Kenya’s Credit Growth to be Strained Further With Rate Cap – Economist

Economist expects CBK to reverse rate cap in second half

Stanbic regional economist
Jibran Qureishi - Economist

In what has now become a yearly tradition, Stanbic Bank today released its 2018 macroeconomic outlook report on Kenya. The bank’s Regional economist Jibran Qureishi highlighted a number of aspects that he believed would be instrumental in shaping Kenya’s macroeconomic environment going forward.

Here are what I consider to be the key takeaways from the event.

  • Credit growth to private sector to remain under pressure

Credit growth to the private sector isn’t likely to improve in 2018 due to a couple of reasons according to the bank. After the passing of the interest rate cap bill back in 2016, lending to the private sector became substantially constrained but Stanbic sees a potential way out.

The bank expects that the government will soon have to revisit the rate cap laws in order to find a common ground with banks. Interestingly enough, Central Bank governor Patrick Njoroge had last year alluded that the rate cap law would need to be reversed.

“It is in our interest as a country and CBK to work to reverse these measures and go back to a regime with freely determined interest rates but in a disciplined environment,” he said. “It is clear to us that this has been problematic in many ways. I can tell you the direction but I cannot tell you when.” The bank’s baseline assumption is that this could happen in the second half of 2018.

Furthermore, the introduction of the new international financial reporting standard (IFRS 9) which specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items could force Kenyan banks to adopt an even more cautious approach to lenders given the stringent guidelines under the new accounting standards.

  • GDP growth will rebound

According to the World Bank, global economic growth is likely to average 3.1 percent in 2018 after a much stronger than expected 2017 thanks to recovering manufacturing and commodity-exporting developing economies benefiting from firming commodity prices.

For Kenya, a strengthening global economy will be important as it supports Stanbic bank’s GDP growth projections for the current year, which it says will rebound to 5.6 percent from 4.8 percent in the previous year.

While this is still far from the government’s target of double digit economic growth, Jibran recommends that it is far more feasible to target sustainable growth, noting that GDP growth only expanded by 6 percent year/year five times only since 1980.

The report partially credits this expected recovery to better agricultural output as well as continuation of public investment in infrastructure.

  • Headline inflation likely to increase in second half of 2018

Headline inflation (a measure of the total inflation within an economy) for the year is expected to come in at 4.4 percent declining marginally from 4.5 percent in the previous year as a result of improving weather conditions and strong base effects.

The report however notes that the second half of 2018 could see higher headline inflation due to higher transport and fuel costs. Here, the bank’s baseline assumption is that oil prices will be rangebound at USD60-70 per barrel but if the prices go higher headline inflation could significantly increase.

According to the bank, higher oil prices could fuel secondary inflationary effects much quicker than higher food prices. To better illustrate this point, consider this. In spite of the drought in 2017 which led to higher food prices, core inflation remained subdued throughout.

It is important to note that Stanbic considers the movement of international oil prices as the biggest wildcard to its 2018 inflation outlook.

  • Kenya shilling set to appreciate

The Kenya shilling is expected to continue appreciating in 2018 on the backdrop of improved tea production owing to better weather conditions and robust tourism earnings. Just recently, Barclays Africa also revealed that it expected the Kenya shilling to hit Ksh. 106 by the end of the year, supporting Stanbic’s expectations of a rally. In addition to this, the bank expects food and diesel imports which had been a huge burden on the current account deficit in 2017 to meaningfully decline.

Furthermore, Stanbic expects domestic demand and import demand for consumer goods is likely to remain sluggish and will pick up in the last half of the year as a result of strained credit growth and output growing below potential.