Economic Overview

June 2024 was marked by a series of economic and political events that will continue to shape investor sentiments towards sub-Saharan Africa. The most recent development was the protests in Nairobi, Kenya, triggered by the now-withdrawn 2024 Finance Bill, which proposed new income taxes. The demonstrations and unfortunate government response—opening fire at civilian protesters—caused significant damage to property and loss of life. Tensions will likely de-escalate in the coming weeks, but we expect market sentiments towards Kenya to remain bearish, especially as Kenyans call for President Ruto’s impeachment. The unrest has worsened public discontent about the Ruto administration, raising security and safety concerns in Kenya that threaten near-term macroeconomic stability and the chances of a positive IMF review in July.

In South Africa, investors closely monitor the unexpected but cohesive political alignment through the Government of National Unity (GNU)—a coalition of ten political parties united by a shared commitment to

Nigeria

Currency risk 

Due to forex supply shortages, the naira depreciated at the official and parallel markets in June. Average daily turnover at the official market, an indicator of forex transaction volumes, declined by 13.16% to $183.83 million in June from $211.7 million in May, highlighting reduced market activities. Between June 3 and 26, the naira depreciated to ₦1,507.83/$ from ₦1,476.12/$ at the official market. The currency closed the month at ₦1,505.30/$, 5.95% below the Stears Q2 2024 endpoint forecast of ₦1,415.78/$.  Notably, the spread between the official and parallel rates, which stood at 29.06% on May 28, just before President Tinubu marked one year in office, significantly narrowed to 1.31% by May 30th. This swift convergence highlights the expectation of lower arbitrage and speculative activities in the forex market. This will bode well for Nigeria's attempts to attract investors in the near term.

We forecast the naira to trade at ₦1,423.26/$ by the end of Q3 2024, 6.10% up from the ₦1,510.10/$ in Q2 2024. This appreciation is premised on the increase in dollar inflows, evidenced by the sustained uptick in reserves that will support the CBN’s ability to defend the naira. The forecasts also consider the temporary but favourable implication of the World Bank’s $750 million disbursement on reserves and forex supply. 

Inflation and interest rate decisions 

Inflationary pressures persisted in Nigeria in May 2024, reflecting the exchange rate pass-through effect on commodity prices. The headline inflation rate increased 26 basis points to 33.95% (Stears forecast: 33.35%) from 33.69% in April. The slow rate of increase in inflation suggests that base effects are taking hold. Notably, the monthly inflation rate (2.14%) declined to a six-month low on lower food prices. Some significant staples like rice, flour, sugar and palm oil saw notable declines, partly supported by softer global prices. 

The June 2023 headline inflation rate did not substantially reflect the high price pressures of Tinubu’s reforms. Consequently, base effects will have little impact on the June 2024 numbers. The June inflation numbers will also reflect the naira’s 3.44% depreciation effect between May and June on commodity prices. This means the annual headline inflation rate will slowly decline while the monthly inflation figures could increase from the current six-month low. We expect the June numbers to be moderately higher than our base prediction of 32.50% but lower than our bear scenario of 35.23%.

Meanwhile, we expect the July inflation numbers to decline further, mirroring the impact of favourable base effects more significantly. The brief naira appreciation due to the expected increase in dollar inflows and higher foreign exchange reserves will support this. The naira’s appreciation, followed by the positive impact of the recent VAT rate and import levy suspension on staple food items to reduce import costs and inflationary pressures, will further support prices, positively impacting inflation. 

These essential fiscal policies will support the CBN's tight monetary stance to curb spiralling inflation in Nigeria, aiming for the year-end target of 21.4%. However, the risk is that tax incentives may significantly boost demand, increasing inflationary pressures.

Additional risks to the July inflation respite are the upcoming planting season, which typically commences in Q3, at the peak of the rainy season, according to Nigeria’s Meteorological Agency (NiMet). This means that food, the primary driver of inflation in Nigeria, will be in short supply, negatively impacting prices. 

