Stability overview of a market that’s seemingly going down

The growth momentum of the global economy has continued to pick up according to CMA’s Capital Markets Soundness Report. The report shows that major world economies including the US, Canada, Eurozone and Japan registered accelerated growth.

On BRICS: India remained vibrant, with China displaying resilience, while Brazil and Russia are emerging from recession. But as the global economy is anticipated to generally register improved performance, what are the implications for Kenya? What are the ways to manage Kenya’s rising debts?

Aside from the promising international markets, something that left many individuals scratching the back of their heads is the question of how sustainable the country’s debt is. Something that needs more discussions is where the money that government borrows go to, which should be about timelines. Is it for long-term, or short-term? And what are you borrowing for? Is it about infrastructure? The money borrowed should bring back investments. It is all of a policy issue.

According to Focus Economics, Sub-Saharan Africa is expected to grow moderately in 2017, as volatile commodity prices and turbulent political undercurrents limit the recovery, with GDP expected to expand 2.5%.

In 2018, regional GDP growth is expected to gain steam as the recovery strengthens. However, the evolution of commodities prices will be key to the economies’ growth trajectory for 2018 expected to hit 3.4%.

On the other side, the region’s biggest economies are likely to be the poorest performers: South Africa is expected to grow 1.3%, followed by Angola with a 2.6% increase and Nigeria with a 2.7% expansion.

The Nigerian economy, on the other hand, has been experiencing continued foreign exchange distortions, concerns over corruption and domestic policy uncertainty.

From the experience of SA and Nigeria, Kenya should continue to empower its key institutions charged with maintaining ethics, governance and rule of law, while stepping up its efforts to mitigate against geopolitical risks, to restore confidence levels, crucial in guiding the country back on a high economic growth trajectory. At what level do you say you are doing well?

Kenya could benefit from capital inflows as global investors seek to deploy excess liquidity in countries not implementing quantitative tightening. It is vital to learn from lessons and provide a clear policy on transition in key financial sector institutions to instil confidence and certainty for the economy.

Euro area

The European Central Bank (ECB) projects that annual real GDP will increase by 2.2% in 2017, 1.8% in 2018 and by 1.7% in 2019. The ECB has slightly marked down its inflation expectation for the end of this year due to the strength of the euro and weaker than expected oil prices. The Bank expects inflation of 1.5% in 2017, 1.2% in 2018 and 1.5% in 2019

Implications for Kenya

Kenya could suffer knock-on effects of external risks (in form of reduced exports) emanating from U.S. economic and trade policy and broader geopolitical uncertainties around the nationalistic ideologies; and a significant risk is posed by the EAC/EU Economic Partnership Agreement (EPA) requirements for removal of duties and taxes, which could lead to further loss of revenues.

A study by the European Commission released in February 2017 indicated that the removal of duties and taxes on goods traded with East African countries under the Economic Partnership Agreement would lead to loss of revenue for the EAC block, though the study further showed that these would be recovered through increased East African exports to Europe

International markets

Chinese Economy

Chinese Academy of Social Sciences (CASS) estimated that China’s economy would expand by 6.7% and 6.8% in the fourth quarter and for the whole year, respectively. The Chinese government trimmed its 2017 growth target to around 6.5%, the lowest in a quarter of a century.

According to China’s National Bureau of Statistics (NBS), the country’s economy continued steady expansion in the first half of 2017 with GDP up 6.9% year on year to about 38.15 Trillion yuan ($5.6 trillion). In the second quarter, GDP held steady at 6.9% year on year, flat from the first quarter

Implication for Kenya: China is a key investor and trading partner in the Kenyan economy. Any major growth slack could have a significant impact on the Kenyan economy

Domestic markets

Macroeconomic Variables

GDP Growth

In September 2017, the country lowered its economic growth forecast to 5.5% mainly due to drought and political uncertainty as the country prepared for a fresh presidential election. The government had initially projected a 5.9% growth for 2017 but the economy expanded lower than projected to 4.7% in the first quarter, mainly due to poor agricultural performance.

The recent GDP statistics by the Kenya National Bureau of Statistics (KNBS) indicate that Kenya’s economy expanded by 5.0% in the second quarter of 2017 compared to 6.3% in the corresponding quarter of 2016.

In September 2017, the country’s inflation rate decreased to 7.06% year-on-year, from 8.04% in August 2017, partially due to decreases in the Food and Non-Alcoholic Drinks index. Inflation rates generally fell in the quarter, compared to Q2. 2017.

On interest rate risk

The CBK’s monetary policy committee retained the Central Bank Rate (CBR) at 10% in September 2017 in its meeting held on 18th September 2017 against a backdrop of general macroeconomic stability, a prolonged election period and continued uncertainties in the global economy. The rate has been retained at 10% since August 2016.

In the quarter, the Central Bank of Kenya indicated that the interest rate cap on loans which was effected in September 2016 will soon be reversed to allow the market to determine the pricing of credit.

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