Stanbic Bank on Monday released its review of 2016 and outlook for 2017 forecasting that Kenya’s GDP growth in 2017 would only expand by 5.4% compared to previous estimate of 5.8%.
According to the report, 2016 largely proved to be a good year for the Kenyan economy with respect to macroeconomic stability in light of economic constraints in other large economies in Sub-Saharan Africa. Global investors were broadly satisfied by the Kenyan economy which stood out not only as a well-diversified economy but also bucked the trend of foreign exchange liquidity challenges that other African markets experienced.
According to the Bank’s Regional Economist Jibran Qureishi, headline inflation is likely to rise up until April and thereafter ease somewhat till July after which a more durable decline in prices in the final quarter of 2017 is expected. The epicenter of concern for headline inflation remains food prices after pretty lackluster short rains in the fourth quarter of 2016. Furthermore, should the long rains season beginning in March disappoint, the effect of higher food prices could possibly become entrenched.
“Headline inflation could get some much needed respite if the long rains are adequate in the key food growing regions. However, we suspect that demand driven inflationary pressures could remain modest in the absence of robust economic activity for the better part of 2017 as private sector credit growth will probably not sprint meaningfully following the implementation of interest rate controls.”
He also added that they expect the Central Bank Rate to remain on hold for the remainder of 2017; unless imported inflationary pressures become excessive, a scenario that could prompt the MPC to become relatively more hawkish.
He argues that the slowdown in private sector credit growth could weigh negatively on overall GDP. However there remains concern about the poor rains and its consequences on agricultural production. Moreover, average GDP growth in Kenya has historically been lower in election years owing to firms maintaining a more cautious stance. Similar events could transpire in 2017 attributable to election anxiety.
Additionally, failure to sign the Economic Partnership Agreement (EPA) is another major downside risk to GDP growth in 2017. Arguably, Kenya has more to lose than other EAC countries if the deal is not unanimously signed owing to the growing importance of the EU market for the very vibrant horticultural sector.
Effects of Global Events on Kenyan Economy
More importantly, global events that took place in 2016 most notably in the UK and US were quite influential on the outlook for the global economy. Following the victory of Donald Trump in the US, the Dollar index has rallied some 5.5% since and subsequently exerted pressure on the Shilling along with many other currencies.
In this case the recent Shilling weakness is more due to Dollar strengthening rather any fundamental weakness of Kenya’s balance of payments. Mr Trump’s promise and endeavour to loosen fiscal policy in the US has prompted the US Federal Reserve to upgrade its rate hike forecasts to three in 2017. However, despite four rate hikes being planned in 2016, only one rate hike was delivered.
“More importantly, this being an election year there isn’t any compelling empirical evidence to suggest that the exchange rate should come under severe pressure. In fact, if corporates eventually adopt a wait and see approach, import demand could remain steady,” added Mr Qureishi.
Oil prices
The US shale oil industry remains the marginal producer at this point in time and any rise in oil prices is likely to encourage them to increase production even further which would thus assist in keeping oil prices relatively range bound, more so as global demand for oil is not proving to be exciting either. That said, the average oil price is likely to be higher in 2017 than that of 2016 and hence the current account deficit is likely to be wider at around 6.7% of GDP from their estimate of 5.8% for the previous year. The IMF stand-by credit facility along with potential new external loan issuances in 2017 may yet help provide adequate ammunition for the CBK to ensure that any weakness in the exchange remains orderly.
