Kenya to Lower Growth Forecast as Drought Cuts Food Output

NAIROBI (Capital Markets in Africa) – Kenya will cut its growth forecast to reflect the impact of a drought that slashed agricultural output in East Africa’s biggest economy and left the country short of its staple food, Treasury Secretary Henry Rotich said.

Economic growth will probably be 5.7 percent this year, compared with an earlier estimate of 5.9 percent to 6 percent, Rotich, 48, said in an interview Wednesday at his office in the capital, Nairobi. The forecast may be reduced further to 5.5 percent once an assessment of the March-May rains is completed, he said.

“We are analyzing some leading economic indicators to see if this drought has gone beyond quarter one,” Rotich said. “If that is the case, we may adjust our numbers a bit lower.”

Kenya is experiencing its worst drought in more than three decades. The dry weather cut production of corn, reducing the country’s strategic grain reserve to less than a day’s supply, and resulted in shortages of products including sugar and milk. The drought has been severe because it’s spanned three seasons and affected a wider region than normal, according to the National Drought Management Authority.

Beyond agriculture, the momentum in the economy is “still strong,” Rotich said, citing the building of a standard-gauge railway linking the port of Mombasa to neighboring Uganda. That’s underpinning growth of the construction industry, he said, while tourism, one of the country’s biggest generators of foreign exchange, is also “picking up.”

Lower Estimates
Cutting its forecast will bring the Treasury’s estimates more in line with the World Bank and the International Monetary Fund, which have cut their predictions to 5.5 percent and 5.3 percent respectively. Both organizations have cited the drought as a factor in lowering their forecasts, as well as the slowdown in lending by banks to the private sector after the government placed a cap on commercial lending rates.

Kenyan President Uhuru Kenyatta introduced the limits, set at four percentage points above the official central bank rate, in August. The decision fulfilled a pledge he made before being elected in 2013 to reduce the cost of credit. The country’s five biggest banks all posted a drop in first-quarter profit last month as the cap cut loan income.

The government is trying to mitigate the impact of the caps by accelerating reforms that address the “root causes” of high interest rates in Kenya, Rotich said. He cited the recent signing into law of the Movable Property Security Rights Bill, which enables borrowers to use movable assets as collateral for credit.

The central bank has carried out a study on the impact of the caps on the economy, and while the results are still being analyzed, the assessment has shown that while the number of loan applications has grown, the value of those applications has declined.

Constraining Credit
“We are aware that the caps potentially will constrain credit to small- and medium-sized enterprises and other high-risk areas that used to enjoy credit,” Rotich said. As the impact of reforms is felt “maybe the caps will become redundant over a period of time.”

Credit to the private sector grew 4 percent in March, the slowest pace since 2003, according to central bank data. Lenders including KCB Group Ltd., Kenya’s biggest by market value, have said they only expect the caps to either be altered or removed after presidential elections take place in August.

“We don’t think that, from our standpoint, that the caps are going to be sustainable for our economy,” Rotich said. “Our preference is to let the markets decide.”

Rotich declined to say when Kenya will return to the Eurobond market. He said foreign debt sales would in future be used for “liquidity management,” as debt raised earlier matured, and the country could issue bonds with longer maturities after Senegal sold $1.1 billion of Eurobonds last month that will mature in 2033. Kenya’s longest-dated Eurobond, issued in 2014, has a 10-year tenure.