Emerging

Tough economic times forthcoming

EcoEmerging // 2nd quarter 2020  
25  
economic-research.bnpparibas.com  
Kenya  
Tough economic times forthcoming  
Kenya’s real GDP growth was subdued last year and it will come under stress in 2020 due to coronavirus outbreak effects. The lower  
GDP growth will further constrain the fiscal policy space whereas the country’s forex receipts are also weakened by adverse climatic  
conditions. While political rivalries continue to complicate the implementation of fiscal policy, failure to reduce budget deficits will  
challenge the sovereign’s debt solvency in the medium term. Meanwhile, monetary policy easing and emergency measures in the  
banking sector could hamper banking sector prospects, which had started to improve following the recent removal of the interest-rate  
cap law.  
Pandemic impact on a subdued economic growth  
1- Forecasts  
Kenya is feeling the economic effects of the pandemic outbreak.  
According to a private-sector organization survey , more than 60%  
2
018  
2019 2020e 2021e  
1
Real GDP growth (%)  
6.3  
5.5  
3.0  
5.2  
of businesses are affected by the measures taken around the world  
to contain the Covid-19 virus. This is notably due to Kenya’s close  
ties with China, which accounts for about 20% of its imports. With  
the reduction of imports, some industrial inputs would need to be  
sourced elsewhere or substituted by local production. Some  
enterprises have therefore downsized their production capacity.  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
4.7  
5.6  
6.3  
5.2  
-6.9  
-7.3  
-7.6  
-5.2  
Current account balance / GDP (%)  
-5.0  
-4.7  
-4.6  
-4.6  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Deterioration of the private sector since the beginning of the year  
Additionally, exports to markets such as the Middle East and Europe  
are also affected. The most vulnerable exports include horticultural  
goods, especially tea and coffee (respectively 23% and 4% of total  
exports), whose prices slightly increased by about 4% in 2019 and  
have suffered diverging dynamics year-to-date (-3% for tea and  
8
0
Global PMI  
Output Stock  
New Orders  
Input Costs  
70  
60  
50  
40  
30  
20  
+5% for coffee).  
Moreover, since December 2019, an outbreak of locust swarms in  
2
East Africa devastated around 13% of Kenyan crops . This could  
bring food insecurity, which is also exacerbated by conflicts in the  
Rift Valley region. Kenya should also suffer from a contraction in  
forex reserves, which are projected at USD 8.9 billion (5.3 months of  
imports) at the end of 2020.  
2
014  
2015  
2016  
2017  
2018  
2019  
2020  
Kenya's external imbalances remain large and should stay so even  
if the decline in the oil import bill offsets the decline in goods exports.  
Meanwhile, the foreign exchange market has also recently  
experienced some volatility, and the shilling (KSH) lost more than  
Source: National Institut of Statistics  
Therefore, economic growth is expected to fall to 3% in 2020,  
according to the most recent central bank forecasts. This follows a  
period of already subdued growth in 2019.  
4
% against the dollar since the beginning of the year.  
3
Airlines and the tourism sector should also be affected, considering  
that Kenya is the third largest tourism economy of Sub-Saharan  
Africa, where tourism accounts for more than 8% of GDP, 15% of  
total exports and 8% of total employment. Construction and real  
estate sectors are also feeling the pinch, as development projects  
are suffering delays.  
Although remaining within the 2.5%7.5% target range of the central  
bank, consumer price inflation (CPI) is progressively increasing and  
spiked at 6.37% on February 2020, due to the related effects of  
coronavirus outbreak. This trend could reduce the room to  
maneuver of the central bank to ease the monetary policy in order to  
boost banking credit and domestic demand.  
1
The Kenya Private Sector Alliance (Kepsa)  
Tea represents 22% of Kenya’s exports, and 3% of the harvest area is infested  
2
by locusts. Coffee accounts for 4% of total exports and 15% of its harvest area  
are covered by locust swarms.  
3
Even before air travel restrictions, national carrier Kenyan Airways announced  
a USD 8 million revenue loss, following flights’ suspension to China after the first  
cases of coronavirus were detected.  