With inflation risks elevated, we expect the CBN to raise interest rates by 100-200 basis points to narrow the inflation-interest rate gap and support the currency in July. At the start of the year, we hinted that a cumulative 1000 basis point hike scenario to 28.75% by the end of H2 2024 or year-end would be the most successful in reining Nigeria's inflation from the monetary front, and we maintain this stance.

Output risks

As earlier mentioned, Nigeria secured a $2.25 billion conditional loan facility from the World Bank. This report breaks down the loan agreements and structure. The loan increases Nigeria’s total debt stock by 2.46% to $93.7 billion, increasing the debt-to-GDP ratio to 53% (above the IMF’s 50% threshold for developing economies) and raising concerns about debt sustainability. 

However, the impact of targets such as increased VAT rates, oil and non-oil revenue growth, and social safety nets will be crucial in the coming months. With proper implementation and strict monitoring, the World Bank loan aims to boost Nigeria's key income source, crude oil. Although oil production declined by 12.58% between January (1.44mmbpd) and May (1.25mmbpd), the government will strive to increase production to avoid loan revocation. 

This means that in the coming months, the three tiers of government will see a sustained rise in the naira Federal Account Allocation disbursements (FAAC) that have more than doubled since 2023. A surge in FAAC means that 33 of the 36 state governments, heavily reliant on these funds, will receive more revenue for developmental projects and salary payouts. 

While we expect this to have a muted impact on the overall economic productivity in the near term, the rise in oil revenues will boost the government’s coffers and maintain the increase in forex reserves.  Increased non-oil revenue will further support this boost, driven by the government's support of small-scale businesses and infrastructure projects within the ₦6.6 trillion fiscal stimulus package. Output, which has grown by a modest average of 2% in the past five years, will benefit from these measures. The PMI reading, a leading indicator of GDP growth, has remained in expansion territory for most of Q2 2024, suggesting growth will exceed the 2.98% recorded in Q1 2024.

While the loan benefits the economy's supply side, it has negative demand-side consequences despite the planned social safety nets for the vulnerable and poor. The loan agreements include a near doubling of the VAT rate by 2026, which we expect to occur in two stages to mitigate economic shock and public outcry. We anticipate an initial increase from 7.5% to 10% in 2025, followed by a rise to 12.5% in 2026. 

Unfortunately, given the current macroeconomic conditions and cost of living crisis, we do not expect income levels to significantly cushion this VAT hike until 2027, regardless of the minimum wage discussions. This means that consumption, which accounts for over 70% of GDP, will likely remain subdued in the short-medium term, impacting long-term investment decisions. 

Overall, July will be marked by the positive implications of the World Bank loan agreements, sustained inflationary pressures and a high interest rate environment in Nigeria. 

South Africa

In June, South Africa’s presidential election outcomes drove the economy. The parliament voted the ANC’s Cyril Ramophosa for a second term despite the party losing its outright majority, gathering only 40% of the total votes cast. However, in a surprising turn of events, Ramophosa has garnered the support of ten political parties, including its foremost opposition, the Democratic Alliance (DA), to secure more than half of the 400 parliamentary seats. This happened under the new coalition Government of National Unity (GNU), which has since faced hurdles, such as the ANC and DA clash on ministerial tickets.  

The GNU is bound by a joint statement of intent that upholds the ten foundational principles, including respect for the Bill of Rights, peace and good governance. In the next five years, the coalition seeks to achieve its minimum requirements of reduced unemployment and a sound macroeconomic environment. The bottom-up developmental approach of the alliance, which involves each party improving citizens' well-being in the most popular districts, is a welcome development to ensure equitable wealth distribution and output growth in South Africa. However, this depends on how power is shared and whether the coalition will last for five years. 

The GNU development will positively impact investor sentiments towards South Africa. If political harmony exists, the IMF’s prediction that the country will displace Nigeria and Egypt to become the most prominent African economy in 2024 may become accurate.

