Agriculture

Drought Fears Ease, but East African Countries Could Struggle to Restore Growth

After better-than-expected growth through the first three months of 2016, visit the growth outlook for Kenya in 2017 was cut by the IMF in mid-April to 5.2%, treatment down from previous estimates of 5.6%, largely due to a struggling agricultural sector, which contributes about 25% of the country’s GDP.

Low rainfall in October and November has contributed to significant food shortages and rising prices, as well as increasing energy prices – which has put a damper on agricultural and industrial production and a range of other productive sectors. In February, food price shot up a record 16.5%, while the number of citizens requiring food aid jumped to 2.7 million. Headline inflation for April stood at 11.48%, according to official statistics. Earlier this month it was revealed that the country will need to import sugar, the price of which has shot up 21.61%, in order to make up for a shortage in cane production, while grain shortages continue to persist.

All of this has added further pressure on the country’s banking sector, which has struggled to adjust to an interest rate cap and rising NPLs, which are putting many of the country’s lenders in an increasingly tough spot. Private credit uptake in Kenya declined to a 17-month low to 4.0% in the first quarter of 2017, which dragged down private sector growth to 4.07%, down from 4.3% in December 2016 and significantly lower than the 21% seen in August of 2015, according to a report from Cytonn Investments Management. Researchers at the firm believe private sector credit isn’t expected to grow due in part to rigidity in loan pricing.

“Private sector credit growth has been declining from highs of 21.0% in August 2015 to lows of 4.0% in March 2017 according to the CBK. This slow growth can be attributed to (i) an increase in investor participation in government securities, thus leading to a crowding out effect in the private sector, and (ii) an increase in commercial bank non-performing loans (NPLs) that has discouraged banks from lending to the private sector and instead preferred to lend to the government that is considered risk free. The new loan pricing framework brought about by the interest rate cap was a new factor that was perceived to worsen the situation,” the firm said in a recent research note.

Analysts at Cytonn also point out that the majority of Kenya’s leading Tier 1 and 2 banks have shown either anaemic or negative growth in Q1 2017, largely the result of increased loan loss provisions for the majority of the country’s lenders, and hyperinflation in South Sudan – which has hit banks with subsidiaries in the country, including Equity Group and KCB Group.

Tanzania is experiencing similar pressures. Rising food prices caused by the drought pushed headline 12-month rolling inflation to 6.4% in March 2017, with core inflation anchored at 2.2%. There too, rising non-performing loans – from an average of 6.4% in 2015 to 9.5% in 2016 – have put a strain on banks’ loan loss provisions, which has contributed to tightening liquidity.

“Liquidity conditions remain tight… Furthermore, as the pace of economic activity has slowed down, non-performing loans of the banking system have risen,” the IMF said following its latest consultation with the country’s policymakers.

Overall, the growth forecast for Tanzania has moderated to 6.5% for 2017, down from about 7% in 2016. The World Bank said in April that the country’s growth prospects are being hampered by a slowdown in private credit growth.

Uganda also experienced a drought-induced slowdown, made worse by the country’s reorientation of the national budget away from consumption spending and towards development spending, its dithering around new infrastructure investment, and political volatility. Analysts at Standard Bank estimate GDP growth for the country slid to just 3% in 2016, the lowest of its regional peers, down from 5.3% the previous year, which has also hit the banking sector hard.

Non-performing loans as a percentage of total loans have increased from 5.29% in December 2015 to 10.47% in December 2016, which has weighed heavily on the banking sector. In October last year, Crane Bank, the country’s fourth largest lender by assets, was put into receivership; in January 2017, some of its assets were sold to Dfcu Bank, another Ugandan lender.

“The effects of the tighter monetary policy stance from 2015 have led to a sharp rise in non-performing loans, from key productive sectors within the economy, further exacerbated by delays in the government releasing payments to suppliers. However, we expect [private sector credit growth] to stage a recovery over the better part of the next 2 years, aided by the more accommodative monetary policy stance administered by the BOU in 2016, which will probably begin to underpin private consumption,” the Bank’s analysts explained in a recent report.

“Firms in Uganda still seem to be suffering from a lack of access to credit which is subsequently preventing them from increasing output.”

Central Banks to the Rescue?

The trend has raised concerns among analysts and the investor community that growth in the region could be subdued for a more prolonged period than many estimate.

“There are nuances between each country, but generally speaking the steep fall in private sector credit is worrying because it prevents entities from investing in new initiatives, which puts a damper on future growth prospects. Combined that with the impact on the money supply and the drag on business efficiency caused by rising food and hydroelectricity prices and you get a fairly dangerous cocktail,” explained Kojo Amoo-Gottfried, a senior portfolio manager at Enko Capital. “It has the potential to create a negative feedback loop.”

The region’s Central Banks have stepped up efforts in a coordinated approach to stem their currencies’ slide and re-start growth.

In Uganda, the Central Bank has moved down the path of aggressive rate cutting, from 17% in April 2016 to 11% the same time this year, so, although private sector credit growth has dropped, the cost of credit has decreased as well, which creates a dampening effect.

In Tanzania, where broad money growth has dropped significantly from 16% in mid-2016 to 4% in April 2017, the Central Bank has been quite proactive cutting the reserve ratios for the country’s banks from 10% to 8% starting in April. It also cut the discount rate from 16% to 12% in a bid to expand private sector credit growth.

Kenya’s government and the Central Bank are also said to be mulling the removal of an interest rate cap that prevents the country’s lenders from charging more than 400bp over the benchmark interest rate, a move originally intended to help spur credit growth. The removal of the cap is unlikely to take place before forthcoming elections in August, when the country’s President Uhuru Kenyatta will look to cement a second term in office.

Analysts suggest that removing the cap might not necessarily translate into stronger growth. At higher interest rates lending certainly becomes more profitable, but banks won’t necessarily want to commit to greater loan growth at a time when many of the country’s core productive sectors still face significant headwinds, weighing down borrowers’ ability to repay their liabilities.

Continued Integration is Key

With no easy answers to the question of growth, some believe one way for the region’s economies to help insulate themselves from some of these challenges going forward is to quicken the pace and deepen the scope of regional integration, which the IMF believes would be a “game changer.” The East Africa Community hopes to cement a monetary union by 2024.

“We need to push the East Africa Community, strengthen trade integration, policy integration – including monetary policy, financial sector integration, and the like,” explained Patrick Njoroge, Governor of the Central Bank of Kenya in an interview with Bonds & Loans in March. “The region shares many of the same challenges, and tackling them would greatly benefit from a more coordinated approach and greater institutional linkages.”

Amoo-Gottfried agrees, arguing that the region should continue along the path towards the long-sought goal of a monetary union, in addition to establishing a customs union to streamline cross-border trade and employment flows.

“The countries are already working on a number of large cross-border infrastructure projects including the East Africa Railway Network, which connects Nairobi to Mombasa, and should continue to partner on similar projects to stimulate growth and regional trade – which has already increased by close to 40% over the past five years,” he explained.

Coordination on deficit reduction, fiscal policy, and tariffs will become more important as the community moves towards monetary union. It could help create a rising tide and bring new economic opportunities to the region.

“At the end of the day, most countries would love to see 5-6% growth… Further regional integration may not bring back the days of 8-10% growth, but it would make these economies much stronger in the long run.”

SOURCE: http://www.bondsloans.com/

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