Increase Govt Expenditure to compensate for reduced Credit Growth – Analysts

The Kenyan Government intends to increase its budget on infrastructure, education, health and social safety net and preparations for the elections the 2017/18 Fiscal Year.

The National Treasury’s ‘2017 Budget Policy Statement’ states that the areas outlined ‘remains a priority so as to realise benefits and maintain positive growth momentum, create jobs, reduce poverty and inequality.”

Financial and economic analysts have projected a positive outlook on Kenya with expectations of continued policy reforms reducing government debt to cut its soaring fiscal deficit.

The Central Bank of Kenya says Kenya has been found in an age of uncertainty attributed to a lack of predictability on US policy on trade that is likely to impact it economy.

“We have adequate buffers in case of any eventuality including a USD1.5 billion standby loan facility with the International Monetary Fund to cushion. There could be some headwinds. The most significant ones still remain the external environment,” said Dr. Patrick Njoroge, CBK Governor during a media briefing.

CBK, Cytonn Investments, Britam Asset Managers projected the economy to grow by 5.7%, 5.4% – 5.7% and 5.0% – 5.6% in 2017 respectively from about 5.9 percent in 2016.

Regionally, with global uncertainty, fueled by Brexit’s potential ripple effect to the European Union, major elections in the Eurozone – France and Germany-, the anticipated US policies after the election President Donald Trump, stability in oil prices and global trade slowdown, Kenya is projected to outperform the rest of Sub-Saharan Africa over 2017-2018.

Read: US President Donald Trump Hints on Plans for Africa

BMI Research says the primary growth driver will be the continued expansion of the transport network, improvements to power generation capacity and the growing real estate sector in Nairobi underpin our very positive outlook on the Kenyan construction sector.

However, “Kenya’s real GDP growth will decelerate over the coming quarters as credit growth remains weak following the government’s cap on lending rates. Even so, the outlook for economic activity remains largely positive, and an election in August and relatively low short-term borrowing costs open the door to some fiscal stimulus to offset slower credit growth.

According to a report released on Thursday by Britam Asset Managers, the government needs to grow its expenditure by the targeted 16.4 percent this fiscal year, and achieve the expected 17.6 percent increase in revenues in order to meet the projected economic growth. The government must therefore spend to sustain GDP growth above 5.0 percent in 2017, as private sector credit growth remains subdued.

However, the report points out that economic activity is expected to slow down, 2017 being an election year. Historically, Kenya’s elections years have been associated with low GDP growth, as the polls delay private sector investments due to political uncertainty.

According to the report, other factors likely to affect economic growth include high inflation, drought, and increased global oil prices.

Heading into 2017, food inflation is expected to be the main driver of overall inflation with cost of transport and household items also going up. Matatu fares, petrol prices, Kerosene and electricity respectively will affect inflation significantly.

Read: Food Inflation Expected to Remain High

Speaking during the release of the report themed “Sustaining Growth in a Resilient Economy” in Nairobi, Britam Asset Managers CEO Kenneth Kaniu said that unfavourable climatic conditions and drought are expected to affect agricultural productivity, increase electricity costs and reduce the availability of water.

“We expect the above factors to culminate in upward pressure on overall inflation in 2017.  Inflation will therefore trend towards the upper range of CBK’s target of 7.5% in 2017,” said Kaniu.

Effect of Interest Caps

The report observes sluggish growth in the private sector due to the introduction of the law capping bank interest rates in 2016, with the sector posting a slowed growth of 4% in Q4 in 2016 from 18% in Q4 2015.

The report recommends that the government should keep directing most of its foreign debt towards development expenditure in order to meet future interest payments, noting that the country’s external debt has steadily increased from 18.9% as a percentage of GDP in 2010 to 25.6% as at June 2016.

The report notes that Kenya has historically underperformed on development expenditure relative to recurrent expenditure, with the 2017 fiscal year targeted development expenditure of 8.3% of GDP being lower than regional peers. The government will therefore need to meet its development expenditure targets during the current fiscal year in order to sustain economic growth.

Related: 

• Kenya Risks Being Downgraded Due to Swelling Debt
• Tough Times Ahead if Ever Increasing National Debt is not Tamed, Warns World Bank

The resilience of the shilling

The report also notes that despite an increase in the cost of oil and the declining performance of Nairobi Securities Exchange, Kenya’s currency remained one of the most resilient in Sub-Saharan Africa in the last two decades, with an annualized depreciation rate of around 4.0%. In effect, the shilling has outperformed even currencies pegged to the US Dollar such as the Nigerian Naira and Egyptian Pound.

Globally, the report says that growth is expected to pick up slightly in 2017 as commodity exporters benefit from stable prices. Fiscal stimulus in developed countries is also expected to support growth.

Following a decision by OPEC member countries to cut oil production by 1.8 million barrels a day, crude oil prices are forecast to increase in 2017. However, upward pressure on crude oil prices will be counteracted by increased supply from the US.

On international trade, the report notes that Kenyan exports to the UK made up 7% of the country’s total exports in 2015 and 2016, underscoring the importance of the trade ties to the Kenyan economy. However, nationalist sentiments in the UK after Brexit, and attendant currency weakness risks has made Kenyan exports to the UK uncompetitive.