By Metropol Corporation
Approach to forecasting
We approach GDP forecasting from the gross fixed capital formation side. Capital formation is the investment in fixed assets of the country taken as a collective. For growth to happen there must be additional capacity created through accumulation of capital. This additional capacity is funded through savings and borrowings.
Our overall view
A significant change in the interest rate regime has necessitated this update. Growth is on track to achieve Metropol’s 2016 forecast range of 5.5 – 6% released in February 2016. However, this update finds that the upper limit of 6% is most likely owing to the spike in lending arising from the interest rate cap.
The Banking Amendment Act 2016, signed into law in September 2016 introduced interest rate caps at 4% over Central Bank Rate (CBR) for lending, and 70% of CBR for deposit rates.
Interest Rate Cap Consequences
Seven Tier 1 banks have excess liquidity of approximately Sh400 billion [about 15% of consolidated bank credit of 2.8 trillion], and can be expected to search for increased lending opportunities. In 2016/7, Sh100 billion will end up in government securities, while lending to private sector could increase by Sh50 billion on the back of increased mobile advances. This will rise to Sh80 billion during the 1st half of 2017/8, and Sh120 billion in the second half.
Higher FDI inflows
FDI inflows have been growing strongly since 2010. This is driven by the hub characteristics of Nairobi, operations of a fully liberalized economy, good weather, a positive investment climate and developments in the oil and gas sector. Evidence of these higher flows is to be found in the locating of Africa headquarters by many major multinationals in Nairobi, the entry into the market of North American food chains, increased presence of private equity and venture capital in Nairobi, and robust activity in the oil and gas, real estate and ICT sectors. The Overseas Private Investment Corporation (OPIC) of USA has recently opened its 3rd African office in Nairobi (after Lagos and Johannesburg).
Q4 2016 Forecast
Interest rates: The Banking (Amendment) Act 2016 became operational on September 14 2016. Lending rates are capped at 4% above CBR and deposit rates are at 70% of CBR
Current account deficit: has continued to narrow through 2016. This is largely on the continued low oil prices, and increased positive balance of trade in EAC and COMESA. This is expected to continue over 2017.
Inflation: will decline over the rest of 2016 and 2017, largely the result of a narrowing in the current account deficit.
Nominal growth: we estimate will be around 6% in 2016 driven by; the spike in lending arising from the interest rate cap, the implementation of the SGR, 2,000km road program, last mile connectivity project (1 million connections), and improved County and national government budget utilization levels.
2016/7: Expectations:
Trends on interest rates, current account position, and inflation will continue;
Nominal growth: 5.5 – 6%
2017/8: Expectations:
Nominal growth: 6-6.5%
[driven by last mile connections, expected to reach 100% by 2020, generation power projects, 2000kms roads, SGR phase 1b, crude oil pipeline, early oil and ICT]
2018/9: Expectations:
Nominal growth: 8-10%
[driven by last mile connections, expected to reach 100% by 2020, generation power projects, 10,000kms roads, SGR phase 1b, crude oil pipeline, early oil, Galana/Kalalu food security, 10 irrigation water dams and ICT]
Detailed Analysis
Governance
- With the devolved government system settling down, both levels of government are expected to absorb more of their budget allocation. This will have positive effects on the general level of economic activity in 2016 and beyond.
- Total reported crime increased by 4.4% in 2015 to 72,490 compared to 69,376 in 2014. However, the general challenge of national security from terrorism overshadowed this small increase in overall crime rates. The general security has improved considerably. Following the removal of travel advisories early in the year by Britain and USA, a strong recovery of tourism has been recorded.
- The reforms in the Judiciary are bearing results. In 2015 judicial officers increased by 43 corresponding to 6.9%. The growth of pending cases in 2016 significantly slowed to 13.6% compared to 30.3% in 2014. This contributed to a perception of improved in the investment climate.
Food Security
- The implementation of the 1.75 million acres Galana/Kulalu Ranch irrigation programme, which is costed at Shs 250 billion has been rejigged on realization of the water reservoir at high grand falls dam.
- Not much is expected this year 2016. The main reason being absence of high grand falls dam at Marimanti, Tharaka Nithi County. Now the project will go through an intermediate stage of 400,000 acres using flood control dam 1. This dam is now under design and will be ready in late 2018. The model farm and other infrastructure investment activities are on-going.
- The programme is intended to reduce food volatility connected with rain fed farming, particularly the supply of maize. The programme will create 1.5-2 million jobs and make the country a net exporter of maize at a production level of 25-30 million bags based on 2 harvests per year on 500,000 acres.
Energy
- The energy projects have gained sustained traction. Last mile connectivity project financed through AfDB and World Bank at Shs 60 billion expects to complete 2 million connections by 2017, to achieve 70% connectivity. The President announced, September 9 th, a new target of 100% connectivity by 2020
- Energy, particularly electric power is and has been a major constraint to development in terms of unit costs and availability. This is attributable to historical underinvestment and low plant efficiency (56%) of installed capacity. However, the declared aim of government is to increase installed capacity by 5,000MW over 2014-2017 period.
- There was 2,000 MW installed capacity in 2015. During the year, 280MW of Olkaria I & IV geothermal came on stream. Another 280MW from Olkaria 5 & 6 are under implementation. The 105MW Menengai geothermal is also under construction. The 310mw Lake Turkana wind power is under active implementation. However, the feed-in of their first 100MW is tied to Ethiopia – Kenya high voltage transmission line which is delayed owing to land disputes. Other active wind power projects are Kipeto in Kajiado (80mw), and KenGen’s 400MW in Meru. The implementation of Garissa 50MW solar plant is expected to start end of October 2016.
Oil and Gas
The current drop in global prices is not expected to impact on the oil and gas activity for the reason that the commercial production is at least three years away, by which time a new global equilibrium (currently estimated at US$80 per barrel) will have been established.
Actual construction of the pipeline (Turkana-Lamu only) is expected in the 1st half of 2017. At an estimated cost of shs 200 billion, the pipeline (and related components) is the key to the $25 billion LAPPSET project.
Short term interest rates
- Since September 14th, 2016, interest rates have been capped at 4 percent points above Central Bank Rate. Deposits will earn interest at 70% of CBR. Owing to high liquidity level of tier 1 banks (7) who control 60% of total lending, the control of the spread is expected to lead to increased competition for customers leading to more lending over 2016-2017.
- As stated earlier, the interest rate regime is now controlled with positive consequences expected over 2016-17. Legislation aimed at introducing retail purchases of government securities faltered, but the implementation of these purchases expected by December 2016 will put further downward pressure on rates.
- Banks have also adopted more efficient systems such as mobile money, and agency banking. Credit bureau referencing is maturing with the sharing of both positive and negative data. All which should contribute to lower charges.
- Lower rates will lead to increased flow of credit to productive sectors (rather than Government) with consequent increase in private sector output and job creation.
Current Account Deficit
- Our expectations are that the current trade gap will narrow over 2016-2017 owing to the continuing low oil prices.
- In addition, COMESA, which account for 20% of exports is expected to support increased exports due to strong growth (over 6%) prospects of the East and Southern Africa region. New exports from the mining sector (titanium, niobium and coal) will also contribute to narrowing this deficit. Tourism has rebounded strongly in the 1st half of 2016, contributing to increased export earnings. This recovery is expected to continue over 2017.
- Further, in the medium term exchange rates should be stable from higher foreign direct investment attracted by oil and gas prospects.
Metropol Corporation is licensed by the Central Bank of Kenya as a credit reference bureau and by the Capital Markets Authority as a credit rating agency