Currency risk 

The expected boost in investor confidence in South Africa’s relative political stability will improve dollar inflows into the country. South Africa’s foreign exchange reserves are already up 0.47% between April ($62.09 billion)  and May ($61.80 billion). The increase in capital inflows will support the South African rand, which was volatile in June and oscillated between R17.96/$ and R18.91/$. However, the rand appreciated by 2.93% between June and May. Positive investor sentiments will help stabilise and support the rand. Notably, the rand appreciated on June 13 (GNU coalition announced) and  June 19 (Inauguration of Ramophosa) to R18.42/$ and R17.96/$, respectively. The aforementioned indicates a correlation and an immediate positive market reaction towards political events in South Africa. 

The increase in export earnings from gold, which saw a 21.95% y/y price increase in the global commodity market, will also support the movements in the rand. Investors rotated funds towards safe-haven assets as part of a rally in global commodities prices and uncertainty. Gold accounts for 15.4% of South Africa's export earnings. However, the US dollar's performance and the rand's attendant impact are a potential risk to the positive currency outlook. The USD will likely remain strong in July as the Fed moves slower than other global central banks in reducing rates. Considering this, Stears predicts a modest rand depreciation to  R18.36/$ in Q3 2024, down from the R18.32/$ recorded in Q2 2024.

Inflation and interest rate decisions 

A relatively positive outlook for rand in July will impact prices positively. In May, South Africa’s inflation steadied at 5.2% (y/y) and eased to 0.17% m-o-m. The inflation trend suggests waning base effects, likely leaving the headline rate around 5% and 5.5% between June and July. However, the monthly inflation rate will be more reflective of the high food and energy costs, evidenced by the increase in the monthly food (0.20%) and transport (0.70%) inflation rates in May. The adverse weather conditions have negatively impacted the food supply, leading to higher prices, while transportation reflects the upward trend in energy costs. 

Elevated inflation will keep eroding purchasing power, making it harder for consumers to maintain their standard of living. The lingering increase in producer prices, driven by higher input and borrowing costs, will further exacerbate this situation. It also means that producers are likely to keep passing the burden to consumers through prices, a trend that will keep inflation sticky downwards. Although we expect some respite to the rand in July, more is needed to taper operating expenses for manufacturers significantly in the short term. 

Inflation risks are high in South Africa, a significant consideration for the SARB at its upcoming meeting on July 18. We expect the bank to retain its 8.35% repo rate at the meeting for the 14th consecutive time. The SARB retaining this hawkish stance will be part of its forward guidance approach to protect the rand further and rein in inflationary pressures. In June, yields on government securities, particularly the 12M treasury bill, increased, offering investors favourable rates of returns. The increase in yields and a favourable political landscape will incentivise the South African economy in the near-term. Unfortunately, high interest rates also limit access to credit for both businesses and consumers, perpetuating the cycle of reduced output and consumption.

Output risks

As manufacturers face a challenging operating environment characterised by reduced access to credit, output remains under threat. In Q1 2024, the South African economy contracted by 0.10%, well below the 1.6% growth rate in 2021. This sluggish growth is reflected in key indicators such as the ABSA PMI, which tracks manufacturing activities, and the S&P PMI, which monitors private sector activities. Both indices show minimal improvement, with the manufacturing PMI contracting to 43.8 points in May, signalling constrained activities.

This constrained manufacturing activity points to slower output growth in the near term, especially as critical sectors of the economy, like mining, struggle to rebound. Reduced output translates into persistent unemployment risks as job creation slows. In Q1 2024, the unemployment rate increased to 32.90% from 32.10% in Q4 2023. The S&P PMI reading for May 2024 highlighted a significant contraction in the employment and new orders sub-indices, indicating that businesses are not expanding their workforce or receiving enough new orders to sustain growth.

The impact of reduced output extends beyond the industrial sector. Lower production levels lead to decreased worker incomes, dampening consumer spending, another risk to growth. With limited access to consumer credit and low income levels, consumers are less likely to finance major purchases, further weakening demand, which contributes 64% to GDP. This reduced manufacturing output and consumption cycle can exacerbate economic stagnation, making it difficult for the economy to recover robustly. 

