Slow credit growth, fuel tax to hurt 2019 economic growth, analysts say

Kenya’s economic growth will slow down in the coming quarters given slow credit growth and a fuel tax harming private consumption, according to Fitch Solutions Macro Research.

According to its latest commentary, slow credit growth will slow investment by domestic businesses, with the ongoing rate cap likely to see commercial banks reticent to extend credit to high-risk lenders.

It notes the dilemma the government faced in implementing the fuel tax since it had to choose between increasing costs for consumers by keeping it, or removing it and cutting back on development spending plans, which would either way have impacted on growth prospects.

President Uhuru Kenyatta chose a middle ground by reducing the VAT on petroleum products from 16% to 8% and MPs’ decision to slash the national budget by Ksh 37 billion as opposed to the Ksh 55 billion the Head of State had proposed in his memorandum after rejecting to assent to the Finance Bill 2018.

Fitch Solutions Macro Research notes that given that ‘Housing, Water, Electricity, Gas and other Fuels’ comprises 18.3% of the consumer price basket, and which is set to rise in conjunction with higher global Brent crude oil prices, this is likely to have a sizeable impact.

“As well as boosting fuel inflation, higher prices will likely boost transport costs, which will feed into prices of all other goods and services to some extent. As such, we forecast inflation to rise from its January-August average of 4.2% to 5.5% by year-end, averaging 4.7% in 2018. Reflecting these ongoing price pressures, and a likely normalisation of weather conditions after successful harvests in 2018, inflation is likely to rise to an average of 6.5% in 2019. Moreover, tighter credit conditions will compound the effects of higher prices, weighing on consumer demand,” it says.

It goes on to note that while public investment as part of President Uhuru’s Big Four Agenda development plan will offer a boost to growth in the medium term, expected headwinds to implementation, such as fiscal obstacles, will limit its positive impact.

“The programme, which has four key aims, sets out a coherent top-down plan for boosting output in selected sectors (housing, agriculture, health and manufacturing). While there are some clear aims which will likely succeed in driving growth, many will require levels of funding that are relatively inaccessible. While there are some clear aims which will likely succeed in driving growth, many will require levels of funding that are relatively inaccessible. Indeed, the fact that Kenyatta had to cut the VAT on fuel to 8.0% from 16.0% means that there will be less revenue available to implement the programme,” it says.

Furthermore, concern over Kenya’s growing debt load (government debt as a percentage of GDP rose to 53.9% at end-2017 from 44.4% at end-2013) will likely see the National Treasury slow down its borrowing.

According to the forecast, private sector investment will be constrained by ongoing headwinds to lending. A cap on lending rates introduced in August 2016 which limited them to 400 basis points (bps) above the central bank policy rate will continue to suppress supply of private sector credit. Given that potential risk premiums on loans are limited by the cap, banks have avoided lending to higher-risk borrowers.

“This will likely continue affecting growth negatively, with smaller domestic businesses likely to find difficulty sourcing capital to invest in business expansion. While Cabinet Secretary to the Treasury Henry Rotich announced plans to repeal the rate cap, the bill was rejected by legislators, meaning that it is likely to stay in place for a number of months. MPs also vowed that they would continue to oppose repealing the rate cap in late September, reiterating their earlier decision. As such, it is no longer our core view that the rate cap will be removed in 2018, meaning that credit growth is likely to be subdued for a longer period, weighing on consumption and investment,” notes Fitch Solutions Macro Research.

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Central Bank of Kenya Governor Patrick Njoroge on Wednesday also warned that the rate caps were “strangling” the economy and urged for a review.

“We uphold our forecast for 2018 growth at 5.4%, but have revised down our 2019 forecast to 5.2% from 5.5% previously,”  the Fitch Solutions Macro Research forecast report concludes.

Disclaimer: This story is based on a commentary published by Fitch Solutions Macro Research and is NOT a comment by Fitch Ratings’ Credit Rating. Nor is any of the background obtained from, or in conjunction with, Fitch Ratings credit analysts.