Kenya's economy is staring at a major slowdown on the impact of the weakening shilling, economists at Standard Chartered have forecast, citing falling demand among businesses.
No new jobs were created in August in the clearest pointer to the dipping confidence on positive outlook. The predictions are informed by slowing momentum as shown by Kenyan Business Sentiment Index, despite the temporary boost presented by the historic visit by US President Barack Obama in July.
"The Kenyan businesses surveyed continued to see the negative effect of the shilling exchange rate as a constraint to business activity," Razia Khan, the chief economist at Stanchart for Africa has said.
The survey conducted among top business considers their anticipation on 15 indicators. Expectations among the businesses surveyed declined in 10 of the indicators in July, to be followed by a further drop in nine last month. Many Kenyan-specific factors are expected to weigh down confidence, while firms are wary of the rising inflationary pressures arising from a weaker currency.
"This points to the need for caution ahead. Kenya's economy may be growing, but headwinds – both external and domestic – are increasingly evident," Stanchart projects in its latest monthly report.
To reduce the impact of one-time events like Obama's visit, the economists use a three-month moving average in tracking the indicators. In the June to August average, the Business Sentiment Index fell to 56.3 in August from 60 in the May-July period to signal slowing momentum.
Higher expectation was reported in July that is attributable to Obama's visit and the Global Entrepreneurship Summit, which attracted thousands of high-net-worth business leaders from around the World.
Businesses anticipated that Obama's visit would yield significant dollar inflows through bilateral agreements, which could help reverse the fall of the shilling. A surge on imports of materials for infrastructure projects and the declining tourism earnings have been cited as the two main drivers of the slump, with the shilling now trading at Sh104.80 against the dollar, a four-year record low.
Stanchart's forecast of a tough year ahead comes amid rising jitters among investors following depressed corporate earnings for most listed companies. At least 25 companies out of the 34 that have reported their operating results in the season have returned either a significant drop in profits or even outright losses.
The narrative among the affected firms has been the impact of the weakening shilling and the steep rise in interest rates.
A weaker shilling results in increased input costs arising from pricey energy and imported raw materials. Also an issue are the prevailing high interest rates that have wiped out otherwise improved operating profits for a number of firms.
Lower corporate profits could have far-reaching implications on the employment numbers, further complicating an already dire situation. National revenues are also on the line since corporation tax is among the bigger sources for the Kenya Revenue Authority.
The effect of the twin factors could already be in play on jobs, as Stanchart reported that employment had remained flat in August.