Kenya should brace for a further shrinking of the actual economy (production of goods and services) as the cost of borrowing rises, the high tax regime and the weakening shilling.
In an economic outlook by KCB Group dubbed ''Surviving a Whirlwind”, the lender says access to credit by small traders might prove challenging as the majority of the banks are at full implementation of their risk-based pricing models.
"We expect a neutral to negative credit outlook in 2024 even as banks re-adjust their lending rates to match the present business conditions. This will eventually lead to further shrinking of the real economy in 2024,'' the report by KCB reads.
Even so, the lender expects the economy to be sustained by good tidings in the agriculture sector, which saw the National Treasury project a 5.5 percent growth in both 2023 and 2024, and 5.4 percent in 2025.
CBK had in December raised the key lending rate by 200 basis points to a historic high of 12.5 percent to wrap 2023 in a decision aimed at rescuing the shrinking shilling against the dollar.
This effectively pushed up the cost of borrowing in the country, with banks now charging average interest rates of about 20 percent per annum from the previous 15 percent rate applicable a year back.
Late last month, KCB Bank Kenya adjusted the Base Lending Rate for Kenya Shillings denominated loans upwards by 0.9 percent for a year from the previous 13.8 percent to 14.7 percent effective December 27 for new loans and January 27 for existing loans.
The projection dashes the hopes of most individuals and businesses of getting affordable loans to survive the tough times, something that could further dent the country’s economic growth while leaving the government with unmet revenue collection targets.
Businesses require working capital for expansion plans, sustain operations, and eventually create more job opportunities as well as paying taxes.
All these might now be cut should businesses fail to secure the much-needed credit from banks that have been pilling investments in government papers.
However, KCB Group expects the growth in the private sector credit to soften, as lenders prefer to loan to the government, which is offering impressive yields of up to 17 percent.
The banking sector remains the largest contributor of credit to private businesses, contributing Sh3.6 trillion as of July 2023, out of the total Sh4.4 trillion extended to the private sector for the period, with the largest allocations to trade, manufacturing, and private households at 17, 15.7, and 14.5 percent respectively.
Overall, regional growth continues to confront major headwinds in the form of elevated inflationary, interest rate and exchange rate pressures. The surge in global interest rates has ensured the retreat of capital to safe havens.
"This is not particularly because global markets have better performance, but just because the dollar has been viewed as ‘the cleanest dirty shirt in the laundry bag'', KCB says.
Federal Reserve Bank in the U.S. additionally pointed to the possibility of rates remaining elevated, at least until June 2024.
"During such economic times characterised by high-interest rates in developed markets, particularly in the U.S., capital retreats beginning with the widely perceived risky markets such as sub-Saharan Africa."
KCB projects the shilling to continue to tumble against other major, quoting its intrinsic value against the dollar at Sh161.00.
Whereas demand-pull inflation has been the key culprit behind U.S. inflation, justified by low underemployment and high job numbers, cost-push inflation has driven local inflation numbers.
It is for this reason, that the Kenyan government has pushed up the anchor-lending rate, which KCB expects to be retained in the upcoming review by the Central Bank of Kenya (CBK).
"We expect headline inflation to ease in the country while core inflation continues picking up. Inflation levels are anticipated to continue cooling off but remain well above CBK’s target of five percent premised particularly in the first half of 2024.