Standard Chartered Bank December Market Outlook
We raise our 2021 growth forecast to 5.6% (from 5.3%) to reflect a faster-than-expected recovery off a weak base after a slight contraction in 2020).
In 2022, there may be some downside risks to growth given the upcoming general elections and the development of the Omicron variant that may dampen tourism recovery in East Africa.
Fiscal policy will be guided by Kenya’s IMF programme, which seeks to reduce debt risks.
Under the IMF programme, allowances are made for near-term economic uncertainty; more significant fiscal consolidation and the achievement of a primary surplus are deferred to the later years.
Government revenue outperformed in both FY21 and Q1-FY22. Kenya’s progress in the IMF Extended Credit Facility / Extended Fund Facility program has been encouraging with a staff level agreement on its second review reached in early November. This should unlock around USD 264mn in financing once the IMF Executive Board approves it and boost FX reserves which are at USD 8.7bn (5.3 months of import cover).
Authorities recently raised their fiscal deficit projection for FY22 to 8.2% of GDP (from 7.5%), slowing the pace of fiscal consolidation to allow for drought-related spending.
A supplementary budget is planned in FY22 to expand the COVID vaccination programme and provide additional support to State Owned Enterprises (SOEs).
We expect the authorities to maintain the fiscal deficit target at 6.0% (starts in July 2022) in FY23.
International oil prices have declined in recent weeks, and this may see inflation within the current range. But we are still cautious about the supply disruptions plaguing the market, and some currency weakness because of rising imports as the economy recovers.
We would expect monetary policy tightening in 2022, especially if inflationary pressures persist and rise above the 5% +/-2.5% target band.
Local yields may also remain range-bound as the authorities are well on track to meeting their FY22 domestic borrowing target of KES 662bn – having borrowed c. 52%.