Key economic sectors pay heavy price for high cost of borrowing

As interest rates soar to record levels and inflation continues unabated, economic growth is threatening to stall as major sectors that have been propelling growth begin to stumble. Further increases in interest rates are likely to spell catastrophic results for these pillars of the economy, say analysts.

CONSTRUCTION AND REAL ESTATE

The country has since the beginning of the decade enjoyed a vibrant property market hinged on increased purchasing power from a growing middle class and a growing economy. Banks and home loan lenders, alive to the huge potential for sustained growth in this sector, had announced substantial interest rate cuts, cutting mortgage rates by between 1.5 and 4.5 per cent in 2010.
The appetite for these loans was reported by the Central Bank as having outpaced the growth in demand for credit to businesses and households in the year to June 2010, emerging as a new driver to the banking sector’s profitability.

A year later and the tables having turned. Prevailing interest rates have now shot up to 26 to 30 per cent with even mortgage loan providers having revised their rates to around 19 per cent. Aware of a possibility of increased number of loan defaulters, banks have also tightened their lending criteria to discourage further borrowing.

However, as mortgage-financed buying stalls and some homeowners lose their homes on defaults, the bigger impact is being felt by developers. Developers face increased costs for construction materials, but are also now proving unable to refinance projects they have begun. Banks are likewise no longer lending to developers for new projects, on the basis that returns are unlikely to cover the prevailing interest rates and the property sales outlook is weak.

The Nairobi City Council (NCC) has already recorded a dip in the number of approved building plans this year, down by 9.7 per cent on last year as a result of developers postponing projects. Developers who are already building are meanwhile factoring in their own higher costs of debt servicing into increased property prices, which the market seems unlikely to support.

This outpricing of high and middle-end homes, and the greater cost and scant finance for self-building, is putting more pressure back into the middle and lower end rental market, and might see some rent rises at that end of the market.

Combined with curbs on other infrastructure spending, this impending standstill in real estate is set to have a huge impact on employment. The construction industry currently employs about one million people with an estimated annual wage bill of Sh3.2bn.

Already, the Kenya National Bureau of Statistics has reported a sharp decline in the quantity of cement sold, a key indicator in the construction sector, with sales down by 7.4 per cent between August and September. A slowdown in the construction industry, say analysts, could have a ripple effect throughout the economy, affecting other sectors related to the industry like transport.

TOURISM

Even as the Ministry of Tourism embarks on an aggressive marketing campaign abroad to paint a picture of Kenya as the best tourism destination, the moves to curb domestic economic growth are knocking the sector back.

Tourism Minister Najib Balala noted in June 2011 that arrivals to Kenya rose to 549,083, up 13.6 per cent from the same period last year and the highest in years, with the sector bringing to the economy Sh40.5bn shillings in revenue, up 32 per cent from Sh30.7bn in the same period last year.

However there are strong indications that the hope of record tourist numbers will not now be achieved in the second half.
The global recession had seen a huge dip in international arrivals with UK and US tourists shying away as they covered other spending priorities. Some were being drawn back by the weakening of the shilling. However, the renewed strengthening of the shilling coupled with the ongoing travel advisory due to the recent attack on tourists in the rather serene Lamu Archipelago has dwindled profit margins for the sector.

At the same time, “there is worry that domestic tourism might be affected by increased inflation,” said Tourism Minister Najib Balala at a recent press conference. The minister has said there are now plans to showcase “pocket friendly” destinations where Kenyans can tour.

But the impact is already being felt. Tourism employs over 500,000 Kenyans in the formal sector and an additional 700,000 in the informal sector. The government will also lose millions through taxes, duties, license fees and park entry fees charged to tourists.

“We have already prepared our staff in case of further eventuality. It’s the first time we have delayed their salaries for two months as we try to cover the other costs. Things have gone up, but we are not seeing an influx of tourists like we usually do. At peak time we are fully booked usually, but the booking is dismal. Any higher and we can’t hang on any more,” said Flavio Mwendwa a proprietor at the Beezako Group of hotels in Mombasa that employs some 500 workers.

Tourism is closely connected to other major sectors of the economy. Its high multiplier effect stimulates growth in other economic sectors such as agriculture, manufacturing, transport and handicrafts. A dip in tourism equally has a grave effect on these other sectors.

MEDIA

With business costs and finance costs both rising, businesses are introducing austerity measures with a straight line impact on the previously outperforming media industry. Media businesses are driven by advertising revenue. But companies that were spending sizeable budgets on marketing and advertising are now scaling back that spending to cover other immediate business needs.

“Some of the companies who have been advertising with us have already come to us telling us that though they still need to advertise with us, the advertising budget has been scaled down significantly as the interest rate takes its toll on them. We have anticipated a situation where we might lose a lot of advertising revenue and this has meant us going back to the drawing board and introducing our own cost cutting measures,” said an HR and marketing manager at a leading media house.

Media industry analysts say further rate rises, through their secondary impact on media revenues, will lead to media houses rolling out deep cost savings, reduced volumes, and staff layoffs, as well as reduced budgets for costly content production.

–African Laughter