Flash Report /

Covid-19: Kenya cuts policy rate (expected) and cash reserve ratio (unexpected)

  • Central bank cuts CBR and CRR by 100bps each to spur liquidity and lending

  • GDP growth outlook now dim, with growth target revised down to 3.4% from 6.2%

  • Asset quality continues to weaken, with the NPL ratio at 12.7% in February; further weakening expected

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
23 March 2020
Published byTellimer Research

As we had expected, the monetary policy committee cut the central bank rate (CBR) by 100bps to 7.25% at today’s meeting, following the discovery of new Covid-19 cases in Kenya. The committee also cut the cash reserve ratio (CRR) by 100bps to 4.25% to support the financial sector’s liquidity and, ultimately, to spur lending. 

In our view, this support to liquidity, although welcome, will not prevent a big hit to credit growth, as only essential services will continue during the crisis. We expect layoffs to affect the consumer segment, delayed supply chains to hit trade and low consumer spending to hurt manufacturing. These three sectors typically drive private sector credit growth and, with the outlook turning negative, we expect private sector credit to decline in Q2 20 and Q3 20. 

The central bank's rate cut actions track global policy changes and we expect the regulator to continue supporting the banking sector. 

Some key highlights from the meeting:

  • GDP growth outlook revised down to 3.4% from the earlier 6.2%, driven by reduced demand from Kenya’s main trading partners, the disruption of supply chains and domestic production. The committee noted particular Covid-19-related concerns include job losses, the unknown duration of the crisis, the health sector impact and the tourism sector impact.
  • Current account deficit projected at 4.0-4.6% in 2020; FX reserves now at 5.01 months of import cover. The current account deficit estimate is tied to the duration and intensity of the Covid-19 pandemic and the resultant impact on export earnings sectors. As it is, the tourism sector has come to a halt, with flights into the country from key source countries halted. The horticulture sector is also struggling, with flower imports significantly down as countries move funds to health care. We believe achieving the higher end of the target band is more likely. 
  • Banking industry NPL ratio rose to 12.7% in February 2020 from 12.0% in December 2019. The committee noted an increase in NPLs from the manufacturing, energy and personal household segments. In light of the recent uptick in Covid-19 cases to 15 confirmed cases in Kenya, the government is pursuing a semi-lockdown, restricting travel and movement within the country. The effects have already started to be felt, with some large players in the hospitality industry asking their staff to take unpaid leave, which only worsen the impact on the financial sector, as such workers find themselves unable to service loans. We expect the strain on asset quality to persist in 2020. The government has also issued a directive to banks to extend loan terms for personal loans to enable ease of repayment. Although this may soften the impact of the rising NPLs, weakness will still be evident across the banking sector. 
  • Private sector credit grew by 7.7% in February 2020, driven by the manufacturing sector (+10.4% yoy), trade (+9.5% yoy), transport and communications (+7.4% yoy) and consumer durables (+20.6% yoy). We believe private sector credit growth will revert to anaemic levels in Q2-Q3 as the impact of Covid-19 continues to take shape. Already, there has been noticeable strain in the trade segment, with shipments from China facing delays, the tourism segment has come to a standstill, the continued weakening of the shilling will inflate prices of imported goods and the slow down of the economy will lead to an upsurge in lay-offs. 

Because of the exceptional circumstances, the monetary policy committee will be meeting again in a month’s time, unlike the usual two-month schedule. Given the country is entering a critical stage of the Covid-19 cycle during which cases are likely to drastically increase, we expect further policy changes.