rowth is set to moderate, with the persistence of drought conditions weighing on the agricultural and electricity supply sectors, which will limit the pace of expansion of private consumption.
Meanwhile, the interest rate cap will likely continue constraining the activity of Medium Sized Enterprises (SMEs), which would mean infrastructure spending should support a robust production overall.
In reference to Consumer Price Indices data released by the Kenya National Bureau of Statistics (KNBS), the economy decelerated slightly in Q1, with drought conditions limiting agricultural production and electricity generation.
A decline in the agriculture sector and slower subsidy inflows likely dragged on private consumption growth. Moreover, fixed investment growth was likely moderate amid relatively weak business sentiment, despite growth in credit at the end of the quarter that might have boosted capital spending.
Turning to Q2, private sector activity deteriorated in April as the delay of the rainy season continued to weigh on horticulture and tea output, before recovering slightly in May on a short-lived downpour.
“The quarter was characterized by slowdown in agricultural activities following delay in the onset of long rains. The agriculture, forestry and fishing sector grew by 5.3 per cent compared to a growth of 7.5 per cent in the first quarter of 2018. The slowdown in agricultural growth somewhat affected agro-processing and consequently led to slowed manufacturing activities during the review period.” Kenya National Bureau of Statistics noted
Meanwhile, the FY 2019–20 budget presented to Parliament on 13 June had notable changes including a reduced fiscal deficit from 7.4% to 5.6%, which will be achieved through a higher capital gains tax and increased excise duties on cigarettes, wines and spirits, while infrastructure projects take the lion’s share of the budget.
Growth softens to over one-year low in Q1
Economic growth came in at 5.6% year-on-year (yoy) in the first quarter, decelerating from Q4 2018’s 6.0% and marking the lowest impression since Q3 of 2017. According to KNBS, growth was held down by a slowdown across sectors.
” Economic activity has notably been subdued in the first quarter of 2019 relative to the performance recorded in the same quarter of 2018. During the period, the economy expanded by 5.6 per cent compared to 6.5 per cent in the corresponding quarter of 2018. The growth, albeit significantly slower than that of the first quarter of 2018, was mostly supported by growths in the service sector industries such as wholesale and retail trade, transportation, accommodation and food services, financial and insurance activities.” KNBS Noted.
According to USAID Report, In the first quarter, although agricultural output shot up compared to a quarter prior (Q1: +5.3% yoy; Q4 2018: +3.9% yoy), delayed rains curbed production and weighed on agro-processing industries, thus leading to a slowdown in the manufacturing sector (Q1: +3.2% yoy; Q4 2018: +3.7% yoy).
In addition, construction activity decelerated in the same period, although remained strong nonetheless, supported by the continued construction of the Standard Gauge Railway linking Kenya to Uganda and other public infrastructure projects.
Meanwhile, the electricity and water supply sector lost stride amid a slowdown in output from geothermal and thermal sources during Q1 displaying 6.1% to Q4 2018 at 8.7% yoy, while the transportation and storage sector decelerated to 6.7% in Q1 amid a fall in the availability of credit. The wholesale and retail trade sector slowed to 5.3% from 6.5% in the Q1.
Money Annual Variation
Generally, macroeconomic factors were favorable to growth during the quarter under review. The average inflation in the period under review eased to 4.40 per cent from 4.49 per cent in the first quarter of 2018. The Kenya Shilling strengthened against all its major trading currencies during the quarter under review compared to the same quarter of 2018.
The Kenya Shilling strengthened against all major world currencies. The Shilling exchanged with US Dollar at an average of KSh 100.73 during the first quarter of 2019 compared to KSh 101.83 in the corresponding quarter of 2018.
The Shilling gained strongly against the South African Rand, Euro and Pound Sterling. The Kenyan currency also strengthened against the Japanese Yen, Ugandan and Tanzanian Shillings and marginally against the US Dollar. Weighted 2 interest rates on commercial banks’ loans and deposits averaged at 12.49 per cent in Q1 compared to 13.61 per cent in the first quarter of 2018.
