By Kosta Kioleoglou
Kenya’s economy has been following an uptrend course, which has created high expectations for the population as well as local and international investors. Amid this positive atmosphere, Kenya has had to face several challenges especially during the last 18 months, which in several cases created serious turbulences, increasing the volatility of the markets.
Despite all these factors the economy is resisting and manages to maintain a positive feeling about the future. In the first half of 2016, the country’s economy has seen a similar growth pattern as experienced in 2015. Q1 of 2016 had a 5.9% growth rate in comparison to the 5.0% GDP rate in 2015 of the same review period according to the Kenya National Bureau of Statistics, the World Bank and Central Bank of Kenya (CBK). This growth was mainly supported by better performances in the activities of: agriculture; forestry and fishing; transportation and storage; real estate; financial services; and wholesale and retail trade.
According to available reports, the economy is expected to expand further during 2016 with the GDP levels remaining at 5.9%, an actual increase from 2015’s GDP of 5.6%. This is a very promising prediction showing that several sectors of the economy keep growing despite the problems that are putting pressure to several economic factors. Positive growth is expected in agriculture, infrastructure projects and construction, tourism and finance amongst others.
The Monetary Policy Committee (MPC) has implemented several changes within the 1st half of 2016. The Government’s target range of inflation was achieved when rates dropped to 5.3% in April due to the fall in prices of food items and fuel. The National Government budget deficit is expected to narrow in the financial year 2015/2016 which will ease pressure on interest rates. The Central Bank of Kenya maintained the Kenya Bank’s Reference Rate at 9.87% all through the 1st half of 2016 while the Central Bank Rate reduced from 11.5% by 100 basis points to 10.5% within the 2nd quarter of 2016 and down to 10.00% on September 20 2016.
By cutting the rate, the CBK hopes to support lending to the private sector, and thus to counter the expected negative impact of the government’s decision to limit commercial banks’ interest rates at 4 percentage points above the CBK’s benchmark rate. The interest rate cap became effective in mid-September and in the CBK’s view, it risks denting private sector credit and economic activity as it limits banks’ capacity to adequately charge for risk.
The CBK expressed its worries about this development. It remains concerned about the persistent slowdown in private sector credit growth. It pledged to continue putting in place measures to sustainably reduce the cost of credit and improve liquidity management. The rate cut surprised market analysts, who had expected the Central Bank to lower the rate at a later stage but the bank decided to act now because of several factors.
Commercial banks’ lending rates started decreasing within the 1st quarter of 2016 from 19.96% in January to 17.79% in March, however the 2nd quarter of 2016 saw a marginal increase up to 18.53% in June.
Thanks to the policy followed so far from the new leadership of the Central Bank of Kenya, the shilling has managed to remain stable to an average of 101 KES (+/- 1) to the USD, which could be considered as a temporary support level against the USD. During the period of the ‘BREXIT’ referendum in UK the Sterling Pound had a significant drop against the Kenyan Shilling. That was an unexpected incident, positive for the Kenyan economy but mainly attributed to the United Kingdom’s exit from the European Union.
During the first six months of 2016 inflation fluctuated between 7.78% and 5.8%, while September inflation stood at 6.2% according to the KBNS .The Central Bank’s target rate for 2016 was 5% (+/-2%) and so far inflation remains inside these boundaries.
During the first half of 2016 the NSE did not manage to resist and retain its value of 3888 points and continued a free falling course, down to 3117 on August 2016 when it reached the lowest value of the year. The Nairobi Stock Exchange has not been performing well and during the period of July 2015 to August 2016, the index presented losses of over 40% creating worries in the market about the real value of the companies listed and the future of the moneys invested.
The Kenyan currency which has been broadly stable during this period, supported by narrowing of the still wide current account deficit on the back of increased earnings from tourism, tea and horticulture, as well as a low oil import bill which are giving positive signs to CBK. The Bank sees that rising foreign reserves and the IMF’s precautionary arrangement together provide an appropriate cushion for potential external shocks. The Bank also noted there were signs of a stabilization in the banking sector which was under pressure during the same period with CBK extending the receivership period of Imperial Bank for another six months while it has taken under extensive monitoring all the other banks in the country trying to stop a domino effect of banks going down which would destroy the economy.
This evolvement can be critical for the next months and should have positive effects to the markets. On the other hand, Massive decline in international crude oil prices has cut Kenya’s monthly oil import bill by about 40% for the last almost 18 months despite the shilling weakening against the US dollar during the same period, making imports expensive.
