UHURU’S FUZZY ECONOMICS

Understanding rosy economy that has left many Kenyans broke

It is said you are the average of your friends. And, at the Nairobi Security Exchange, the financial well-being of most companies can as well be used to gauge the health of its peers.

The prognosis is not exactly good, according to figures from their books. More than 15 companies have issued profit warnings over the past one year, a sign of something seriously wrong.

For one or two companies, it can be management issues, but when more than a dozen companies find themselves shedding revenues, eyes begin to turn to the micro-economic details.

Political uncertainty, poor credit uptake and erratic weather conditions featured as the main reason companies listed at the Nairobi Securities Exchange (NSE) issued profit warnings. When companies aren’t doing good business, they shy away from taking up loans for fear of having problems servicing them.

While official statistics showed conditions eased in 2018, the number of firms that issued profit warnings – expecting profits to decline by at least 25% – kept increasing into 2019. If the trend doesn’t change much, expect more profit warnings from the NSE going into 2020.

Companies that issued profit warnings in 2018 include Standard Group, Flame Tree Group, Standard Chartered, Family Bank and BOC Gases.

Others are Deacons, Bamburi Cement, Britam, Mumias Sugar, Kenya Re-Insurance, Kapchorua Tea, Housing Finance Group, Kenya Power, Sanlam, National Bank of Kenya, UAP Holdings, East African Portland, Kenya Reinsurance, Carbacid, Sameer Africa and Crown Paints.

Things haven’t changed much in 2019. Already Insurer UAP-Old Mutual and coffee grower Eaagads have issued warnings for the year ended 2019.

For UAP, this was not unfamiliar as it was a trend it had tasted last year.  It attributed its projected decline in earnings to the continued slump of the property market.

“There are indicators that the weakening performance of the property market in Kenya and the uncertain political environment in South Sudan will likely lead to further impairments in the carrying value of certain investment properties,” UAP management said.

Eaagads has largely attributed its anticipated slide in earnings to the depressive global coffee prices, which have reduced significantly this year in the face of market oversupply. 

“The drop in profitability was further exacerbated by an increase in coffee production costs, notably increased labour costs, which have been on an upward trend year over year,” noted the company’s board.

The explanations sound valid, and in most of these cases, CEOs and boards are helpless since the external economy is beyond their control.

It may appear like 2019 would end on a positive note, but that temporary relief was swept off on November 19th when BOC Gases issued a profit warning for the second year running. The company blamed the expected drop in profitability on depressed demand for gases from the industrial sector, especially SMEs, due to the prevailing economic environment. Delayed payments by the public sector was also a factor.

Indicators suggest growth

Interestingly, various groups reported the economy remained resilient in the first half of 2019 despite the slowdown in agricultural production following the delayed onset and below average rainfall. Real GDP grew by 5.6% in the first half of 2019 supported by the non-agriculture sector, particularly services.

Leading indicators of economic activity suggest stronger growth in the second half of 2019, supported by agricultural production, growth of MSMEs, implementation of the Big 4 agenda, foreign direct investment and a stable macroeconomic environment.

The World Bank has forecast Kenya’s growth to hit 5.8% for 2019, down from 6.3% in 2018. In its 12th edition of the Kenya Economic Update, the World Bank said that after a strong rebound in 2018, economic activity was moderated in 2019, primarily due to lower agricultural output and considerably weak private sector investment.

When Jubilee Government took office, we had a single $600 million foreign commercial loan, which was paid off using the first Eurobond issue. Today, a third of our foreign debt amounting to $10 billion is commercial

The 5.6% economic growth in the first half of 2019 was a deceleration from 6.5% in the first six months of 2018. “While challenges in agriculture account for a significant drag to growth, private investment has also accounted for a share of the deceleration,” says the survey.

On paper, the economy is doing fine, with expected growth of over 6.5% this year, but the situation on the ground is starkly different. Official data shows that the economy is growing, but the tax base is not expanding and revenue is falling short as debt-servicing charges are rising.

Jobs disappearing

With profit warnings, comes lay-offs and many corporates have indeed cut their payrolls. Kenya’s public debt has increased threefold over the last six years, from Sh1.8 trillion to Sh6 trillion. 

