Kenyan Economy Suffers Following Interest Rate Cap
IHS Markit | Apr 06, 2017 08:17
PMI survey data indicating a contraction of business activity raises concerns about the impact of recent bank lending regulations.
Last September, Kenyan policy makers implemented a cap on the rate at which commercial banks can lend at 4% points above the Central Bank rate, which currently stands at 10%.
Stanbic Bank PMI data, produced by IHS Markit, reveal that three years of sustained improvements in business conditions came to an end in March. The Banking Amendment Act was reported by companies to have contributed directly to the contraction in Kenyan private sector business conditions.
Companies responding to the PMI survey have mentioned the lending rate cap as having a detrimental impact on business in early-2017 as customers faced financial constraints and weaker demand conditions. The PMI data suggest that there is a strong likelihood that GDP could fall in the first quarter of the year.
Order book growth wanes
March PMI data also pointed to a slowdown in new order growth to the weakest since the survey began at the start of 2014. This represents a marked turnaround from the end of 2016 when sharp expansions in new orders were being recorded.
h3 Threat to the economy/h3Evidence on the impacts of the lending cap are also beginning to show through in official data. Credit growth to the private sector was much slower at the end of 2016 than had been seen earlier in the year, tracking at around the lowest since the end of 2003.
Meanwhile, analysis by the Kenyan central bank suggests that loan approvals declined by 6% between December 2016 and February 2017.
The minutes from the central bank’s recent Monetary Policy Committee meeting also suggested that small and medium enterprises have been disproportionately affected. This is believed to be a consequence of rigid credit standards, with banks gravitating towards lending to safer borrowers, such as the government or large corporations rather than small riskier borrowers.
The PMI data back up these findings. Small and medium-sized companies recorded much sharper reductions in output during March than larger firms, according to the PMI data, with small companies performing worst over the first quarter as a whole.
Get The App
It will be interesting to see if policy makers take note of the negative economic impacts of the rate cap and reassess the policy going forward. The release of official GDP estimates for the end of 2016 and opening quarter of 2017 will provide additional important information with regards to the impact of credit growth and bank lending.
The PMI will meanwhile continue to provide the latest information on how the economy is faring as we head into the second quarter of the year. PMI data covering data for April will be released on May 4th.
Disclaimer: The intellectual property rights to these data provided herein are owned by or licensed to Markit Economics Limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit’s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information (“data”) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon.
In no event shall Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers' Index™ and PMI™ are either registered trademarks of Markit Economics Limited or licensed to Markit Economics Limited. Markit is a registered trade mark of Markit Group Limited.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.