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Kenya's business sentiment drops as credit tightens

NEWS
By Jackson Okoth | August 3rd 2015

The Kenyan business sentiment weakened further in July, falling to a five-month low of 54.5, having already fallen to 58.6 in June, according to a business sentiment indicator compiled by Standard Chartered Bank.

This is a diffusion index, summarising in a single number how optimistic businesses feel about current and future economic conditions in Kenya. The index cites significant pressure on the Kenyan Shilling in recent weeks and the aggressive tightening response by the Central Bank of Kenya (CBK).

Central Bank of Kenya raised its benchmark Central Bank Rate (CBR) by another 150 basis points to 11.50 per cent - at the Monetary Policy Committee (MPC) meeting last month - to anchor inflationary expectations, noting the "elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months."

The banking sector regulator, which has now raised its rate by a total of 300 basis points following a hike in June, added that it had introduced a 3-day repo to help it manage liquidity, noting "the need to closely monitor liquidity conditions in the market."

"We expect more tightening at the next MPC meeting, brought forward to August 5, 2015," Standard Chartered Bank chief economist for Africa Razia Khan said. Kenyan businesses reported lower interest rates paid, despite 300bps of policy tightening in June and July, and a higher six-monthly reset of the Kenya Banks Reference Rate in July.

Interest rates

The slow pace of transmission from policy tightening to market interest rates indicates scope for further policy tightening, or at least a better alignment between policy and market interest rates. Higher overnight rates by end of July suggest that this indicator's reading may change in August.

The index reveals a mixed reaction to CBK tightening. On the one hand, Kenyan businesses appear more optimistic that something is being done to rein in currency weakness. On the other hand, businesses fear that both credit availability and their financial positions might deteriorate more sharply.

In all, four of the five indicators that make up the headline index fell between June and July, including production and new orders. Of the indicators that contribute to the headline reading, the supplier deliveries indicator increased, but that, too, only marginally.

The Kenya index remains above the key 50 level, consistent with an expansion in economic activity. However, economic activity appears to be losing momentum relative to the second quarter of this year.

Sentiment regarding the negative impact of the Kenya Shilling fell in July. The 'effect of the Kenyan Shilling exchange rate indicator' rose, reflecting the Central Bank Kenya's efforts to stabilise the Shilling.

Full impact

Khan said that many Kenyan businesses believe the full impact of CBK tightening is still feeding through to the economy. "However, given the optimism generated by President Obama's recent visit to Kenya, we expect this more bearish assessment to be short-lived.

"With increased international private-sector focus on Kenya described as a 'hotbed of technology and innovation' in Africa, sentiment should recover in August," she said.

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