CFC Stanbic sees high interest rates hurting economy

NAIROBI: Over Sh450 billion worth of Government debt will be due for repayment this year, signalling that the State will borrow even more and stoke a fresh round of interest rate hikes.

It is projected that the Government will turn to borrowing from the domestic market to repay its loans when they fall due, pushing the average cost of credit including on commercial lending rates. Economists at CFC Stanbic Bank have forecast that the huge loan repayments that will fall due in the next 11 months present the biggest threat to the economy and consumers through costlier credit.

"Higher lending rates are the biggest threat to the ordinary consumers," regional economist at CFC Stanbic Jibran Qureishi said of the outlook for 2016. Kenya's economy is projected to grow at 5.7 per cent in the bank's estimates, up from 5.3 per cent last year. Qureishi's forecast closely mirrors other projections including World Bank's 5.7 per cent, but is significantly lower that the International Monetary Fund's 6.8 per cent.

Earlier in the week, Standard Chartered Bank projected that the Kenyan economy will grow by 5.8 per cent this year shrugging off headwinds in the global economy. For StanChart, Kenya's level of debt was of rising concern, but the economists at CFC Stanbic downplayed such fears.

A spike in the cost of credit in 2015 prompted the Government to take up debts with short maturities, of between 91 days and one year – which CFC Stanbic lauds as prudent debt management. Borrowing on longer term would leave the Government with costlier loans for longer periods. However, the decision to borrow short term now means huge exposure as most loans are maturing around the same time.

The impact of the higher lending rates is however projected to be mitigated by the slump in the global price of crude oil, whose effect is lower cost of energy for households and the wider economy. Qureishi projects that the crude oil prices will remain subdued, at least for the first half of the year, following global developments including the high production levels in both US and Saudi Arabia, and the oncoming of Iranian produce to the international markets.

Kenyans were, however, yet to enjoy fully the benefits of the slump in global oil prices, partly due to a pricing formula that considers the prevailing market prices in the previous 45 days to the day when retailing pricing is fixed by the Energy Regulatory Commission.

Already, pump prices are at about Sh88 per litre of petrol in Nairobi, down from a peak of near Sh120, with projections of further cuts in the coming months. Lower energy prices are also hoped to translate to cheaper processed commodities for household consumption, while the rains are expected to help in cutting food prices.

At the economy level, the cheaper energy prices will mean Kenya will be spending less on importing fuel and cutting the current account deficit – the difference between capital inflows and outflows.

Qureishi said the current account deficit for 2015 would be around 8 per cent, up from a high of 10 per cent in the previous year. Huge government spending, considering that 2017 is an election year, should boost economic activity – helped by te continued investment in infrastructure projects.

"We are in a pre-election year and while spending on development will increase future productive capacity, the government ought to ensure that recurrent expenditure doesn't get out of control," CFC Stanbic projects.