Fifteen Nairobi Securities Exchange (NSE) #ticker:NSE listed firms are facing a Sh13.8 billion plunge in profits in nine months since June last year, as a tough economic environment and corporate governance malpractices eat into companies’ earnings.
The 15 publicly traded firms have issued profit warnings in the period with three of the alerts coming last week, indicating that their earnings will fall by at least 25 percent over the previous financial year.
The diminished earnings signal gloomy prospects for millions of youthful jobseekers as the affected companies slow down on new investments, hurting employment creation.
The profit dip also dampens growth in payroll and corporation tax collections by the Kenya Revenue Authority (KRA).
The majority State-owned electricity distributor Kenya Power, Bamburi Cement, Kenya Reinsurance Corporation, Britam, Housing Finance, National Bank and UAP Holdings are some of the big publicly-traded firms that have either reported or warned investors to brace for at least 25 percent fall in full-year earnings.
Other Nairobi Securities Exchange-listed firms whose earnings are projected to drop sharply include State-controlled East African Portland Cement Company, industrial gas producer Carbacid Investments, Unga Group, Uchumi Supermarkets and Crown Paints.
Firms such as insurer Sanlam, battery distributor Eveready and tyre vendor Sameer Africa have sunk into full-year losses, while others such as ARM Cement, Nakumatt and Deacons are staring at possible liquidation having fallen into administration. The Federation of Kenya Employers (FKE) attributes the struggle by the erstwhile stellar performers to a slowdown in payments to government contractors, the weight of increased levies by national and county governments, high labour costs and erratic weather conditions which have stifled growth in corporate revenue.
“The business environment is not conducive to sectors that are rich in job-creation like agriculture, manufacturing and services (retail and wholesale sectors). The country continues to experience depressed job growth in the formal sector,” said FKE executive director Jacqueline Mugo. “The middle class in Kenya are getting trapped in poverty and, therefore, have no disposable income to support supermarkets, for example, which has led to the closure of many retail stores.” Former supermarket giants Nakumatt, Uchumi and Ukwala are all facing the prospect of shutting down having fallen into financial difficulties.
The Treasury is already feeling the pinch of the slowdown in corporate earnings through missed tax collection targets.
Payroll taxes, for example, missed the target for six months through December 2018 by Sh8.59 billion despite increasing to Sh180.37 billion from Sh158.17 billion, a sign of sluggish growth in creation of new job opportunities.
Tax receipts from other income tax streams, largely corporation tax, suffered the biggest shortfall of Sh31.11 billion after slowing down to Sh145.18 billion from Sh161.50 billion in the July-December 2017 period.
“The (Sh52.7 billion total revenue) shortfall was in all broad categories of ordinary revenues with income tax recording the highest shortfall on account of depressed performance in corporation tax,” Treasury Secretary Henry Rotich says in the 2019 Budget Policy Statement which lays out the spending plan for the year starting July.
“This shortfall is expected to close in the second half of the financial year (January-June 2019) as the yields from the full impact of the revenue policy measures take effect and as the roll out of the Revenue Enhancement Initiatives (REI) being put in place by the Kenya Revenue Authority (KRA) is finalised.”
Private sector activity as measured by Stanbic Bank Kenya’s monthly Purchasing Managers Index (PMI) slowed in the first two months of 2019 hitting 51.3 in February.
This was the lowest level since 42.9 in November 2017 when the economy was in a gridlock due to a bruising presidential poll contest. PMI readings from survey above 50 signal an improvement in business conditions on the previous month, while those below 50 show deterioration.
Jibran Qureishi, the lead regional economist for Stanbic Bank, said businesses continue to suffer as a result of accumulated bills owed to them by the national and county governments amid reduced access to bank loans as a result of the September 2016 interest rate caps.
“The reasons there are shackles on private sector and subsequently job creation is on one hand, we have the government not paying contractors and suppliers and, on the other hand, there’s limited access to credit as a result of the rate cap,” Mr Qureishi said on phone.
“We need to get the shackles off by addressing delayed payments to the private sector which is really constraining their cash flow and address the rate cap.”
The 47 counties alone had by end of last financial year in June 2018 accumulated Sh108.41 billion claims from contractors and suppliers, a steep climb from Sh35.84 billion the year before, statistics by the Controller of the Budget show. The developments in the private sector is a pointer that businesses may have reaped little from the March 9, 2018 truce between President Uhuru Kenyatta and opposition chief Raila Odinga, popularly known as the “Hand Shake”.
“We had significant issues that affected business because of the prolonged election process. We are gradually getting out of it, but we are not fully out of it,” KRA commissioner-general John Njiraini said on January 16.
“Even this year we still have businesses complaining and expressing concerns regarding the pick-up of economic activity and sluggish demand which is affecting the bottom-line in terms of profitability.”