EcoEmerging // 2nd quarter 2020  
26  
economic-research.bnpparibas.com  
Monetary and fiscal stimulus  
3- Currency depreciation and inflationary pressures  
The government has responded to the epidemic with tough  
measures on travel, mass gathering and isolation rules to curb the  
spread of the virus . Yet the main sources of concern are related to  
the weakness of the health system and to job losses. While the  
World Bank would give USD 60 million to the health sector to deal  
with the outbreak, Kenya is also seeking emergency assistance  
from the IMF of up to USD 350 million. In the meantime, local  
stimulus measures have been introduced by the authorities.  
KSH/USD (Y/Y)  
CB Policy Rate  
CPI(Y/Y)  
1
5%  
4
10%  
5
%
Central Bank inflation target band  
0%  
5%  
-
In line with the accommodative stance of other African central banks,  
Kenya’s last Monetary Policy Committee held on March 23 cut the  
rd  
-10%  
15%  
policy rate by 100 basis points (the third consecutive cut despite  
inflationary pressures). It has also reduced the reserve requirement  
ratio for commercial banks (to 4.25% from 5.25%, thus releasing an  
extra KSH 32.2 billion for lending to households and small  
businesses expected to suffer from reduced cash flows.  
-
2014  
2015  
2016  
2017  
2018  
2019  
2020  
Source: National Institut of Statistics, Central Bank  
Moreover, many infrastructure projects have stalled or generated  
inadequate returns to service the debt borrowed for their  
construction. Total debt service is rising with the total interest  
payments-to-fiscal revenue ratio doubling over the past three years  
th  
Additionally, on March 18 , the central bank issued a set of  
emergency measures to be applied in the banking system. These  
include: the extension of personal loan repayment delays by up to  
2 months, restructuring of corporate credits, dropping charges on  
banking transactions with a mobile phone until the end of June; and  
the increase in the duration of repurchase agreement (repo)  
transactions with banks to 90 days from 28 days in order to ensure  
there is sufficient liquidity in the banking sector.  
1
(
to 31% in 2019 from 16% in 2016).  
As a result of the COVID-19 epidemic effects, the governement  
expects revenues to drop by an additional KHS 70 billion by the end  
of this current fiscal year. The budget deficit is expected to increase  
to 7.6% of GDP in 2020.  
The government has also announced fiscal measures to be effective  
on April 1 , including tax relief for low-income households,  
reductions in both personal income and corporate tax , and a cut in  
st  
The government needs to issue additional bonds in the international  
5
7
market, as recently announced , and also needs a precautionary  
the value-added tax (VAT) rates. The government also plans to  
release KSH 49 bn (USD 460 million) to cover suppliers’ unpaid bills  
and KSH 10 bn to refund VAT to corporates in the next three  
months. Finally, additional spending totaling KSH 10 bn is being  
considered to support the most vulnerable people.  
line from the IMF (USD 1.5 bn three-year stand-by credit facility).  
The first large debt maturity falling due (USD 2 bn) is scheduled at  
the end of 2024.  
Finally, the central bank’s measures in the banking sector could also  
challenge banking-sector prospects, which were starting to improve  
8
Public finances under big pressure  
following the removal of the controversial Banking Amendment act  
in November 2019.  
Public finances are expected to deteriorate due to the economic  
slowdown and support policy measures. They are also threatened  
by several issues. Firstly, the rivalries within the ruling party hinder  
the implementation of fiscal policy. The pace of fiscal consolidation  
has slowed since Ukur Kanacho was appointed new finance  
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minister, taking over from Henry Rotich .  
4
These include the cancellation of all international flights (except cargo planes),  
the shutdown of bars and nightclubs, banned church congregations and  
weddings, and the capping of funeral gatherings to 15 people.  
5
Reduction of the pay as you earn tax (PAYE) from 30% to 25%; reduction of  
the Resident Income Tax from 30% to 25%; and reduction of the turnover tax  
7
th  
rate from 3% to 1% for all Micro, Small and Medium Enterprises.  
On March 4 , the government announced a USD 1.5-billion issue by June, and  
6
nd  
On July 22 , President Kenyatta ordered to arrest of Finance Minister Henry  
a second possible bond issue in S2 2020.  
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Rotich over alleged corruption surrounding the Kimwarer Dam and Arror Dam  
hydropower projects.  
Approved in September 2016, the Bill limited commercial banks’ interest rates  
to no more than 4 percentage points above the central bank’s reference rate.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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