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Kenya - Ongoing Drought Will Result In Growth Slowdown In 2017

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Tuesday, July 04, 2017 11:55 AM / BMI Research

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A dought and deceleration in credit growth has led us to revise down our 2017 forecasts for real GDP growth in Kenya as economic activity will remain weak over H117. The outlook remains positive beyond 2017, with the economy’s headwinds expected to be short-lived.

We have altered our forecasts to incorporate a dip in real GDP growth in Kenya over 2017, as the impact of an ongoing drought compounds the headwinds posed to the economy by declining credit growth.


We are generally positive towards the long-term growth prospects for the Kenyan economy, but have expected a deceleration in growth in 2017 after the government announced a cap on commercial bank lending rates in August 2016.


However, the severity of the ongoing drought has led us to make further downward revisions to our growth forecasts for 2017, to 5.2% from 5.6% previously.


Kenya is still highly dependent on the agriculture sector, despite being one of the more diverse economies in Sub-Saharan Africa.
 

The strong correlation between crop yields and real GDP growth rates over the past 25 years is indicative of the key role farming plays in sustaining economic activity.  

Given the severity of the drought, our Agribusiness team is now in the process of revising down our forecasts for production of key crops over the nwext few months to reflect negative growth. 

Farming remains the country's largest employer and accounts for 30.0% of GDP. With farms struggling to maintain levels of output and the cost of living increasing due to food shortages, we expect growth in private consumption will begin to decelerate, particularly among the poorer elements of the population.  

Weaker export revenues will also add headwinds to GDP growth in 2017 as the drought affects some of the key goods Kenya sells abroad. Agricultural products accounted for 47.1% of the country's total merchandise exports in 2015, making the sector a key earner of foreign currency. 

Drought Will Not Derail Long-Term Growth
Despite the headwinds posed by drought over H117, these will not lead to any significant change in our otherwise positive outlook for the Kenyan economy.  

While any slowdown in agriculture will have a significant impact, other sectors will likely continue to post strong growth.  

Our Infrastructure team has long highlighted Kenya as a regional outperformer, with a number of large projects expected to continue attracting foreign investment into the economy and sustain growth in the construction industry.  

Over a more long-term basis, we see the oil sector becoming a significant driver of real GDP growth as crude production comes online from 2020. 

The strength of these sectors will see Kenya remain one of our top picks in East Africa over coming years, despite an expected slowdown in 2017. 


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