Kenya's economic growth is expected to slow down to between 5.4 and 5.7 percent in 2017 down from 6 percent in 2016, analysts said on Monday.
Cytonn Chief Investments Officer Elizabeth Nkukuu told a media briefing in Nairobi that the slowdown will be largely due to the ongoing drought that will affect agricultural sector which accounts for about 20 percent of total Gross Domestic Product (GDP).
"We expect strong levels of GDP growth at between 5.4 percent and 5.7 percent in 2017, driven by government expenditure and the growth of key sectors such as construction, as Kenya benefits from its diversity in growth sectors," Nkukuu said.
"This is despite the challenges we face as an economy with the interest rate cap and slowdown in the agricultural sector," she added.
Nkukuu said she expects inflation in 2017 to be higher than the 2016 figures averaging between 6.7 percent and 7.2 percent driven by prolonged dry weather, which will persist until mid-2017 driving food prices up.
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"The reduced growth will also be caused by the heightened political pressure given that presidential elections will be held in Aug. as well as the low private sector growth which was at 4.6 percent in October 2016 from a high of 21 percent in August 2015," Nkukuu said.
Economic expansion in 2017 is expected to be fueled by continued expenditure on infrastructure and the recovery of the tourism sector.
The East African nation will also experience a significant decline in private sector credit growth due to an increase in Non-Performing Loans which has prompted banks to reassess their risk assessment framework, and now prefer to lend to the government as it is risk free.
Nkukuu said that the operationalization of the Banking (Amendment) Act, 2015, brought a new loan pricing framework which locked out most consumers and Small- and Medium-sized Enterprises from accessing funds.
"We expect initial upward pressure on interest rates in 2017 as the government may look to increase borrowing locally to cater for the deficit that is likely to arise from lower revenue collection and foreign borrowing," said Maurice Oduor, an Investment Manager.
"However, improved liquidity and liquidity distribution by Central Bank of Kenya is set to mitigate the upward pressure exerted on interest rates," Oduor added.
The Kenya equities market is expected to be flat in 2017, following two consecutive of negative NASI performance of 8.5 percent and 11.0 percent in 2016 and 2015, respectively.
The market decline so far has made valuations attractive, providing an attractive entry point for long term investors.
In private equity, Oduor said Kenya remains an attractive destination for investors, especially in the following key sectors: financial services, renewable energy, education and technology.
He said consolidation in the banking sector will be the key focus in the financial services sector, with a lot of expected activity as small banks consolidate or get bought out, in a move that will attract global investors.
"In addition, the renewable energy sector offers a high potential for wind, solar and geothermal energy generation in the country," Oduor added.
The analysts also noted that Kenya's equities market is expected to be flat in 2017, following two consecutive of negative performance.
"However the market decline so far has made valuations attractive, providing an attractive entry point for long term investors seeking return in the markets," Nkukuu said.
According to the analysts, the real estate delivered high returns averaging 25.8 percent across all themes in 2016, with the best performing themes being retail and offices with average yields of 10.0 percent and 9.4 percent, respectively.
In 2017, the sector is expected to continue with its good performance across all real estate themes compared to traditional asset classes.
The key drivers of real estate in 2017 will be the large housing deficit, demographic trends such the growing middle class, continued improvement in infrastructure and better operating and legal environment.