NAIROBI, KENYA, JULY 4 ― Kenya’s economy is projected to maintain a positive growth in the second half of the year maintaining an average growth of 5.5 per cent in 2018, investment firm Cytonn has projected.
This will be buoyed by improved weather conditions and a conducive operating environment, which will support the country’s macroeconomic environment.
Cytonn’s projection falls within the average prediction of 15 research houses, global agencies, and government organizations which place growth at between 4.2 per cent and 6.2 per cent, with an average of 5.5 per cent.
Among them is the Central Bank of Kenya (CBK) which has projected a growth of 6.2 per cent with the National Treasury putting the growth at 5.8 per cent.
Oxford economics has projected a growth of 5.7 per cent while the African Development Bank (AfDB) is optimistic Kenya’s economy will grow at an average 5.6 per cent.
According to the International Monetary Fund(IMF)- Kenya’s 2018 annual Gross Domestic Product growth outlook, the economy is expected to expand by 5.5 per cent.
The World Bank and the Standard Chartered have projected growth of 5.5 per cent and 4.6 per cent respectively.
Cytonn Investment Management Plc had projected a growth of 5.4 in quarter one and 5.5 per cent in the second quarter.
“We had an improvement during half one 2018 on the overall macroeconomic landscape. Of the seven indicators we track, five are positive and two are neutral, with government borrowing being the only indicator whose outlook has changed, to positive from negative. From this, we maintain our positive outlook on the 2018 macroeconomic environment,” said Maurice Oduor, Senior Investment Manager at Cytonn.
The inflation rate increased to 4.3 per cent in June 2018 from 4.1 per cent in May 2018 and the Monetary Policy Committee (MPC) met thrice in half one 2018.
In the March 19, meeting, the MPC decided to lower the Central Bank Rate to 9.5 per cent for the first time since July 2016, noting that there was room for monetary policy easing to further support economic activity as evidenced by inflation, which had eased to 4.5 per cent in February 2018 from 4.8 per cent in January.
The MPC also noted increased private sector optimism as per the MPC private sector market perception survey. It retained the CBR at 9.5 per cent in the May 28, meeting, citing that the impact of the 50-basis points(bps) reduction in March had not yet been fully transmitted to the economy, despite there being room for monetary policy easing to further support economic activity.
Indicators tracked by cytonn include borrowing where Government borrowing has moved from negative at the beginning of the year to “positive”.
At the beginning of the year, the government was behind it domestic borrowing target, having borrowed 75.7 per cent of their pro-rated target at the time, and KRA was unlikely to meet its collection target due to expected suppressed corporate earnings in 2017.
By the end of half year2018, the government had surpassed its domestic borrowing target for the fiscal year 2017/18,” Cytonn notes.
“The 2018/19 budget has given a domestic borrowing target of Ksh271.9 billionn, 8.6 per cent lower than last fiscal year’s target, which might result in reduced pressure on domestic borrowing, with the Kenya Revenue Authority expected to increase their revenues by 17.5 per cent to Ksh1.9 trillion in the fiscal year 2018/19 from the estimated target of Ksh1.7 billion in 2017/18. It is for these reasons that we turn positive from negative,”Cytonn notes.
The investment firm also notes that the Exchange Rate has remained “neutral” and is expected to remain so for the rest of the year.
The currency has remained relatively stable since the beginning of the year, hitting a high of Ksh100.0 in April, supported by increased horticulture export inflows, the increased level of forex reserves following receipt of the Eurobond II proceeds, and the IMF extending the US$ 1.5 billion standby credit and precautionary agreement.
“We have maintained our outlook on Interest Rates at neutral, and expect it to remain so throughout the year. At the beginning of the year, we expected upward pressure on interest rates as the government was behind its borrowing target, but with the interest rate cap still in place, we expected the CBK to keep rates low by rejecting bids deemed expensive in primary bond auctions,” Cytonn management Plc said.
With the domestic borrowing target for the fiscal year 2018/19 8.6 per cent lower than the 2017/18 fiscal year’s target, there may be reduced pressure on domestic borrowing.
However, if the proposal by the National Treasury to repeal the interest rate cap is implemented it can result in upward pressure on interest rates, as banks would resume pricing of loans to the private sector based on their risk profiles.
“However, with the cap still in place, we maintain our expectation of stability in the interest rate environment,” the Investment firm said in a statement on Tuesday.
Inflation remains “positive” for 2018 with the average inflation rate for half 1 2018 coming in at 4.2 per cent compared to 9.8 per cent in H1’2017.
The management at Cytonn has project inflation to average 7.0 per cent in 2018, down from 8.0 per cent in 2017 and within the government target range of 2.5 per cent and 7.5 per cent.
“We are still positive on GDP growth in 2018, with our outlook remaining unchanged from the beginning of the year. We maintain our GDP growth projection for 2018 between 5.3 per cent and 5.6 per cent,” Oduor said.
The average 5.5 per cent growth by analysts will be higher than the 4.9 per cent recorded in 2017, blamed on last year’s prolonged general elections, drought and credit crunch to the private sector as a result of the interest rate cap law.
“Our outlook on investor sentiment remains positive for the rest of the year given the now settling operating environment following the elections in 2017,” Cytonn said.
It is also expected long-term investors will enter the market seeking to take advantage of the valuations which are still historically low and expectations of a relatively stable shilling.
Security in the country has also remained good. The expected direct flights to and from the USA in October this year are also expected to positively impact the economy.