In summary, the South African economy will face multiple issues, including currency pressures and rising inflation risks to output and consumption. Addressing these issues will require coordinated efforts to boost industrial output, support job creation, and manage inflation, ensuring a more stable and prosperous economic future for the country. 

Egypt

In June, Egypt witnessed easing financial pressures, primarily due to the significant Ras El Hekma deal, valued at $35 billion, which provided fiscal authorities with much-needed relief. The International Monetary Fund (IMF) also agreed to upsize the country's program to $8 billion from the initial $3 billion. This increase, however, comes with additional conditions aimed at promoting fiscal discipline and sustainability. Among these conditions are a halt to ways and means advancements—essentially the monetary financing of budgetary objectives—and the imposition of a public investment ceiling.

To meet these new quantitative performance criteria (QPCs), the Egyptian government must diversify its revenue streams, focusing on increasing tax revenues and phasing out subsidies on regulated items. The subsidies have long strained the national budget, and their removal is expected to free up resources to be redirected towards more productive uses. However, this move is likely to face public resistance due to the immediate impact on living costs, making its implementation a delicate balancing act for the government.

Another critical aspect of the IMF's conditions is the mandate for the government to reduce spending. This involves stringent budget cuts across various sectors to narrow the fiscal deficit. The ultimate goal of these measures is to achieve debt and fiscal sustainability, a pressing need given Egypt's burgeoning debt-to-GDP ratio, which has risen from 57.09% to 91.23% over the past thirteen years. The increase in debt has been accompanied by a significant rise in interest payments, further straining the government's finances.

The IMF's conditions highlight the importance of structural reforms in enhancing Egypt's economic resilience. Improving tax collection efficiency, broadening the tax base, and reducing reliance on external borrowing are crucial to achieving these objectives. The government is also expected to enhance transparency and accountability in public finances, which will be vital in building trust with international investors and financial institutions.

Currency risk 

The sustained increase in Egypt’s capital inflows, evidenced by the 12.35% increase in foreign exchange reserves between April and May due to bullish investor sentiments, will likely support the currency in the short term. However, this respite in currency pressures will not likely be sustained due to other emanating risks, including Middle Eastern tensions and the performance of the USD, as with other South Africa, Ghana, and Kenya. 

Moreover, as part of the IMF’s conditions for fiscal transparency, Egypt devalued its currency in March by ~40% to ensure that rates are market-determined. The CBE is unlikely to substantially intervene in the markets to deter the pound's decline. Between June 3 and 26, the currency depreciated 1.56% to close at E£48.08/$. Stears forecasts the pound to decline further in the coming months, closing Q3 2024 at E£48.55/$. 

Inflation and interest rate decisions 

We expect currency pressures to persist in Egypt despite the inflow of capital from recent deals and IMF support. This persistent pressure, coupled with the anticipated increase in fuel and food prices as the government considers removing more subsidies on regulated items, poses substantial risks to inflation. Eliminating subsidies, while necessary for fiscal consolidation, will likely lead to immediate price hikes, further straining consumers' purchasing power and potentially slowing economic activity.

Like Ghana, we expect Egypt's annual headline inflation rate to maintain a disinflation trend, primarily due to favourable base effects from the previous year. Egypt’s inflation rate fell to 28.10% in May from 32.54% in April. However, the monthly inflation trends could see an uptick. Higher prices, especially for essential commodities like food and fuel, will be directly reflected in the monthly numbers. 

Given these inflation risks, we anticipate the Central Bank of Egypt (CBE) will retain its current interest rates at 27.25% at its July 18 meeting. This decision aims to positively anchor inflation expectations, support the currency, and rein in inflationary pressures. The CBE has set a target to bring inflation closer to its 7-11% range by the end of the year. 

Higher interest rates will also increase the yields on fixed-income security instruments, providing attractive returns for investors. This strategy appears effective, as evidenced by the strong investor appetite for Egypt’s securities. At the latest auction on June 26, all treasury bill issuances across the 3-month, 6-month, and 12-month tenors were oversubscribed by 2x. This oversubscription indicates robust demand for these instruments, reflecting investor confidence in Egypt's fiscal measures and their expectation of stable returns despite the challenging economic environment.