This was as a consequence of a downward review of the Central Bank Rate to 9.00 per cent during the period. The Nairobi Securities Exchange (NSE) 20 Share Index averaged at 2,915 points in the Q1 compared to an average of 3,780 points during the same quarter in 2018.
During the Q1 of 2019, the current account balance improved by 32.7 per cent to a deficit of KSh 78.8 billion from a deficit of KSh 117.1 billion in a corresponding quarter of 2018. The narrowing of the current account deficit was supported by increase in net service inflows and decrease in merchandise trade deficit.
Merchandise trade balance shrunk from a deficit of KSh 248.3 billion in the Q1 of 2018 to a deficit of KSh 239.0 billion in the first quarter of 2019.
Overall balance of payments registered a surplus of KSh 25.5 billion in the first quarter of 2019 compared to a surplus of KSh 205.5 billion in a similar quarter of 2018. Net financial inflows declined by 71.3 per cent to a surplus of KSh 95.7 billion in the Q1 from a surplus of KSh 333.2 billion in the corresponding quarter of 2018. The stock of gross official reserves as at the end of Q1 of 2019 declined to KSh 853.1 billion from a stock of KSh 944.1 billion as at end of the first quarter of 2018.
In the Q1 of 2019, secondary income recorded a surplus of KSh 128.5 billion from a surplus of KSh 112.2 billion in the corresponding quarter of 2018. Remittances from the diaspora increased by 2.9 per cent from KSh 65.9 billion in the first quarter of 2018 to KSh 67.9 billion in the Q1 of 2019.
Imports and Exports
Value of total exports declined to KSh 156.9 billion in Q1 from KSh 161.7 billion during the same quarter of 2018 mainly due to a reduction in value of exports to Far East Asia. Similarly, value of imports declined by 3.9 per cent to KSh 421.2 billion from KSh 438.5 billion in the first quarter of 2018.
However, both Merchandise exports and imports declined by 2.9 per cent and 3.4 per cent respectively in the first quarter of 2019.
The decline in value of imports was mainly as a result of decrease in imports of industrial machinery and petroleum products in the first quarter of 2019. During the review period, Inflows in international trade in services grew up by 14.3 per cent to KSh 149.5 billion while outflows reduced by 10.1 per cent to KSh 88.8 billion
External Public Debts
The deficit in the current account balance narrowed to KSh 78.8 billion during Q1 from KSh 117.1 billion in a similar quarter of 2018. Stock of public external debt increased by 8.3 per cent, to KSh 2,721.6 billion as at end of March 2019, from KSh 2,512.4 billion as at end of March 2018. Bilateral debt increased by 14.4 per cent to KSh 846.6 billion as end of the first quarter of 2019. Commercial banks continued to be the dominant creditors with a share of 34.6 per cent to the total stock of public external debt.
Purchasing Managers’ Index
Meanwhile, business conditions in the Kenyan private sector improved further in June after rebounding in May. The Purchasing Managers’ Index (PMI)—produced by IHS Markit which is a London-based Critical Information Provider, and Stanbic Bank—rose to 54.3 from 51.3 in the previous month, moving above the critical 50-point threshold that separates expansion from contraction in activity.
June reflected a solid rise in new business and output, while sales rose at the fastest pace in the year so far amid upbeat domestic and external demand. In turn, the rate of hiring was the quickest in two-and-a-half-years.
On the price front, input costs continued to rise steeply driven largely by a tax hike and higher fuel prices. Firms responded by raising output prices in order to maintain profit levels. Meanwhile, business sentiment for future output jumped in June, with firms reporting the highest level of optimism in the survey’s history.
“The Stanbic Bank PMI recovered to a ten month high in June, reflecting the upbeat sentiment from private sector firms mainly due to the government releasing payments owed to both contractors and suppliers as well VAT refunds” Jibran Qureishi, Regional Economist East Africa at Stanbic Bank, noted reflecting to the result.