CfC study shows private sector to cut production as rates increase

What you need to know:

The Kenyan private sector output in October had a PMI of 51.7, a slight decline compared to 51.9 of September. An index lower than 50 would indicate a contracting economy.
The PMI, a valued economic indicator in developed countries, captures the direction of the economy by getting information from executives of private companies on what is happening in their businesses such as to employment, output levels and new orders booked.
The poor sentiment is attributed to a weak shilling and rise in financing costs.

The Kenyan economy is expected to slow down further in the coming months as private businesses cut back on production as rates rise, a survey by CfC Stanbic shows.

The Kenyan private sector output in October had a PMI of 51.7, a slight decline compared to 51.9 of September. An index lower than 50 would indicate a contracting economy.

The PMI, a valued economic indicator in developed countries, captures the direction of the economy by getting information from executives of private companies on what is happening in their businesses such as to employment, output levels and new orders booked.

“Rates of expansion in output and employment were only marginal, leading to the weakest overall improvement in operating conditions in the survey’s 22-month history,” said Jibran Qureishi, an economist at CfC Stanbic Bank.

The poor sentiment is attributed to a weak shilling and rise in financing costs.

Profit warnings

CfC findings echo those of Standard Chartered survey which revealed negative future outlook by businesses.

“Current conditions declined by 1.6 per cent compared to September and future expectations fell even more – by 4.7 per cent,” reads the Business Sentiment Indicator report released by StanChart.

Kenya Revenue Authority has also disclosed companies were remitting lower tax installments on expectations of drop in earnings.

The taxman said the payroll of large corporates had expanded by a dismal 3.4 per cent in the three months to September underscoring the negative outlook. Some of the listed companies have issued profit warnings indicating they expect their earnings to fall by more than 25 per cent.

The predictive producer price index released by Kenya National Bureau of Statistics showed input prices went up by six per cent with the increase expected to flow into the economy in coming months.

Treasury secretary Henry Rotich, however, remains optimistic saying companies were only being cautious when making their instalment payments. He argued that the current conditions were only temporary pointing at the recent drop in interest rates.