Even then, the government plans to spend Sh2.6 trillion in the 2019-2020 financial year, financed through domestic revenue to the tune of Sh1.88 trillion (Sh1.81 trillion tax and Sh70 billion non-tax, respectively), Sh701 billion of debt, and external grants of Sh19.5 billion. Of the Sh701 billion of debt, it plans to borrow Sh434 billion domestically, and Sh267 billion from foreign lenders — comprising of Sh200 billion in commercial debt and the balance of Sh67 billion in soft loans from development lenders.

Economist David Ndii says this means that over a quarter (27%) of the budget is debt-financed and 90% of this debt will be commercial – 30% from foreign lenders and 60% from the domestic market. 

“The Jubilee administration has been doing this for six years running,” he says in an analysis published by The Elephant website. “When it took office, we had a single $600 million foreign commercial loan, which was paid off using the first Eurobond issue. Today, a third of our foreign debt amounting to $10 billion is commercial.” 

Mr Ndii says the Jubilee administration justified the $2.8 billion debut Eurobond issue, the largest African issue to date, on the promise that it would replace domestic borrowing, thereby leaving domestic credit to the private sector and reducing interest rates. 

“It did not. Instead, the administration ratcheted up domestic borrowing as well and crowded out the private sector completely. It is also worth reminding ourselves that the proceeds of that Eurobond cannot be accounted for. The Sh701 billion deficit translates to the Government spending 37% more than its income. This is like a Sh30, 000 earner who has just acquired a credit card deciding that she can afford to live large by spending Sh40, 000 a month.

The other problem has been the government borrowing short-term to invest long-term. “If you do that, the debt repayments eat into the working capital, and you will soon be defaulting on your suppliers, as the government is doing,” Mr Ndii says.

Growth by megaprojects

So the economy heads into 2020 with a limp, which economists say many require painful surgery in economic stimulation to deal with. It will need an injection of more funds into more productive sectors and growth in credit to the private sector to ensure that jobs are being created and more taxes being paid.

Growth is expected to be driven by the increased number of megaprojects under execution, the early impact of the Big 4, which will provide the economic growth momentum. Good weather for the long rains in March, April and May will help calm down inflation nerves.

The cost of living is expected to remain high in reality, as it were but low on paper. According to Central Bank of Kenya, month-on-month inflation remained well anchored within the target range in September and October 2019, largely due to relatively stable food prices and lower cost of energy. The inflation rate stood at 4.9% in October compared to 3.8% in September, mainly reflecting temporary effects of increases in the prices of maize grain and sifted flour. 

“Overall inflation is expected to remain within the target range in the near term due to lower food prices following improved weather conditions, and lower electricity prices,” says Dr Patrick Njoroge, Central Bank of Kenya Governor.

The November excise tax adjustments in the Finance Act 2019 are expected to only have a marginal impact on inflation but likely to impact on growth in credit to the private sector.

Stable forex market

The foreign exchange market has remained stable, supported by the narrowing current account deficit and increased portfolio and other investment inflows. The current account deficit narrowed to 4.1% of GDP in the 12 months to September 2019 from 5.1% in September 2018. This largely reflected strong receipts from transport and tourism services, resilient diaspora remittances and lower imports of food and SGR-related equipment. The current account deficit is expected to narrow to 4.3% of GDP in 2019 from 5% in 2018.

The CBK foreign exchange reserves, which currently stand at $8,794m (5.5 months of import cover), continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.

Meanwhile, private sector credit grew by 6.6% in the 12 months to October, compared to 7% in September. Strong growth in credit to the private sector was recorded in a number of sectors: trade (8.5%); finance and insurance (15.1%); consumer durables (28.6%); and private households (6.9%). 

Growth in private sector credit particularly to Micro, Small and Medium-sized Enterprises (MSMEs) is expected to increase due to the deployment of innovative credit products targeting the sector, and the repeal of interest rate caps.

The banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 51.2% and 18.3%, respectively, in October. The ratio of gross non-performing loans (NPLs) to gross loans declined marginally to 12.3% in October from 12.6% in August. 

In particular, there were decreases in non-performing loans in the real estate, transport and communication, and building and construction sectors reflecting increasing repayments and the enhanced recovery efforts by banks.

Interest rates caps 

The repeal of interest rate caps should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy. Further, banks have adopted the Banking Sector Charter, which defines a commitment to entrench a responsible and disciplined banking sector which is cognizant of, and responsive to, the needs of their customers.