Output risks

Following the bullish investor sentiments toward Egypt, business confidence among the non-oil private sector is positive despite potential currency risks. This is evident by the 4.64% rise in Egypt’s PMI reading to a year-high of 49.6 points in May from 47.4 in April. Investors will keenly watch the output levels of critical sectors like the manufacturing and construction sectors that jointly contribute 30% to GDP. 

Overall, the Egyptian government’s commitment to phasing out subsidies and implementing fiscal reforms stipulated by the IMF program is crucial for long-term economic stability. However, these measures will inevitably cause short-term pain, particularly in inflation and consumer spending. The key will be managing these transitions smoothly to avoid significant public backlash and ensure that social unrest does not undermine the economic gains from these reforms in the short term.

In July, the Egyptian economy will be characterized by a more fiscally prudent government, a hawkish central bank, renewed inflationary pressures, and sluggish output growth.

Ghana

Ghana’s debt sustainability conversations were a focal point for the country’s near-term economic recovery in June. Fiscal authorities successfully restructured $18.5 billion, 61.67% of the total $30 billion external debt, with bilateral and commercial creditors. This substantial progress means that Ghana’s short-term debt burden will be reduced. The IMF projects the country’s debt-to-GDP ratio to decline from the peak of 93.30% in 2022 to 83.60% in 2024. The debt restructuring also covers lower interest payments, leaving cash for the government to embark on developmental projects bound to support productivity and economic growth in the medium term.  

The debt restructuring talks will grant Ghana access to an additional $360 million in IMF support in July. Ghana is under the IMF’s Extended Credit Facility (ECF) programme to ensure sustainable debt and improvement in government revenue.  This restructuring will likely lead to an upgrade to Ghana’s long-term debt credit rating, which is currently junk. It also means that Ghana will access additional dollar inflows from other multilateral lenders, such as the World Bank and AFDB. The possible increase in additional finance and positive reviews from the IMF will boost investor confidence towards the country ahead of the election activities set to peak this Q3 2024.

Currency risk 

An improvement in capital inflows will support the Cedi, which steadily depreciated in June to close the month at ₵14.57/$ from ₵14.14/$ in May. 

The expected increase in capital inflows due to the successful debt restructuring agreements will sustain the growth in Ghana’s foreign exchange reserves, which rose 4.05% between March and April. The increased reserves from the IMF’s support fund and investment inflows mean that the central bank will have additional foreign exchange to support the currency if needed. Positive exchange rate expectations anchored in the restructuring agreement and a better credit rating will also support the currency.

However, there are risks. Due to low production, Ghana’s export earnings have not improved substantially, especially from cocoa. In the first four months of the year, cocoa, which accounts for ~10% of total export earnings, declined by 49%, indicating constrained government revenue. Like with South Africa and Kenya, currency risks also emerge for Ghana from the performance of the USD, which we expect to stay strong in the near term. A stronger USD will emerge from higher interest rates, forcing investors to favour assets in advanced economies over developing countries. Stears predicts the cedi at ₵14.92/$ at the end of Q3 2024 from ₵14.57/$ in Q2 2024. 

Inflation and interest rate decisions 

Although the cedi will receive some support in the coming weeks, it will remain relatively weaker than last year. The exchange rate pass-through effect on commodity prices in June will also continue to exert inflationary pressures. 

Additionally, adverse weather conditions limit food production, further driving up prices. These factors will keep inflation high in Ghana significantly as base effects fade. Consequently, while the headline inflation rate, which slowed to 23.10% in May 2024, may moderate slightly in June and July, the monthly inflation numbers are expected to rise, driven by higher food, energy, and transport costs. This situation exacerbates the inflationary pressures for consumers already grappling with higher living costs. 

The Bank of Ghana’s continued hawkish monetary policy stance is crucial in response to these multifaceted inflationary pressures. The central bank aims to curb excessive inflation and stabilise the currency by maintaining a high monetary policy rate. However, this approach also has trade-offs, such as potentially higher borrowing costs for businesses and consumers, which could dampen economic activity. 

