Lost year: Why Kenyans can’t wait to see the back of 2017

Central Bank of Kenya headquarters in Nairobi (PHOTO: Courtesy)

NAIROBI, KENYA: In retrospect, 2017 will probably go down in history as the year when the ‘gods’ conspired against Kenya, casting a cloud of gloom over the country’s economy.

From a debilitating drought to an unprecedented credit crunch that starved the private sector of much-needed credit and a prolonged election that literally stalled business activities, 2017 was simply a lost year.

The signs that the year was by no means going to be easy started to manifest in 2016, but nothing could have prepared businesses and the economy in general for what lay in wait as the country crossed into the New Year.

While the Government revved up the economy by pouring billions into the construction of roads, a modern railway, air and seaports as well as energy projects, the private sector, including small businesses and millions of households were left to their own devices.

Even as the economy grew by 5.9 per cent in the first three months of 2016, the uptake of credit by the private sector fell sharply as demand for goods and services in the economy plummeted.

Firms and households slashed their credit uptake from Sh39.6 billion in the fourth quarter of 2015 to Sh7 billion between January and March last year, according to the Central Bank of Kenya.

“The slowdown was mainly inflows to business services, transport and communications, finance and insurance, and building and construction activities,” said CBK in its Quarterly Economic Review for January-March, 2016.

This had the net effect of mass defaults by borrowers.  

Gross Non-Performing Loans (NPLs), or bad loans, increased by almost 16 per cent from Sh147.3 billion in December 2015 to Sh170.6 billion in March last year.

The real estate sector was the chief defaulter. NPLs in the housing sector in the first quarter of 2016 surged by Sh5.9 billion, or 42 per cent, in what CBK attributed to “slow uptake of housing units.”

Personal/household sector registered the second highest increase in NPLs by Sh5.77 billion “as a result of negative macroeconomic drivers such as job losses and delayed salaries.”

A slowdown in business, which led “to failure to generate enough cash flows to meet all financial obligations”, saw the manufacturing sector’s NPLs increase by Sh2.7 billion or 15.5  per cent between December 2015  and  March 2016.

By October last year, uptake of credit by the private sector had picked up, albeit at a slower rate of 1.45 per cent.

This was a far cry from CBK’s ideal credit growth of between 12 per cent and 15 per cent.

By November 2016, a survey by Financial Standard, then known as Business Beat, found that at least 20 companies that had either folded and shipped out or simply downsized, leaving more than ten thousand employees without jobs.

They all blamed a tough business environment.

Moreover, most economic sectors struggled to repay their loans in the fourth quarter. Unlike in the first quarter when only three economic sectors registered an increase in NPLs, a total of nine sectors saw their NPLs increase between October and December 2016.

Tourism joined real estate at the summit of the log of bad debtors.  

Other new entrants to the list of chief defaulters included transport and communication, building and construction, agriculture, energy and financial services.  

Around this time, the country started slipping into the election mood. On December 22, 2016, investors watched as members of the National Assembly inclined to Jubilee Party made changes to the electoral law amidst a chillingly tight security, offering a glimpse into the future of the electoral contest that was unfolding ahead of the August 8 polling day.

Slowly but surely, investors started holding back their money, fearing for a repeat of the post-poll violence that left more than 1,000 people dead and property worth billions destroyed in 2007/2008. Businesses started to reduce their stocks.

At this point, all economic indicators were blinking red.  

The shilling weakened against the US dollar, the Nairobi Securities Exchange (NSE) closed the year on a low, with the benchmark index, the NSE 20 share index, losing 21 per cent to settle at 3186.21. It slid below the 3,000 mark before it regained some ground.

As if this was not bad enough, then the rains failed. Crops stunted or just wilted away. Without water and pasture, thousands of cattle died.

Close to four million Kenyans, in turn, fell into starvation as rivers dried up.

Agriculture - where six out of ten Kenyans eke a living - was crippled by a drought that ominously swept across the Horn of Africa.  

The so-called backbone of the economy was battered. In the first three months of this year, the agricultural sector shrank by 1.1 per cent, the first time since 2009 that the sector registered a negative growth.

Growth would pick up slightly in the second quarter, with the sector growing by 1.4 per cent. However, it was not enough to save cash-strapped consumers from higher food prices.

Subdued production of maize, milk, sugar, beans and tomatoes meant that more money went into food as the prices of these basic foodstuffs shot up.

