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Kenya

Kenya: Private sector credit growth is gaining momentum

  • Private sector credit growth accelerates to 7.7%, but this is still slightly below the regulator's target

  • Private sector firms are now cautiously optimistic about market conditions

  • The current account deficit has risen slightly to 5.4%

Kenya: Private sector credit growth is gaining momentum
Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

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Tellimer Research
3 August 2021
Published byTellimer Research

According to data from the Central Bank of Kenya, private sector credit growth reached 7.7% in June 2021. This is an increase from the 6.8% yoy recorded in April 2021. According to the regulator, the growth was mainly boosted by manufacturing (+8.1% yoy loan growth), transport and communication (+11.8% yoy) and consumer durables (+23.4% yoy).

There was a notable increase in demand for credit in Q2 21 after the economy started on its recovery path following the lockdown in Q1 21 that had caused a slight slump in credit demand.

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While the growth is impressive, it is slightly behind the central bank’s target of 8.5% yoy by June 2021. For its FY 21 target, Kenya's central bank has a target of 10.2% yoy private sector credit growth.

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We believe this rate of growth is achievable for the sector, but we have two major concerns:

  1. Fears of a fourth wave of Covid-19. Infection rates in tested sample sizes have been averaging 15% with cases continually rising. So far, according to the Ministry of Health, only 1mn Kenyans have received their first dose of the Covid-19 vaccines and only 662k have received a second dose. As a result, there is concern that the government may opt to implement further lockdowns in future, as has been the case each time there has been a new wave.

  2. Election disruption. Kenya’s elections are slated to take place in August 2022. As the election process draws near and campaigns gain momentum, these tend to disrupt the economy as investors take a wait-and-see approach.

Market perception survey indicates cautious optimism

The regulator carried out a market perception survey to gauge the outlook for the economy. More that 50% of companies surveyed were confident of achieving higher growth in 3Q 21 than in 2Q 21.

Some of the upsides for Q3 21 noted in the survey included:

  1. An increase in consumer demand which is expected to result in higher sales. 38% of firms expect an increase in demand and 42% expect an increase in sales volumes.

  2. Increased production volumes. 39% of firms expect an increase in production volumes. However, this is tempered by an expectation of an increase in input prices which is likely to hold back production volumes.

  3. Increasing accessibility to vaccinations is expected to minimise the spread of Covid-19. So far only 1.3% of the population has been fully vaccinated. The government is expecting some vaccines from the COVAX programme later in the year with some vaccines donated by UNICEF having arrived in the country in the past week.

  4. Real estate firms expect an improved environment stemming from increasing investment in infrastructure by the government. This is mainly expected to benefit government-related contractors. In our view, the private sector related developers are likely to face continuing challenges as uptake for real estate remains slow.

Some downsides highlighted by the firms include:

  1. Increased taxation may impact consumer demand. Firms expect higher inflation in the third quarter of the year, which may result in tempered consumer demand. New taxes implemented in the June 2021 budget have resulted in an increase in prices of household goods, which will result in consumers adjusting their consumption.

  2. Increase in the price of inputs. 64% of firms expect an increase in the price of goods, but only 28% expect an increase in the price of goods sold in Q3 21. This may point to an expectation of lower margins as firms consider postponing sale price hikes to avoid hitting consumers.

  3. Heightened political activity to lead to delays in investment decisions.

  4. Cash flow challenges arising from the pandemic are still yet to be resolved, which is affecting the ability of firms to return to normal operations.

Current account deficit now at 5.4% of GDP as of June 2021

The regulator noted the current account deficit had risen slightly to 5.4% in June 2021 from the 5.2% recorded in April 2021. The regulator expects this to fall to 5.2% of GDP by FY 21. This view differs from IMF, which expects the current account deficit to expand to 5.6% in the medium term with the risk mainly associated with the 2024 Eurobond maturity and increased import demands.

Remittances continue to support the country’s foreign exchange position following a growth of 20.4% yoy in June 2021. Foreign exchange reserves now stand at US$9,530mn (5.72 months cover) which the regulator considers adequate for the country.