The charts that will keep Finance Cabinet Secretary Henry Rotich busy

NAIROBI, KENYA: President Uhuru Kenyatta will be taking on his second time in office with a full plate on the political front. But it is the economic side that will call to his attention defining investment decision the cost and who will be juggling these difficult numbers.

And this year there are no scapegoats, there was sufficient rain so agriculture is good to go, there are no elections, so political noise is muted.

It will be the President’s policy decisions that will steer the economy as environment (weather, no campaigns) seems favourable

Here are six numbers to watch out for in 2018.

Debt

Kenya stock of debt as at November was Sh4.53 trillion, if we stick to budget figures of Sh582.5 billion budget deficit then the debt will hit Sh5.1 trillion in the next six months.

While some of the debts will be paid during the year, Treasury has defended its decisions to borrow from Paul to pay Peter as a sound debt restructuring model.

Analysts however point out that this flawed way of handling debt will lead to a debt trap even forcing Kenya to take up more expensive debts than the ones she currently holds.

“There are a lot of maturing debts this year so it is something to watch in the first quarter. It includes the deferred October debt and the other debts that are coming up. Obviously with the downgrading by Moodys and Fitch we will have to borrow more expensively,” said Kwame Owino, CEO Institute of Economic Affairs.

Mr Deepak Dave of Riverside Capital says that it will be more important to look out for the cost of these new debts and not just the headline figure.

“It will be important to look at the debt - pricing of the successive loans taken to refinance maturing debt. Is Kenya being treated by public markets as a High Risk borrower,” he reckoned.

Jibran Qureishi, Stanbic Bank Regional Economist, East Africa says that in 2018 there will be two things to watch out on debt and that will be if there will be fiscal consolidation and the cost of debt servicing.

Tax Revenue

The Kenya Revenue Authority was expected to collect ShSh1.499 trillion this year, however the first quarter of the fiscal year; the taxman was 13 per cent short of its tax target. So the figure has now been cut down to Sh1.439 trillion.

“When we look at how we have performed so far we see it that our revenue targets are too ambitious especially with the economy slowing down,” Mr Owino said.

The government has kept on spending lavishly partly believing that they will not need to borrow more so long as it can raise revenue above 20 per cent of GDP, from 18 per cent-19per cent in the past. This has not materialized.

“With the large informal sector there is very little we can do to expand taxes, there is very little we can do, so we will need to tame expenditure,” said Qureishi.

Mr Deepak says that the government should be realistic and ask whether Kenyans are actually earning enough to meet rising revenue target of the State.

The year 2017 saw massive layoffs which meant that the pool of people to be taxed had actually shrunk. This was clearly demonstrated with Pay As You Earn, which are taxes paid on formal jobs falling short a whooping Sh17 billion in the three months to September.

Mr Owino says that corporates which have issued profit warnings as the economy slumped are also likely to drag down KRA’s tax returns. In fact he says that ‘If new investment does not come in, then we will still miss our tax targets’.

“Many people are blaming the elections but I think the twin factor on interest rate controls and government crowding out the private sector is to blame. The government is taking all the money that should go to investment in the small and medium enterprises so this credit squeeze obviously affects profitability and KRA cannot raise enough funds.” Mr Owino said.

IMF Facility

Debt and taxes balance out what the International Monetary Fund (IMF) will be reviewing on whether to extend the two-year standby facilities for Kenya worth about $1.5 billion set to expire in March.

The funds comprise a standby arrangement worth about $990 million and a standby credit facility worth about $495 million.

This money is important and helps cushion Kenyans from unforeseen economic shocks. These include sharp rise in oil prices, massive dollar outflows to volatile dollar exchange rate and risks that threatens Kenya’s forex reserves

“The IMF will be looking at our debt servicing ratio. Can the country sustain debt repayment from the existing economic fundamentals,” Mr Deepak said.

Mr Qureishi says that the IMF could impose tough conditions to be met in terms of taming our expenditure which could range from cutting workforce to reducing projects.

“I think the IMF will probably give the government a benefit of doubt because of the extended electioneering period and the completion of the SGR project. Going ahead however, debt servicing costs and fiscal consolidation will be a rigid condition to be met,” said Mr Qureishi.

The IEA boss says the IMF have been very keen on how Kenya remained disciplined on her spending “but so far our budget deficit has not been convincing.”

“Of course if they do not agree with the government that we will be at a worse position if they withdraw the facility,” Mr Owino said.

GDP

Kenya’s growth has mainly been driven by government spending on huge infrastructure projects, if the government were to consolidate its spending, then will the country’s Gross Domestic Product grow as fast?

“The proportion of GDP has been from Consumption as opposed to investment. Are the investments in infrastructure actually translating to real growth or do we have to keep paying for projects that don't pay off?” Mr Deepak poses.

According to Focus in the Economics Survey, Kenya’s economy is likely to bounce back to 5.3 per cent in 2018 from the estimated 5 per cent this year on the back of a recovery in the agricultural sector and increased investment.

The economists however note that lingering political tensions and the government’s interest rate cap policy pose significant downside risks.

Fitch’s forecast is that GDP growth to recover to 5.5 percent in 2018 as falling inflation allows the Central Bank to begin easing monetary policy and infrastructure projects continues n the current financial year.

CBR

Analysts however disagree with the ratings agency’s position that CBK will move the indicative rate for borrowing.

CBR which has remained at 10 per cent since August 2016 is seemingly inflexible since the rate capping law was introduced.

“CBK has no leeway to change the CBR within the rate cap environment. If there was no cap then there would have been motivation to bring it down with the subdued inflation and economy in a clear need for stimulation. But now I do not think they will cut,” said Mr Qureishi.

CBK monetary policy decisions are supposed to boost the economy by lowering CBR to encourage banks to lend more or raising it to manage inflation and discourage banks to lend less.

Kenya’s credit growth has been the worst this year growing less than 3.9 per cent month to month and as low as 1.4 per cent in July. During this period CBR has not been moved to correspond with the decline in borrowing.

“The differential between these rates have made things difficult. Does the CBK really have control of monetary conditions,” said Mr Deepak.

Inflation

The CBR has not also reacted to inflation, which will be another key figure to look out for in 2018. In 2017, inflation rose beyond CBK target to a high of 11.7 per cent in May. Inflation has however stabilised to 5.72 per cent in October.

CBK said it could not move CBR because the inflation was driven by food prices that had soared following the drought of late 2016.

“Inflation will not be a major factor in 2018. What we saw in early 2017 will not be repeated because there has been good weather which has really boosted agriculture,” said Mr Qureishi.

Mr Deepak however gives a cautionary tone saying that, although unlikely, if inflation does rise sharply it will further affect credit.

“Once this rises past the point where Real interest rates are negative, the financial sector will sharply need to cut credit,” Mr Deepak said.

Mr Owino says that inflation was difficult to predict as they depend on unprecedented factors.

“At IEA we do not predict inflation. We know of course that it will be determined by the prices of oil and food and that is where we focus on,” he said.