Economy: Is the worst of 2017 slowdown over?

Kenya’s economy is showing signs of coming through the worst of its 2017 slowdown as markets ushered in 2018.

The attack on the economy in the third quarter of last year had slowed growth to its slowest in five years.

Unlike the beginning of 2017 when the country ushered in the New Year with almost all the economic indicators blinking red, it was poles apart in 2018. 

From the investors’ wealth on Nairobi Securities Exchange (NSE) to purchasing confidence and back to the money market, the first week of the New Year has been sweet melodies for most players.

It is a well-deserved reprieve for the business community who for the better part of 2017 took a back seat under as dangerous political ammunitions were thrown around. 

On the Nairobi bourse, despite starting the first two days of trading on a losing streak, the market recovered to build on gains made in 2017.

Week on week turnover stood at Sh1.8 billion on a volume of 62 million shares, up from Sh873 million on 38 million shares posted on the last week of 2017. In the process, market capitalisation, a measure of the value of all shares traded, rose by Sh44.3 billion to close at Sh2.57 trillion.

Investors will be following this keenly given that in 2017, their paper wealth expanded by 32 per cent from Sh1.9 trillion in 2016 to Sh2.51 trillion.

During the first week of trading, all the three indices closed in green. The NSE 20 share Index was up 1.47 points to stand at 3713.41 as All Share Index (NASI) closed 1.73 per cent higher to close at 174.17. Safaricom commanded 47.57 per cent of the week’s traded value.

In the money market, activity in the inter-bank market increased during the week ending January 3, 2018, as trading picked up, after the long festive season.

According to the Central Bank of Kenya (CBK), the volumes traded increased to an average Sh21.4 billion from Sh13.7 billion in the previous week.

Despite the number of deals increasing to an average of 45 from the previous week’s average of 40, banks loaned each other at average rate of 7.13 per cent. In the previous week, interbank rate was averaging 7.63 per cent. In fact, on Wednesday, the rate was 6.62 per cent.

The Kenya shilling exchange rate returned mixed performance against major international currencies in the week ending January 4, 2018 weighed down by dollar demand to cover imports. However, against East African currencies, CBK said it remained largely stable.

“It depreciated marginally against the US dollar due to increased demand from the energy sector,” CBK said in its weekly bulletin.

UNDER PRESSURE

However, it might come under pressure in the coming week due to increased demand for dollars by manufacturers, oil and food importers. Having closed the year at Sh103.23 against the dollar, it has depreciated marginally. On Thursday, CBK quoted it at 103.44.

However, the weakening of the shilling was not as profound as in the beginning of last year.

Fears that the shilling might come under pressure following an increase in the price of crude oil in the global markets are not unfounded.

In the third quarter of 2017 Kenyans paid more for food and petroleum imports as earnings from exports fell behind.

According to data from the Kenya National Bureau of Statistics (KNBS), the high import bill worsened the country’s current account deficit - or a situation where the value of the goods and services the country imports exceeded the value of the goods and services it exports.

Current account deficit expanded by 28.9 per cent to Sh145.4 billion between July and September, 2017, compared to Sh112.8  billion in the same period the previous year.

Nonetheless, the country’s gross foreign reserves are still impressive at $7.081 billion translating to import cover of 4.74 months. This is an improvement by $18 million from the previous week that closed the year.

However, rising global oil prices and oil import being one of the key determinants of the size of import bill, may be a potential threat.  Brent crude oil has topped $68 (Sh7,008) a barrel for the first time since 2015. Locally oil prices have been rising to reflect this upward trend in global crude prices.

Moreover, businesses moved into the New Year with a bullish sentiment. Stanbic Bank’s purchasing managers index (PMI), a widely accepted barometer for the health of private sector, crossed the 50 threshold in December 2017 signaling expansion, after eight month of contraction- or readings below 50.0.

“Growth was underpinned by expansions in output, new orders, stocks of purchases and employment, thereby reversing the recent downward trend,” read the survey which relies on data compiled from monthly replies to questionnaires sent to purchasing executives in approximately 400 private sector companies.

In October, after the Supreme Court had annulled President Uhuru Kenyatta’s win in the August presidential elections, the index plunged to an all-time low of 34.4 as the political situation in the country deteriorated.

But in what is a signal of good things to come, the index has since been on an upward trajectory following a marked increase in new orders for the first time in five months.

December 2017 also saw the sharpest increase in output since September 2016.

New export orders also rose for the first time in five months amid reports of greater international demand for Kenyan products, said the survey.

GREATER OUTPUT

And with greater output requirements, employers were forced to expand their payroll, albeit not in a big way.

“The Stanbic PMI rose above the 50 level mark for the first time since April as the private sector began to benefit from political stability,” said Stanbic Bank’s regional economist for east Africa, Jibran Qureishi.

He was optimistic that growth would recover in 2018 supported by agriculture and tourism, with resumption in public spending adding ‘much-needed stimulus” into the economy.

“Business conditions improved for the first time in eight months amid reports of greater political stability. Growth was underpinned by expansions in output, new orders, stocks of purchases, and employment, thereby reversing the recent downward trend,” read the survey.

“In response to greater output requirements (and subsequent capacity pressures), firms increased their payroll numbers during December,” said the survey by Stanbic.

But the authors of the survey were quick to note that “the rate of jobs growth was only marginal”.

However, it will be interesting to see whether this confidence will translate into faster economic growth in the fourth quarter of 2017 and hence 2017 too. GDP growth between July and September 2017 was disheartening.

The gross domestic product, the total value of goods and services produced in a given period of time, slowed to a five-year low between July and September last year as electioneering affected the economy.

The economy grew at 4.4 per cent in the third quarter compared to 5.6 per cent registered in a similar period in 2016. The last time the growth slowed down to such levels was in the third quarter of 2012, when the country recorded a 4.4 per cent growth.

Although interest rate has been fixed at 14 per cent since September 2016 when Banking (Amendment) Act 2016 capped the rate charged on loans by lenders, uptake of credit has not been impressive.

PRIMARY CONCERN

Johnson Nderi, corporate finance manager at ABC Capital, says that as much as most business persons are upbeat, working capital is not readily available to most of them.

“From a macro-economic perspective, that is a primary concern,” said Nderi.

Mr Nderi is keen on seeing how President Kenyatta’s Big Four plan will be implemented. Under the Big four plan, the President intends to concentrate on ensuring food security for the country, revamping manufacturing and thus creating more jobs, ensuring universal access to healthcare and development of low-cost houses for the poor.

Mr Nderi said most CEOS will be watching to see how the Government will implement these ambitious programmes. However, he said that he was skeptical as there are no concrete plans to ensure that these plans are executed. Manufacturing, for example, he said, needs a lot of savings. “Unfortunately, I have not seen any policy that pushes savings,” he said.

He was, however, optimistic that the threat of politics was somehow behind us.

Year-on-year inflation also dropped to a 55-month low of 4.4 per cent in December, 2017 from a five-year high of 11.7 in May as prices of food came down.

A stable inflationary rate means investors can plan for the future without fearing for erosion of their wealth by a rising cost of prices.