple of positive pointers into the economy including; there was an improved outlook from the rating agencies e.g. Moody’s rating agency upgraded Kenya’s credit rating outlook from stable to positive, and the country improved its ranking on ease of doing business by rising 21 places to position 92 from position 113 in 2016.

According to the Cytonn Invest weekly report, 2017, which is an election year, politics is bound to take center stage and be among the key determinants of spending and government policy. The company expects an increase in government spending on infrastructure as the current administration aims to regain power in the upcoming elections, as well as recover from the low absorption rates for development expenditure, which stood at 69.2 percent as at June 2016. Security is expected to be firm as a result of government initiatives towards improving internal security. However, it is also worth noting that the current political stand-off between the government and the opposition is not good for business and may result in an increase in Kenya’s political risk, which may negatively affect the level of private sector investments in the country.

According to the report, private sector credit growth has been on a free-fall for 16 consecutive months, coming in at 4.6 percent in October 2016 from a high of 21.0 percent in August 2015. The decline was due to reforms in the banking sector brought about by the increase in Non-Performing Loans (NPLs), which prompted banks to reassess their risk assessment framework, preferring to lend to the government as it is risk free as opposed to the private sector, which is considered riskier.

This trend is expected to persist in the year 2017 as a result of the enactment of the Banking (Amendment) Act, 2015, which outlines the loan pricing framework, thus SMEs and subprime borrowers are likely to be locked out. This is because it will be difficult for commercial banks to fit SMEs and subprime borrowers in the current pricing framework that is capped at 4.0 percent above the Central Bank Rate (CBR) – currently at 10.0 percent – effectively capping the lending rates at 14.0 percent. The expected downward trend in growth in private sector credit will have a negative effect on the contribution by the private sector to GDP growth in 2017.

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