For the poor, who toil from dawn to dusk just to put food on the table and maintain a roof over their heads, it was painful.

By May, year-on-year inflation, or the general rise in the prices of goods and services in 12 months, hit a five-year high, increasing by 11.7 per cent.

A two-kilogramme maize flour, a critical ingredient in the preparation of ugali, a staple dish in most households, was retailing at a high of Sh150.

The political noise was also building, culminating in street protests and counter-protests. They all had the effect of raising political temperatures and scaring away investors.

Credit uptake by the private sector grew even slower at 0.6 per cent. It was the lowest growth rate since CBK started taking stock of this data.  Tourism, restaurant and hotels sector continued to lead in the increase of NPLs as the hospitality sector took a further beating.

The ratio of gross NPLs to total loans also increased from 9.5 per cent in the first quarter of this year to 9.9 per cent in the second quarter.

For seven consecutive months (from April to October 2017), Stanbic’s Purchasing Managers’ Index (PMI) was below the 50 mark, hitting an all-time low of 34.4 in October, as output and new orders contracted. This was in comparison to a reading of 40.9 in September.

In PMI, readings above 50.0 signal an improvement in business conditions on the previous month while readings below 50 show deterioration.

The slowdown in the private sector was understandable.  As August 8 neared, the street protests got uglier. People fled from their home fearing for their lives in anticipation of ethnic flare-ups.

In Kisumu, there were reports that supermarkets such as Tumaini were not restocking even when they ran out of perishables. Others closed shop altogether.

In Naivasha, casual workers in the flower farms left in droves, haunted by the sordid events of 2007.  

Even the United Nations gave terse instructions to its workers at its Nairobi headquarters: Carry a small bag in you can put all your vital documents - passports, title deeds and driving licences.

The investment world, however, heaved a sigh of relief after the Electoral Boundaries Commission declared Uhuru Kenyatta the winner of the August 8 presidential contest.

But their relief was short-lived. The Supreme Court invalidated his election, sending voters back to the ballot in 60 days, setting the stage for a rematch on October 26, but which the Opposition boycotted.

This chain of events has seen the National Treasury, just like the International Monetary Fund (IMF) and World Bank, climb down from its lofty economic growth projection.

Treasury now expects the economy to grow by 5.1 per cent in 2017, down from an earlier estimate of 5.9 per cent.

The World Bank, for its part, expects the country’s economy to grow by 4.9 per cent, down from 5.5 per cent while IMF puts it at around five per cent. The economy last year grew by 5.8 per cent.

And the numbers by the Kenya National Bureau of Statistics (KNBS), the national statistician, amplify these projections. GDP growth in the first half of the year was the lowest in five years.

The economy in the first quarter of this year grew by 4.7 per cent, the lowest growth since 2012 when GDP increased by 4.2 per cent.  GDP growth in quarter one of 2016 was 5.3 per cent.

It was the same with quarter two, with the economy having grown by five per cent compared to 6.3 per cent in the same period last year. The last time the economy registered such growth was in 2012 when GDP grew by 4.3 per cent.  

The leading indicators by Kenya National Bureau of Statistics bare it all. Fewer soft drinks such as soda and flavored juices were produced in the first eight months this year compared to the same period last year.

The same was reflected in the housing sector. The value of buildings approved by the Nairobi County Government in the first seven months was fewer than the same period last year.

This was expected as the real estate sector struggled to pay loans on the back of a slump in the demand for houses. With the raging political uncertainty, no one wanted to sink their money into a new building.

Even those who got approvals, said the managing director for Knight Frank Kenya, were not building.  This, in turn, saw cement manufacturers suffer as less of their material was consumed.

Consumption of light diesel, used to power machinery in the manufacturing sector and agriculture, also slumped.  

Few vehicles were assembled in the first nine months. Even fewer new vehicles were registered during this period.

This saw the Government collect fewer taxes, a trend that is likely to persist going forward.   

In the financial year ending June 2017, the tax-to-GDP ratio fell to 16.9 per cent, the lowest in a decade, according to the World Bank.

The Bretton Woods institution blamed this on reduced economic activities. “For instance, over the past year, the financial sector, which is one of the largest contributors to corporate tax, experienced a slowdown following the interest rate cap — this has, in turn, reduced their profit margins and tax obligations,” said the World Bank.