NCBA Group Plc is projecting the country’s economy to expand 3.9 per cent in 2021 if the second wave of Covid-19 is less severe and the government continues to reopen the economy.
Economists at the bank say the recovery of the economy will also depend on how quickly business is able to reopen, how fast a vaccine is found and how fast government revenues pick up, allowing for healthy spending beyond the Big Four.
This is pegged on anticipations that the agriculture sector will provide primary support to the recovery.
They, however, project the economy could still recover at a more moderate pace of 2.5 per cent in 2021 if the second wave of the pandemic is severe but lockdowns are still more localised.
In a report unveiled during the third NCBA Economic Forum, they, however, predict that shifting priorities may cause the government to prematurely withdraw its tax relief measures, thus hurting recovery.
According to NCBA, the government could face significant fiscal challenges in addressing the raging pandemic while stimulating growth.
“Given the immense uncertainty that the pandemic continues to present, we looked at likely growth under different scenarios, informed by the evolution of the pandemic and potential policy interventions,” they said.
The lender expects the GDP for the current financial year to contract by 1.8 per cent in 2020.
This is a downgrade from the initial baseline projection of a 0.2 per cent expansion in 2020 and markedly slower than the 5.4 per cent growth in 2019.
“The unique source of uncertainty and the longevity of the pandemic has made for a challenging investment environment, weakened household and firm incomes aggravating earlier fragilities in domestic demand,” the bank says.
The analysts warn that while Treasury’s move to focus on domestic rather than external debt is less costly, the strategic shift could crowd out the private sector.
They project the Sh524 billion domestic debt target may be scaled further up towards Sh600 billion as revenues grossly underperform.
They also project that non-performing loans ratio could accelerate towards 15 per cent as prudential guidelines are retightened.
“While NPLs for banks have stabilised around 13 per cent, it is clear that the prudential interventions masked a lot of delinquencies for banks and their effects on the balance sheet will be lagged,” they noted.
They warn that the risk of capital loss could undermine banks’ appetite for private sector lending.
At the same time, the heavy liquidity demand by the sovereign may divert capital away from the productive sector. This may further subdue domestic demand and private investments.
Speaking during the economic forum, NCBA Group MD John Gachora said that whereas things had begun looking up with the easing of restrictions, it felt more like a “truce” than an actual “peace treaty” and continues to call for a unique response and preparedness.
NCBA Economic Forum was launched in January 2018 with the aim of bringing together the government and industry stakeholders for a conversation meant to spark economic thought leadership and inspire action.
This forum features experts in various fields drawn from the public and private sectors to offer deep insights and understanding of economic issues.