We expect the bank to keep the monetary policy rate at 29% at its upcoming July 23 meeting. This decision aims to positively anchor inflation expectations, support the cedi, and hedge against recurring inflation risks. The BoG's decision will also be motivated by the pending activities of the peak election campaign, which could drive up money supply growth and increase inflation.

Output risks 

Ghana's economy grew by 4.70% in Q1 2024, marking the fastest growth rate since Q4 2021, which saw a 6.10% increase. This represents a 0.90 percentage point rise compared to the 3.80% growth rate in Q4 2023. The industrial sector played a crucial role in this positive trend, expanding by 6.80%, a significant jump from the 1.30% growth in Q4 2023. Mining and quarrying grew by 12.90% within the industrial sector, further boosting overall industrial growth.

However, the services sector, which accounts for 44.90% of GDP, experienced a notable slowdown, decreasing from 5.10% growth in Q4 2023 to 3.30% in Q1 2024. Reduced wholesale and retail trade activities, influenced by the higher operating costs resulting from the Cedi's depreciation, drove the slowdown. Similarly, the agriculture sector's growth moderated to 4.10% from 4.50%, as adverse weather conditions affected output.

We expect growth to remain positive in Q2 2024, although it is unlikely to significantly surpass the Q1 growth rate of 4.7%, assuming no substantial changes in the key drivers of economic growth. Ghana’s PMI has remained in expansion territory, slightly increasing from 51.3 points in April to 51.6 points in May 2024. However, business confidence remains low, as companies remain sceptical about a robust macroeconomic recovery in Ghana over the next year, particularly given the looming political risks. 

In summary, the Cedi's performance, which may gain some support through inflation and additional external funding, will shape Ghana’s macroeconomic environment in July.

Kenya

On June 27, President Ruto repealed the 2024 Finance Bill after ten days of deadly protests in Kenya. The bill caused an uproar in the country as Kenyans took to the streets to declare their displeasure with the new income taxes. The demonstrations were premised on the government cutting back its spending instead of increasing taxes. This public outcry follows the safe passage of the 2023 Finance Bill, which introduced a VAT hike of 16% (from 8%) on energy products and a housing levy of 2.5% on gross pay. 

Kenya is under the Extend Credit Facility (ECF) and Extended Fund Facility (EFF) IMF conditional loan programmes that require the government to cut back spending and improve government tax and export revenue. According to the May 2024 budget implementation review, fiscal authorities have made considerable strides to achieve these loan objectives. The government targets a 16% increase in income over expenditure in the 2024 fiscal year. While these are commendable, the bulk of the austerity measures implemented due to these programmes have meant a substantial squeeze on income levels, worsening the cost of living in Kenya. Unfortunately, the hardest hit by these policy changes are the low-middle income earners, comprising over 70% of Kenya's total consumer market. 

Despite the bill being withdrawn, Kenyans still call for Ruto's impeachment, a demand likely to persist soon. Although the ongoing protests may soon de-escalate, public discontent remains high. Regardless of the outcome, we expect relatively positive investor sentiments toward the Kenyan economy to wane. Investors will adopt a wait-and-see approach before bringing in capital. 

Yields on Kenya’s sovereign dollar bonds declined to a five-month low, becoming one of the worst performing Emerging Market bonds since June 18, when the protests began. This indicates dwindling investor confidence. Additionally, we expect the protest and the government’s brutal response to feature in the IMF’s upcoming July review of the country's economic progress. The Fund’s expected pessimistic tone, forerun by this press statement, regarding the recent events, will further discourage investor sentiments. Still, the IMF will be non-relenting on the conditions it has imposed on Kenya, as they are imperative for debt sustainability. President Ruto is stuck between a rock and a hard place to please Kenyans, and the multilateral lender and investors will keenly watch to see how it all unfolds.

