- Kenya’s input prices and output charges rise at much softer rates.
- New orders decrease slightly, survey shows.
- Declines in output and employment ease.
Kenya’s private sector business conditions showed a strong move towards stability in December 2023, as revealed by the latest Purchasing Managers’ Index findings, even though businesses remained less optimistic about the future into 2024.
According to the Stanbic Bank Kenya PMI compiled by S&P Global, rises in input costs and output prices were the softest since April of the previous year, having slowed markedly from record highs in October.
Kenya’s private sector experiences uptick in client spending
Consequently, many companies experienced a recovery in new work amid improved client spending, offsetting the impact of cost-of-living pressures. As a result, new orders, output, and employment all declined to lesser degrees.
The headline figure derived from the survey is the PMI. Readings above 50.0 signal an improvement in business conditions compared to the previous month, while readings below 50.0 indicate a deterioration.
The headline PMI moved three points higher in December, up to 48.8 from 45.8 in November, signaling a modest and softer decline in operating conditions across Kenya.
Kenya’s private sector conditions have now deteriorated for four consecutive months, although the latest decline was the weakest in this sequence.
Output levels at Kenya’s private sector fell to a lesser extent at the end of the year, as firms highlighted a partial rebound in demand conditions. Similarly, new order inflows dropped at the softest pace in four months and only slightly.
According to anecdotal evidence, customer turnout and purchasing power improved amid a softening in inflationary pressures, especially across the services sector. Private sector firms were also supported by the sharpest increase in new export business in exactly two years.
On the flip side, contractions in output and new orders remained sharp in the manufacturing and construction sectors, as Kenya’s private sector firms continued to signal cost-of-living pressures and weak demand conditions.
“The Purchasing Managers Index improved in December, despite still difficult business conditions for the private sector. Service sector companies reported an uplift in activity while declines persisted particularly in manufacturing and construction sectors, as firms continued to signal cost-of-living pressures and weak demand conditions,” said Christopher Legilisho, Economist at Standard Bank.
Read also: Inflation and energy costs curtail Kenya’s private sector growth
Cooling inflationary pressures
December survey data also highlighted a marked slowdown in input cost inflation across the private sector. After reaching a survey-record peak in October, the rate of inflation slowed for the second month in a row and by the greatest degree ever noted.
While firms indicated that currency weakness and tax burdens continued to lift overall input costs, the settling of fuel prices somewhat alleviated the rise.
In a similar fashion, average output charges rose to a much softer degree in December, albeit remaining sharp and faster than the long-run average.
Sector data showed a cooling of inflationary pressures in all segments except agriculture, with manufacturers even reducing factory gate prices.
With cost pressures easing and the downturn in sales softening, purchasing activity at Kenyan firms was broadly stable in December, helping businesses to raise their inventories and deplete backlogs of work.
Lead times on purchased items shortened for the third month in a row. The drop in employment levels was also tempered at the end of the year, with the latest data indicating the softest fall since September.
Agriculture was the only sector to see a rise in staffing. Nonetheless, Kenyan businesses were less optimistic about future activity in December, with the degree of confidence slipping to a seven-month low.
Expectations were also among the lowest seen on record, with just 11 percent of panellists predicting growth over 2024. That said, inflationary pressures are noted to have eased, amid better cash flow prospects for clients.
The rate of job declines also softened compared to previous months, with the agricultural sector seeing an increase in hiring, according to the PMI, which is compiled from responses to questionnaires sent to purchasing managers in a panel of around 400 private sector companies.
The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. The sectors covered by the survey include agriculture, mining, manufacturing, construction, wholesale, retail, and services.
Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month.
“Furthermore, Kenyan businesses reported elevated inventories, with a slowdown in price increases in December. Firms indicated that input costs and purchase cost pressures were primarily due to higher taxes, among other factors,” Legilisho said.
There was notable reprieve from fuel and transport costs that moderated during the month, as fuel prices dropped. However, business expectations for the year ahead remain quite weak based on the survey results from respondents, Legilisho noted.
Read also: World Bank tips Kenya on how to drive inclusive growth and tackle poverty
Cost of doing business in Kenya
In December, the Federation of Kenya Employers (FKE) cautioned that the cost of doing business had become unsustainable since the enactment and implementation of the Finance Act 2023.
The employers’ view is that the changes have negatively impacted cash flows and enterprises’ financial positions in various ways.
These impacts include a direct effect on the payroll, a downturn in demand for general wages, an increased risk of business closure, and a rise in employee layoffs.
As a result, approximately 70,000 jobs in the formal private sector were lost between October 2022 and November 2023, according to FKE.
“The weakening of the shilling has aggravated the situation further and has adversely affected businesses that rely on imports, including the import of machinery and equipment necessary for our manufacturing industries,” said FKE national president Habil Olaka.
This has been largely attributed to capital flight and a reduced inflow of foreign currency due to the low value of exports.
Read also: Depreciating shilling worsens Kenya’s debt and economic struggles
Loss in value of the Kenyan shilling
The Kenyan Shilling depreciated against all major international trading currencies in the third quarter of 2023 compared to the corresponding quarter in 2022.
According to the latest data from the Kenya National Bureau of Statistics (KNBS), the Kenyan Shilling lost ground against the Euro, Pound Sterling, US Dollar, and Japanese Yen by 30.3 per cent, 29.7 per cent, 20.6 per cent, and 15.3 per cent, respectively.
“The local currency also notably depreciated against the South African Rand, Tanzanian Shilling, and Ugandan Shilling,” KNBS said in the latest GDP report.
The employment state remains fragile, according to FKE. “We have not yet gotten back on track since Covid-19. Every day we receive notifications from employers about their intent to declare redundancy,” Olaka explains.
About 40 per cent of employers have reported that they plan to reduce the number of employees to meet the increasing operating costs in Kenya.
The country’s capital cost remains high, making it difficult for the private sector to operate, FKE said.
The cost of capital is affected by various factors such as interest rates, inflation, market conditions, and government policies.
Read also: Kenya’s economy strengthened in 2023, forecast to grow by 5.2% this year — World Bank
