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Kenya: Kenyan economy continued to expand well above the global average in 2016

2017/04/17

In contrast to a lot of other large African markets, Kenya was less affected by sustained low commodity prices during 2016 and continued to post strong increase throughout the year, despite a slight heating of inflation and tighter credit climate.

The Kenyan economy continued to expand well above the world average in 2016, with the IMF projecting year-end increase of 5.98%, up on 5.64% in 2015. The estimate is in line with the 5.7% increase posted in the third quarter, according to data released by the Kenya National Bureau of Statistics (KNBS) in late December.

Looking ahead, the economy is expected to maintain its steady increase trajectory, with the IMF forecasting rises of 6.13% in 2017 and 6.46% the following year.

Ups and downs

Some of this coming increase will be fuelled by production starting at oil fields in the South Lokichar Basin in the northern Turkana County. Full production will come on-line in 2020, providing Kenya with export capacity, but initial output starting in the initial quarter of 2017 should help meet domestic request and reduce fuel import costs.

The revenues from hydrocarbons production will help to offset lower output from some of Kenya’s traditional commodity earners, with a lack of rainfall in the second half of 2016 reducing expectations of strong increase in tea, and to a lesser extent coffee, output.

Year-end targets for tea production will likely be missed next lower-than-average rainfall in the second half of the year saw weaker yields in late-season harvests. The government had set a target of 500m kg of tea output for 2016, but Kenya – the world’s major tea exporter – is likely to fall well sort of this, with only 308.1m kg picked in the initial eight months of the year.

Mixed fiscal messages

While a lot of African economies struggled with a stronger dollar and depreciating currencies over the year, Kenya managed to sidestep much of the volatility. Inflation softened somewhat towards the end of the year, to 6.35% in December, down from 6.68% at the end of November, according to figures issued by the KNBS.

November’s nine-month high was itself below the 7.78% rate posted in January, which had been mainly driven by higher food costs caused by drought conditions late in 2015 and into 2016, and by increases in some tariffs – such as on alcohol and tobacco – that came into result at the start of the year.

Though inflation began to edge up again late in the summer, the Central Bank of Kenya (CBK) decided at the end of November to keep its key rate unchanged at 10% at its final monetary policy committee conference for 2016.

The CBK said inflationary pressures were still mild, but noted that domestic and world uncertainties could affect rates in the new year. In particular, it cited the possible impact of the decision to cap bank-lending rates at 4% above the key central bank rate, and the potential for shifts in US monetary policy to have an result on capital flows.

Financial fault lines

While the economy continued to expand strongly, there was as well an increase in non-performing loans (NPLs) held by Kenya’s commercial banks, with the total price topping KSh207bn ($2.01bn) at the end of the third quarter of 2016 – up KSh17bn ($165.8m) on the previous quarter and KSh82.2bn ($801.8m) on the year-end total in 2015.

The swell in NPLs caused the banking sector to become additional cautious in 2016: lending increase was down sharply on the previous year, according to CBK data, slowing to 4.6% year-on-year in October. Month-on-month lending had eased from September, at the same time as it was 4.8%, a marked fall from the 20.6% expansion from the same month in 2015.

Nonetheless, the central bank reported applications for loans had risen by an annualised 14.8%.

The rise of bad loans prompted most of Kenya’s listed banks to increase their provisions to cover NPLs, a measure that will have eroded shareholder dividends in 2016. Between them, Kenya’s 11 listed commercial banks had raised their loan-loss provisions to KSh25bn ($243.9m) as of late September, from KSh11bn ($107.3m) in the same month in 2015.

The resulting deceleration of credit increase and loss of liquidity could restrict private sector development in the new year, potentially putting projected GDP expansion under pressure.

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