Petroleum products are Kenya’s second largest import commodities, accounting for 25% of the country’s total imports. Kenya oil consumption stands at 4.5 million tons annually. A possible rebound of the oil prices could shake the Kenyan economy as the expenditure of the country could grow very fast. Crude oil currently is selling just over USD50 per barrel and analysts expect the price to further increase based on the recent OPEC’s promise to cut crude production.
The next couple of months will show what we should be expecting on the oil price and its effects to the Kenyan economy.
The Real Estate market and construction are some of the key sectors of the economy, remaining at the center of interest of all Kenyans. Representing almost 10% of the GDP, the property and construction market has been considered as the main reason for the country’s growth. A lot of people have invested their lifetime savings in this sector of the economy, hoping to achieve good returns and believing that it is one of the safest options available for investment. At the same time infrastructure and construction attracts the foreign interest with the Chinese playing a key role.
The construction industry expansion experienced a slight reduction of 9.9% in Q1 2016 compared to 12.6% in Q2 2016. Consumption of cement increased from 3.0 million MT in the 2nd half of 2015 to 3.1 million MT in the 1st half of 2016. Production of cement also experienced an increase from 2.9 million MT in the 2nd half of 2015 to 3.0 million MT in the 1st half of 2016. But while it seems that construction keeps going on with a great pace, the property market performance seems stagnant and in some cases even falling down.
The real estate sector remains challenged by the market dynamics and as per the House price index of the Kenya Bankers Association published a few weeks ago for Quarter 2 2016 was marked by a very small increase of 1,74%. The Index (KBA-HPI) during the second quarter of 2016 represents a continuous but modest increase on house prices in the country. The price rise can be characterized as modest at best, portraying a sense of broad market stability. This is confirmed by the evolution of the KBA-HPI, which as at the end of the second quarter of 2016 had risen by about 11% since the index’s base period of the first quarter of 2013. The demand and supply market dynamics have not been subject to significant changes over the period.
In general, increasing supply especially at the high end areas but not only there, is leaving a lot of space for negotiations as vacancies increase together with the options of buyers or those who are looking to rent. While supply in the prime residential market has been growing gradually, local high net worth individuals looking to buy are only settling for best-in-class properties, with currently more options to choose from. The stability in luxury residential prices also reflects the relatively steady macroeconomic conditions, without major impacts from external shocks. Transactions are still happening in low volumes, as is the nature of this niche market. In contrast, prime residential rental prices in Nairobi decreased by circa 8% between December 2015 and June 2016 compared to a nil percentage decline over the same period last year.
According to available reports, this trend is expected to continue into the 2nd half of 2016 as corporate budgets for housing costs remain under pressure, and there is not yet enough part of the population that can afford this type of accommodation.
With demand for upmarket property slowing down, partly due to downsizing of operations by firms which were angling for a piece of the nascent oil industry, developers are moving into middle-income areas where the returns have been relatively stable.
One of the biggest challenges of the property market is the almost non-existing mortgage market. The recently released CBK statistics show the number of mortgages increased in 2015 by circa 11.1% as a result of the relatively favorable interest rates. The average mortgage size also increased by 11% to Sh8.3 million in 2015, from KSh7.5 million in 2014. Still the total number of mortgages in Kenya remains extremely low and does not support yet the sustainability of the real estate market. The main impediments to the mortgage market include high property costs and high interest rates.
Agriculture on the other hand, is the sector that seems to gain the preference of Kenyans as well as foreign investors. During 2016 1st quarter, the sector was representing KES 277406 Million reaching an all-time high. GDP from Agriculture in Kenya averaged KES 200961.20 Million from 2009 to 2016, creating hopes for further expansion to the country’s traditional base of the economy.
Being just a few months before the end of 2016 everybody is focusing more and more on the upcoming elections due in less than 10 months. During this period, now until the elections, a lot of instability and volatility, which will create uncertainty to the markets, is expected. This is going to play a key role on the country’s economic evolution over the next few months, which is going to be very interesting as several local as well as international affairs are expected to affect the markets.
For now, I believe this is a good time to sit back and analyze our position, have a good look into our portfolios and think twice before we rush into any decision to buy or sell. This is a good period for consideration and remaining vigilant. This is the time to take a moment and reconsider your options and prepare your strategy for the next 15 months until the end of 2017.At the end of the day as Benjamin Franklin said “By failing to prepare, you are preparing to fail”