Currency risk 

The expected decline in capital inflows into Kenya due to political instability will likely weigh negatively on the shilling’s performance in July. Following the start (June 18) and end of the protests (June 27), the currency depreciated by 0.29%. We expect this downward trend to persist until the storm calms around the President’s impeachment and upcoming IMF review. The bearish capital inflows indicate less foreign exchange at the central bank's disposal to aid the currency in the near term.

As with South Africa, the movements in the USD, which we expect to be relatively strong in July as the US Fed stays hawkish before its rate cuts begin, will also determine the Kenyan shilling’s performance. On a more optimistic note, Kenya’s export earnings from tea and coffee, contributing 23.55% to exports, have notably increased. We expect this trend to continue in the second half of the year, barring any constraints to production. Still, market sentiments on the political landscape developments, exchange rate expectations and investor confidence will determine the shilling’s movements in July.  Stears expects the shilling to close Q3 2024 at Kes129.42/$.

Inflation and interest rate decisions 

With currency risks rising, inflationary pressures will remain high. The exchange rate explains roughly three percentage points of Kenya’s inflation rate. For every 1% decline in the shilling, inflation will rise by 0.03%. This means a further decrease in consumer spending as disposable income falls. Kenya's annual headline inflation rate in May increased to 5.14% (Stears forecast: 4.11%) from 5.1% in May 2024. Food and electricity prices drive the increase. Food items weigh 33% in Kenya's inflation basket, indicating that an increase in food prices will steer the direction of the headline rate. Food prices in Kenya are rising due to supply constraints from bad weather conditions. Adverse El Nino effects have persisted in central food-producing counties. 

With inflationary pressures expected to stay high, the Central Bank of Kenya will retain its hawkish stance on interest rates. The bank kept rates unchanged at its last MPC meeting in June, and we expect the same outcome at the August meeting. The high interest rates will anchor inflation and exchange rate expectations, support the shilling and curb inflation. However, considering the alterations to the interest rate corridor and discount window in May, we expect lending rates to cool in Kenya from the nine-year high of 16.28%. This approach to monetary easing will reduce the borrowing costs for businesses while keeping rates of returns for investments positive.

Output risks 

The expected decline in borrowing rates is poised to bolster business confidence in Kenya, potentially enhancing output prospects amid a challenging macroeconomic and political landscape. According to the Kenya National Bureau of Statistics, the economy grew by 5.60% in 202, up from 4.22% in 2022. The agricultural and hospitality sectors, which have rebounded since 2022, drive this improvement.

We expect the upward growth trend to continue in 2024. The Stanbic IBTC PMI reading also reflects this positive trend, increasing to 51.8 points in May from 50.1 points in April. This uptick indicates that businesses are experiencing improved new orders and employment levels, supporting output in the near term. The agricultural sector, benefiting from favourable weather conditions and enhanced farming techniques, has significantly recovered. Increased crop yields and better livestock production have contributed to higher agricultural output, which remains a cornerstone of Kenya’s economy.

The hospitality sector has also seen a robust recovery, driven by increased tourism and domestic travel. Government initiatives to promote Kenya as a prime tourist destination and improved infrastructure have boosted visitor numbers by 2.4x since 2021. This surge in tourism will positively impact related industries such as transport, retail, and food services, creating a ripple effect that enhances overall economic growth.

Additionally, although facing challenges, the manufacturing sector is gradually picking up. Access to more affordable credit enables manufacturers to invest in new technologies and expand their production capacities. 

Overall, Kenya will face a challenging macroeconomic and political environment in July despite the decline in borrowing rates, coupled with the recovery in agriculture and hospitality. The impact of political instability on investor confidence and economic activities will shape the start of the year's second half. Heightened inflation risks will affect consumer spending and business operations, potentially slowing the pace of economic recovery and worsening investor sentiments.

The government must effectively address these risks to sustain growth. This will include ensuring political stability, implementing policies that promote economic diversification, and managing inflation. Moreover, continued investment in infrastructure and support for critical sectors like agriculture, hospitality, and manufacturing will be vital for maintaining Kenya's upward trajectory of economic output.