Analysts are drawing optimistic views on economic prospects due to, among other factors, improved weather conditions, payments of pending bills by the Government, growth in tourism, the expected increase in lending to MSMEs following the repeal of interest rate caps, implementation of the Big 4 agenda projects, ongoing public infrastructure investments, and a stable macroeconomic environment.

Kenya’s Big Four economic plan, introduced in 2017, focuses on manufacturing, affordable housing, universal health coverage, and food and nutrition security. It envisages enhancing structural transformation, addressing deep-seated social and economic challenges, and accelerating economic growth to at least 7% a year. By implementing the B4 strategy, Kenya hopes to reduce poverty rapidly and create decent jobs.

However, the optimism is moderated by concerns about the delays in the clearance of pending bills, reduced demand of some products, and the slowdown in global growth.  

The Sh701 billion deficit translates to the Government spending 37% more than its income. This is like a Sh30, 000 earner who has just acquired a credit card deciding that she can afford to live large by spending Sh40, 000 a month

Global growth has weakened further in 2019, largely due to continued uncertainties with regard to the trade tensions between the U.S. and China, other geopolitical developments and the uncertainties about Brexit. Central banks in major advanced economies have continued to implement more accommodative monetary policy to support growth and financial stability. The risk of increased volatility in the global financial markets remains high.

The CBK Monetary Policy Committee in November lowered the Central Bank Rate (CBR) to 8.50% from 9.00%. It noted that inflation expectations remained well anchored within the target range, and that the economy was operating below its potential level. Furthermore, the committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity.

When a government is unable to raise cash from other sources, the easiest target is often more taxation and that was witnessed in the current fiscal year, with KRA raiding various sectors including soft drinks and water.  President Uhuru Kenyatta, in fact, emphasized the tax issue by asking Kenya Revenue Authority (KRA) to come up with other means of collecting and administering more revenue.

He called for the review of tax laws, directing KRA, Treasury and the Attorney General to draft a bill and submit it to the cabinet to facilitate reforms that will help tap in more tax.

But Institute of Economic Affairs Executive Director Kwame Owino warns that the new revenue avenues should not include pulling more money out of firms in taxes.

“If the President thinks that the trick to getting out of this fiscal mess is by squeezing more taxes out of firms, then even he is not paying attention. There is no financial manouevre out of this,” he said recently.

The World Bank reckons that ensuring prompt payments to firms that trade with the government could restore liquidity and stimulate private sector activities. Also, it vouches for improved revenue mobilization and accelerated structural reforms that crowd in private sector participation in the Big 4 agenda.

“Several macroeconomic policy reforms, if pursued, could help rebuild resilience and speed-up the pace of poverty reduction,” says Mr Peter Chacha, World Bank Senior Economist. “These include enhancing tax revenue mobilization to support government spending, reviving the potency of monetary policy, and recovery in growth of credit to the private sector”.

Agriculture remains a key driver of growth in Kenya and a major contributor to poverty reduction. 

The fact that Kenya is on course to renewing its $1.5 billion (Sh151.5 billion) standby credit facility with the International Monetary Fund (IMF) has renewed hope among economists and policymakers. IMF’s team that visited the country in November to discuss recent economic development and reform plans hailed economic growth and fiscal plan as solid.

ICT magic

Known as the “Silicon Savannah,” Kenya has seen its Information and Communications Technology (ICT) sector grow an average of 10.8% annually since 2016, becoming a significant source of economic development and job creation with spillover effects in almost every sector of the economy.

But keeping pace with technology innovation and the growth of the global digital economy will require stronger digital foundations, such as new regulations and policy guidelines designed to support the digital transformation, the World Bank says. For example, it notes that telecommunications regulation has struggled to keep pace with the evolving market dynamics and emerging technologies, and the digital entrepreneurship space faces limited growth-oriented financing and lacks a firm pipeline of digitally-skilled talent.

“Kenya is eager to position itself as a hub for information and communication technologies, ecommerce and digital services,” says Casey Torgusson, World Bank Senior Digital Specialist and author of the report’s special section on Accelerating Kenya’s Digital Economy. “Building strong digital foundations will be critical to the country’s long-term success in harnessing the potential of the digital economy as a driver of its economic growth, job creation and service delivery while ensuring that no one is left behind.”

When the Economic Survey is released sometime after march 2020, Kenyans will be watching various numbers and economic indicators keenly to see if they will indeed match their daily life experience. Hopefully by then the wheels of fortune will be moving in favour of the economy, business and
employment.

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