Macro Analysis /

Kenya cuts policy rate, slashes growth forecast on Covid-19 damage

  • Revised growth forecast still higher than World Bank's 1.5%, but lower than parliamentary projections

  • Rate cut positive, but increasing loan accessibility remain low due to Covid-19 impact on businesses

  • About 3% of industry loans now restructured due to negative Covid-19 impact

Kenya cuts policy rate, slashes growth forecast on Covid-19 damage
Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
30 April 2020
Published byTellimer Research

The Central Bank of Kenya cut its benchmark lending rate by 25bps to 7.0%, in line with expectations, at the meeting on Wednesday. According to the Bank, the cut was in light of the continued grim outlook on the economy amid the Covid-19 pandemic. So far, since the first Covid-19 case was reported in Kenya, the country has had 384 confirmed cases, 129 recoveries and 15 deaths. 

While the latest rate cut is positive, its intended impact of increasing loan accessibility may remain low with the business environment hampered by curfews and lockdown measures. GDP growth projections have also been revised down to 2.3% from 3.4% previously. The new projections are lower than the 2.8-3.2% forecast by Kenya's parliamentary budget office, and higher than the 1.5% growth (and 1% contraction in a worst-case scenario) by the World Bank. 

Since the last meeting where the regulator cut the policy rate and the cash reserve ratio, the committee noted that 43.5% of funds released into the banking system were utilised mainly by tourism, real estate, trade and agriculture sectors. As of 18 March, restructured loans amounted to KES81.7bn (c3% of total industry gross loans as at January 2020). ABSA Kenya management recently disclosed that they have so far restructured loans of cKES 8.3bn (equivalent of c4.3% of its net loans in FY 19). Our banks universe accounts for c63% of total industry loans and we believe the likely restructuring rate to be 3-6%. According to the regulator, restructures were mainly in Tourism, Restaurants and Hotels (31%); Real Estate (17.2%); Building and Construction (17.0%) and Trade (12.4%).

Key highlights from the central bank meeting 

  1. Current account deficit is expected to remain at 5.8% in 2020. This is based on lower oil imports, which are expected to offset the expected reduction in remittances. Key risk on this projection is the fall in horticultural exports and tourism services. Although the flower industry is starting to see some demand, it is unlikely that these receipts will suffice. 
  2. Sector NPL ratio stood at 12.5% in March compared to 12.7% in February. The improvement was on higher loan growth within the quarter. We believe this respite is temporary as the impact of Covid-19 is expected to filter through the numbers in Q2 20. Though the regulation to allow restructuring of loan terms will soften the impact of NPL formation, we still expect asset quality to continue declining. 
  3. Private sector credit grew 8.9% yoy. Sectors that boosted growth were manufacturing (17%); building and construction (9.5%); trade (7.8%); transport and communication (7.1%); and consumer durables (24.1%). We believe our bank universe is likely to record stellar loan growth numbers in the upcoming Q1 20 results. However, even with the liquidity boost from the regulator, we believe the industry will post anaemic loan growth from Q2 20. 
  4. Inflation is expected to remain within the target range (2.5% to 7.5%) in the near term. The regulator's outlook is hinged on lower oil prices, recent reduction in Value Added Tax, and favourable weather conditions. We believe there is a risk of higher inflation figures as the country faces a likely food crisis from the locust invasion, which has already caused a 1.5% hit on GDP and continued disruption of the food supply chain with market closures implemented due to Covid-19.