Deteriorating financial conditions as a result of the interest rates cap pose a risk to the country’s growth prospects,according to an analysis by panelists at FocusEconomists.
They however, aver that GDP growth is expected to remain broadly stable this year, supported by strong public investment and loose monetary policy.
According to the panelists, the Kenyan economy is expected to have performed strongly last year, despite Q3’s mild deceleration, adding confidence remained high as all sectors of the economy had contributed to growth.
“However, the extended drought that has been affecting the country for some time intensified in the final months of last year, which may have resulted in a softer GDP outturn in Q4,” they add.
“Nevertheless, the IMF highlighted the robustness of the Kenyan economy in late January in its first review of the SBA/SCF program the country entered in May 2016. In its review, the Fund called on the government to scrap the interest rate cap introduced in September 2016. According to the IMF, the cap could shave several percentage points off GDP growth because it restricts the flow of credit, with SMEs being particularly affected. The cap puts a ceiling on the interest rate commercial banks can charge clients and a floor on the interest they must pay to depositors,” the FocusEconomics report further says.
FocusEconomics is a leading global provider of economic analysis and forecasts as well as price forecasts.
It says the outlook remains vulnerable to adverse weather conditions: the drought has continued into the first months of 2017.
On balance, FocusEconomics panelists see the economy growing 5.7 per cent in 2017, which is down 0.1 percentage points from last month’s estimate. In 2018, the panel sees GDP growth at 5.9 per cent.
With regard to Sub-Sahara Africa, the panelists say the region is believed to have recorded its worst economic performance in over two decades in 2016.
“A preliminary estimate shows that the region’s aggregate GDP increased 1.1 per cent year-on-year in Q4 2016, which followed an equally weak 1.0 per cent expansion in Q3. As a result, growth is expected to have fallen to 1.2 per cent in 2016 from 3.2 per cent in 2015, which marks the region’s worst economic performance since 1993. The combination of low commodity prices, weak external demand, severe weather conditions and security problems took a large toll on economic activity in the region last year,” the report says.
It adds Brent crude oil prices—the global benchmark—averaged US$44 per barrel in 2016, down 16 per cent from 2015, and prices for many agricultural and mineral commodities remained weak, affecting the terms of trade of commodity exporters in Sub-Saharan Africa..
On top that, capital inflows fell. Compounding these adverse external developments, many countries were subject to negative shocks domestically. A severe drought caused by the El Niño weather phenomenon caused a sharp fall in agricultural production, particularly in Ethiopia, Mozambique, South Africa and Uganda, and cutbacks in hydroelectric generation across the sub-continent. Moreover, the security situation deteriorated, especially in Nigeria with militants’ attacks on oil pipelines causing a substantial disruption in the county’s crude oil supply.
The big oil exporters and South Africa account for most of the regional slowdown, while activity in commodity importers generally remained robust. The economies of Angola and Nigeria—the region’s two largest oil exporters—are expected to have contracted 0.2 per cent and 1.8 per cent last year as these countries faced severe financial and economic strains.
In both countries, a decline in oil production due to lower investment in Angola and militants’ attacks in Nigeria, was exacerbated by lower prices. Domestic demand weakened as lower revenues, related to a fall in both crude oil production and prices, forced large cuts in government spending. In South Africa, the region’s second-largest economy, growth is expected to have fallen to just 0.4 per cent in 2016 from 1.3 per cent in 2015, reflecting the impact of lower commodity prices and a severe drought that damaged the agricultural sector. On top of that, the country continued to face heightened governance concerns, which are inhibiting investment.
“Other commodity exporters, particularly exporters of metals, struggled to adjust to the decline in prices last year. Growth slowed notably in the Democratic Republic of Congo and Mozambique. Meanwhile, the economies of agricultural exporters such as Cote d’Ivoire, Ethiopia and Tanzania decelerated in 2016, continuing to grow at a pace of around 7.0 percent or more. Solid growth in these countries was again the result of strong public infrastructure investment and healthy private consumption, as they benefited from low oil prices. Among other agricultural exporters, growth also slowed in Ghana, Uganda and Zambia,” the panelists
However, following 2016’s dismal performance, economic growth in Sub-Saharan Africa is expected to rebound this year and accelerate further in 2018.
This year’s growth recovery is, however, moderate because the region is still adjusting to low commodity prices. Although prices are projected to fully recover this year from the record lows registered at the beginning of 2016, the increase is expected to be gradual and price levels will remain well below those seen after the Global Financial Crisis. Meanwhile, growth rates will continue to vary across the region. Although growth in South Africa and other major oil exporters is seen rebounding this year, it will be weaker compared to exporters of agricultural and mineral commodities. Meanwhile, more stable currencies, lower inflation, improved agricultural production and large infrastructure programs should support economic activity in agricultural exporters, such as Cote d’Ivoire, Ethiopia, Kenya, and Tanzania, and mineral exporters such as Ghana.
The 2017 growth forecast for the region assumes that fiscal positions will gradually improve, but the terms of trade will remain weak, causing a drag on growth. Moreover, numerous external and internal risks continue to loom on the horizon. Among the external risks, uncertainty related to the economic policy of the new US administration and elections in key European economies this year, particularly in France, have the potential to disrupt global financial markets and prompt higher borrowing costs in large African economies.
In addition, a potential sharp slowdown in China could weigh on demand for commodities and undermine the recovery of prices. Among domestic risks, the primary one is policy makers across the region failing to adjust the economies to the new environment of low commodities prices and to continue with the economic reform agenda.
The outlook is based on the consensus of the forecast by the 12 global banks, consultancies and think-tanks.
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