Kenya's economy will perform better in 2013 compared to growth in 2012 because of the continuing drop in interest rates, an economic analyst from global investment bank Renaissance Capital Yvonne Mhango has said.
"We expect stronger economic growth of 4.3 percent in 2013, up from 4 percent in 2012, with lower interest rates likely to spur a recovery in credit growth that will support a pick-up in economic activity, particularly in the financial intermediation, wholesale and retail trade, transport and communication, real estate and construction sectors," said Mhango in the bank's most recent update received on Tuesday.
According to the Renaissance Capital's monitoring of local economy, credit growth began to respond to falling interest rates in late 2012 when it bottomed in October at 8.5 percent and picked up thereafter.
"On the demand side, we expect household consumption to strengthen and demand for consumer durables to increase. Lower interest rates are also positive for fixed investment; however, its recovery may be tempered by the dampening effect of elections, " she said.
Renaissance Capital said the risks to growth outlook are the elections and poor rainfall. Growth may also surprise on the upside if the elections go smoothly and private investment picks up significantly thereafter.
"While we expect an increase in inflation in 2013, partially due to a pick-up in food prices, we expect this to be moderate. We think further monetary policy easing will help strengthen credit growth, and by implication economic growth, but will be negative for the shilling," said Mhango.
"We believe the upside risks to our inflation outlook include a poor long rains season of March-May; high global food prices; a rush of election-related spending in the first half of 2013, particularly if there is a second round held; and a sharp increase in the oil price," she added.
The forecast for Kenya's economic growth comes three weeks to the general elections, a period usually associated with lower slowing economy.
Elections related spending will increase the current account deficit although not by a very big margin.
"We project a small increase in the current account deficit to 11.3 percent of gross domestic product (total value of the economy) in 2013, from 10.5 percent in 2012," Mhango said.
She said the increase will also be driven by slowdown in tourism income and upward pressure on imports due to election- related fiscal spending.
However, Mhango said this may be tempered by a slowdown in investment-related imports during the polls.
"We also expect a slowdown in financial inflows in 2013 due to uncertainty surrounding the elections. That added to a lower interest rate environment points to some shilling weakness in 2013. We project an exchange rate of 91 shillings against 1 dollar at year 2013, from 86 shillings against a dollar at year 2012."
The bank also projects that budget deficit is likely to come in at a slightly lower 6.2 percent of the total value of the economy (GDP), instead of the target of 6.6 percent.
Mhango said the upside risk to the deficit is strong election- related spending in the second half of financial year 2012/13.
"Fiscal operations in this financial year reveal that 95 percent of the deficit was domestically financed, as opposed to the target of 67 percent, implying that we are likely to see a return to greater domestic borrowing in 2013," said Mhango.