StanChart upbeat on Kenya’s growth, predicts fall in rates

Standard Chartered has painted a rosier picture for the Kenyan economy in 2016 compared to last year, predicting lower inflation and lending rates as the shilling stabilises.

Standard Chartered chief economist for Africa research Razia Khan said Wednesday that the country’s gross domestic product (GDP) growth for the year is likely to come in at 5.8 per cent, before rising to six per cent in 2017.

The performance of the economy is likely to pick up in the second half of the year, according to Ms Khan.

The lower interest rates are expected to be realised towards the end of the year, taking into account that inflation decline will be gradual after having crossed the CBK upper preferred limit of 7.5 per cent in December.

“Growth forecasts in 2015 were too optimistic to begin with, maybe overstating the importance of infrastructure spending in driving overall GDP growth. However, we are still relatively optimistic and looking at the continuation of the growth uptrend in Kenya which we think we will be within reach of six per cent from 2016,” said Ms Khan.

“CBK policy has already been tightened and that is still having an effect overall.

“We still expect to see some bit of fiscal consolidation being announced in the supplementary budget, thus inflation should be relatively benign. This should see interest rates starting to come down, though not immediately.”

Global economic growth was less than expected in 2015, when falling commodity prices, weak international trade and capital flows, and episodes of financial volatility sapped economic activity.

On the exchange rate, Ms Khan said the forecast is for a modest rate of depreciation, which should alongside the benign inflation should support the case for a rate cut by Central Bank later in the year.

READ: Kenya's economic growth will be above regional average, World Bank says

The StanChart projection of 5.8 per cent growth comes in slightly lower than that of the International Monetary Fund and The Treasury, which both see the growth this year touching six per cent.

“Real GDP growth is projected to accelerate to about six per cent in 2016 on account of continuation of strong investment momentum, effect of good rain on agriculture and a pick-up in tourism following removal of travel advisories from major tourism source markets,” said the International Monetary Fund last month.

Treasury secretary Henry Rotich has struck an optimistic tone on the economy as well saying that 2016 growth should be at least over six per cent, also on account of the favourable weather, tourism, and investments.

Fund manager PineBridge Investments has, however, projected a lower growth rate than Standard Chartered at 5.7 per cent.

Ms Khan, however, flagged some risks to the economy this year, saying that rising debt levels mean that the country cannot afford a slowdown in growth.

The twin fiscal and current account deficits have also been a worry for investors in Kenya since export earnings have not shown appreciable growth to match the expansion of the import bill.

The widening current account deficit was one of the key contributors to the shilling’s volatility last year.

Foreign exchange earnings have risen much slower than external debt, meaning that servicing the debt might exert a strain on the economy down the road in terms of exchange rate stability.

This, Ms Khan said, should spur policy makers to take action to raise the country’s export growth which is lagging behind regional peers.