As Kenyans look ahead to August’s general elections, much of the discourse has focused on fears of a repeat of the violence that followed the 2007 presidential contest. However, even darker clouds are looming over Kenya’s economy.
The economy has proven resilient over the last four years, with growth staying above 5% over that period. But that growth is now coming under threat from both external and internal forces, Dr Patrick Njoroge, the governor of the Central Bank of Kenya (CBK) told African Business.
“Last year [the global economy] was rather much more volatile than in 2015,” says Njoroge. “This year, there is an expectation of further strengthening, but that is on the baseline. “[But] the problem with that baseline is that there are many scenarios that are not just worrying but could make things a whole lot worse [than in 2016].”
Njoroge warns that the policies of US President Donald Trump – who campaigned on an anti-globalisation agenda and has threatened to conduct trade wars with other nations, including China – could directly threaten Kenya’s economic growth.
“The issue is that there is so much uncertainty at this moment,” Njoroge says. “And that uncertainty – a lot of which relates to the policies of the new US administration, and the rise of populism across the globe – is extremely worrisome and it will have serious consequences for the global economy. We could very well go back to a situation where we have a serious recession if all these risks materialise.”
However, despite this dire warning, the governor believes that Kenya is prepared to deal with these challenges. Kenya’s economy has performed well during the downturn in commodity prices and the period of global low growth, with the East African nation experiencing economic growth of 5.9% in 2016, up from 5.6% in 2015, according to World Bank data.
However, the governor expects global investment in 2017 to be lower year-on-year, leaving emerging economies, such as Kenya, with stagnant growth figures. “We recorded growth of nearly 6% in 2016, with inflation in the target range of around 5%,” Njoroge says. “I expect both growth and inflation to remain stable in the current year.”
Meanwhile, Kenya has managed to reduce its current account deficit significantly, according to the governor. “In 2014, Kenya’s current account deficit was at 9.8% of GDP, but the deficit shrunk substantially in 2015 to 6.8% of GDP,” he says. “The downward trend continued in 2016, with the deficit falling to 5.5%.”
“The deficit is expected to also remain stable in 2017, with our foreign exchange reserves sitting at around $6.9bn” he adds. “So this bodes well for a balanced foreign exchange market. We expect stability all round because the macro framework seems to be strong and steady.”
Impact of drought
However, the biggest internal threat to Kenya’s economy is the current drought gripping parts of East Africa, which could have a significant effect on the agricultural sector and inflation, the governor warned.
East Africa experienced its worst drought in five years in 2016, with around 2.7m people in Kenya being affected, according to Kenya’s National Drought Management Authority. The drought has had a significant effect on the agricultural sector, which accounts for around 25% of the country’s GDP and 65% of total exports. Kenya’s leading export products include tea, coffee, sweet potatoes and flowers.
The UN Food and Agriculture Organisation has warned that this year’s long rains – which fall from March to May across the region and are critical to ensuring that crops and livestock can survive the dry season, which lasts from June to October – will also likely be poor, prolonging the drought. If the drought continues this year then it is likely the economy will be affected and food prices could increase, according to Njoroge.
“With agriculture being a major contributor to growth we could see a fairly negative impact on the economy if the rains fail,” he says. “[The drought] could also have a deep impact on inflation, like it did in February, when food prices shot up on average 16.5%.
“However, we have implemented contingencies to protect ourselves from all these [threats]. We’ve ensured that we have sufficiently large external reserves and hedged ourselves from the risks that I’ve mentioned.”
Kenya also has access to a $1.5bn IMF loan facility available as a precaution, which will help mitigate any currency volatility caused by the risks, he adds. The governor’s cautious outlook for 2017 stands in contrast to his bullish view of the banking sector in Kenya, which has been under increased scrutiny following the collapse of Chase Bank and Imperial Bank in 2015 and Dubai Bank Kenya in 2016.
“The banking sector has stabilised and strengthened,” says Njoroge. “We have ushered in a phase we want to become the new normal which is underpinned by three pillars: enhanced transparency, stronger corporate governance and better business models.”
The three pillars encourage all the stakeholders in the sector – be they managers, board members, shareholders or the CBK – to take an active interest in ensuring that the banks are being run properly, according to Njoroge.
“Banking business models need to evolve,” he says. “Structures and processes that have worked well in the past may not work so well in the future, and they need to be rethought in order to make banks more resilient in dealing with new challenges.” Njoroge has asked the country’s banks to redesign their business models and submit their proposals to the CBK by the end of April 2017.
However, as Kenyan banks adapt to the “new normal”, the Kenya Bankers Association has warned that the interest rate cap, which limits the amount of interest banks can charge on loans and sets a minimum interest rate for savers, is hurting the country’s banking sector.
Interest rate cap
The interest rate cap, introduced in September 2016, caps loans at a rate of 4% above the central bank rate (CBR) and interest for savers cannot be less than 70% of the CBR. The move was meant to protect customers, but the IMF has claimed that it reduces access to credit and is weighing on growth.
However, Njoroge disputes this. “We can’t say for sure how the interest rate cap will affect the banking sector [because] there is insufficient data available to us at the moment,” the governor says. “What we can say for sure is that the average interest rates for the country have fallen.”
“Of course, [the cap] will have an impact on [the banks’] profits, but they can still thrive without charging extortionately high interest rates,” he adds. “We expect the cap will weaken banks’ balance sheets to a limited extent, but not dramatically.”
Njoroge did not specify when the complete data will be available but information that the CBK has assessed has proven inconclusive. Nevertheless, if banks continue to restrict lending and the threats that Njoroge outlined come to fruition, then voters may turn on President Uhuru Kenyatta’s government.
from African Business Magazine http://ift.tt/2p2aBii