Kenya’s private sector activity grew at a slower pace in October easing to 53.2 from 54.1 in September according to the Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) released Tuesday.
Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.
In the survey, the new business received by Kenyan firms was up sharply during the month, despite a slower rate of growth compared to September.
Surveyed businesses were encouraged by a strong inflow of new clients, often related to referrals from previous customers. It was also noted that efforts to improve marketing strategies and service quality helped to increase demand.
“Despite this, output levels expanded only marginally, with panellists continuing to mention that cash flow issues had stopped them from meeting demand. As such, backlogs of work increased further, marking the sixth successive month of greater capacity pressures.”
The cash flow challenges were being compounded by a cap on commercial lending rates said Jibran Qureishi, regional economist for East Africa at Stanbic.
“We have in the recent past linked this to the combination of delayed payments of arrears owed to the private sector which was also compounded by the interest rate capping law,” he said.
Looking ahead, expectations for future activity fell notably in October, posting the weakest optimism in the year so far.
Qureishi is optimistic that “The imminent repeal of the interest rate cap is indeed a positive move and will embolden commercial banks to price credit risk again and more importantly for SMEs.”
“That being said, other issues that have restrained aggregate demand continue to persist and ought to be addressed as well in order to bring down the banking sector NPL levels and further supplement the improvement of private sector cash flows,” he adds.
Kenya’s National Assembly’s finance committee recommended the removal of the Intrest rate cap. It is scheduled to debate the committee’s report on Tuesday.
Analysts from the National Commercial Bank of Africa, Global Markets Research, observe that the discussion in Parliament will be fundamental in guiding asset pricing going forward.
“While Parliament may favorably consider the President’s reservation, it is unlikely that they settle on a blanket repeal. At a minimum, MPs may endorse the Finance Committee’s recommendation to lift the cap but have terms for existing loans unaltered. Even then, should parliament reject it, but fail to get three third majority support, there may be a renewed push for fresh controls “to keep lending rates low”, they stated in their Weekly Fixed Income Report.
“A repeal of the cap may attract increased scrutiny of bank lending activities and general performance with potential for fresh legislation that still places a ceiling on cost of credit. Thus far the rhetoric has leaned towards a graduated scale, informed by borrower’s varied risk profiles,” they add.