Kenya’s private-sector borrowing hit a two-year high in the first quarter of the year, driven by falling interest rates and increased credit appetite from the country’s corporate sector.
According to the latest data from the World Bank, private-sector borrowing expanded by an average of 25 per cent in the first four months of the year, well above the Central Bank target of 20 per cent and clear of the country’s 2013 credit growth target of 17 per cent.
The last time credit expanded by 25 per cent was in March 2012.
The growth saw the country’s banking sector extend loans worth Ksh327 billion ($3.76 billion) in the year to April or nearly 2.5 times the Ksh127 billion ($1.46 billion) that the lenders extended in the same period last year.
Private sector credit grew 23.9 per cent in the 12 months to April 2014, compared with 10.5 per cent in the period to April 2013.
The high credit appetite was fuelled by falling interest rates, which have hit a three-year low, and are expected to go down even further as the government keeps out of the local bond market, having raised $2 billion from the international market through a Eurobond. (See video)
The increased credit appetite will thus come as a relief to the government as it seeks to meet its economic growth target of 5.8 per cent, up from last year’s growth of 4.7 per cent.
The uptake of loans is likely to offer relief to Treasury mandarins keen on stimulating economic activity, which in recent months has suffered from a series of setbacks including falling tourist numbers and declining tea earnings — the country’s major foreign earner.
Vimal Shah, Kenya Private Sector Alliance chairman, said the increased lending was a sign of economic recovery, which is expected to continue despite the existing hurdles.
“East Africa is becoming a hub and long-term investors seeking to get returns in 10 or 20 years to come will continue borrowing. Lending to the private sector will rise,” said Mr Shah, adding that the confidence has been reconfirmed by the recently oversubscribed bond.
Private sector
However, Polycarp Igathe, chairman of the Kenya Association of Manufacturers, said that while increased borrowing could be a sign of growth, it could also be an indicator that businesses are struggling.
“The private sector is investing to grow. However, it may also mean a cash crunch or working capital constraints. As you know, the government owes the private sector a lot of cash in VAT refunds,” said Mr Igathe.
According to the World Bank, in the absence of any inflationary threat, the Central Bank was comfortable, allowing private credit to increase in order to stimulate economic growth.
But of late inflation has been rising, with the rate rising to 7.30 per cent in May, just 0.2 per cent shy of the CBK’s upper limit of 7.5 per cent.
Experts say that any further rises could prompt the Monetary Policy Committee to raise the Central Bank Rate, which it has held at 8.5 per cent since May last year.
Analysts at Standard Chartered Bank said the rising inflation was narrowing the spread with the CBR, projecting that the Central Bank could raise the benchmark as early as next month.
“The May inflation sprint most likely signals the start of a new interest rate cycle in Kenya, although we do not expect interest rates to rise anywhere near as much as they did in the last tightening cycle. A sufficiently early rate hike will help moderate the overall pace of tightening that is required,” said Razia Khan, head of research at Standard Chartered Africa.
“With indicators pointing to robust underlying momentum in the economy, and strong credit growth (notwithstanding recent security risks), the likelihood of food-related pressures spilling over into secondary effects is high,” she added.
“If the credit growth rate continues to rise and comes closer to 30 per cent... you would expect the CBK to react,” said Kuria Kamau, an analyst at Kestrel Capital.
However, there are other risks that could compromise the stability of the economy, the main one being insecurity arising from terrorism and other forms of violent crime.
Already the tourism sector, one of the major foreign-exchange earners, is on its knees as tourists from Europe and America shy away from visiting the country. Some hotels have closed, while others have cut the number of their staff in a bid to reduce operating costs.
Experts fear Kenya may not achieve the 5.8 per cent growth target set by the government this year.
The agricultural sector, the driver of the economy, has also continued to underperform due to the vagaries of the weather and slow sector reforms aimed at increasing production and efficiency.
According to the World Bank report, exports of commodities declined 5.8 per cent in 2013. Coffee exports fell 29 per cent on the back of a 21 per cent drop in 2012, while exports of chemicals fell 14 per cent.
Tea, Kenya’s main export, on the other hand, grew a mere 1.3 per cent, down from 4 per cent in 2012. The Bank says the country’s exports have continued to deteriorate in the 12 months ending April.
Source: The East African
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