World Bank cuts Kenya's 2025 growth forecast as private sector squeezed

The World Bank has downgraded Kenya's 2024 growth forecast to 4.5%, a 0.5% reduction from its initial prediction, citing high debt levels, elevated lending rates, and a contraction in private sector credit, which fell -1.4% last December compared to 13.9% growth the previous year. Domestic borrowing to offset lower external financing is crowding out the private sector, while unpaid bills and tax revenue shortfalls hinder fiscal consolidation, contributing to increased bad loans, especially among smaller lenders. While inflation and exchange rates have stabilized, real lending rates remain high, impacting key sectors like manufacturing, finance, and mining.

Analysis

The World Bank has revised Kenya's 2024 economic growth forecast downward by 0.5 percentage points to 4.5%, primarily due to significant macroeconomic headwinds including high public debt, elevated lending rates, and a sharp contraction in private sector credit. This revision underscores the challenges facing East Africa's largest economy, which saw growth slow to 4.7% in the previous year from 5.7% due to factors like unrest over tax hikes. A critical concern is the dramatic reversal in private sector credit growth, which plummeted to -1.4% in December 2023 from a robust 13.9% expansion a year earlier. This credit squeeze, exacerbated by the government's increased domestic borrowing to cover budget deficits amid lower external financing, is reportedly crowding out private investment and impacting key sectors such as manufacturing, finance, and mining. Furthermore, Kenya's debt-to-GDP ratio stands at a concerning 65.5%, classifying the nation as at high risk of debt distress. While inflation and foreign exchange rates have stabilized, real lending rates have remained stubbornly high, contributing to an increase in non-performing loans, particularly among smaller commercial lenders. The World Bank projects a potential recovery to around 5.0% growth in the medium term, contingent on mitigating risks like adverse weather, and has urged the government to implement targeted tax reforms, including eliminating certain consumption tax exemptions, to bolster revenue and support fiscal consolidation.

Key Decisions for Investors

• Investors should exercise caution regarding Kenyan assets given the downgraded growth outlook, high sovereign debt levels, and significant contraction in private sector credit, which signals a challenging operating environment.
• Monitor key indicators such as trends in private sector credit growth, the government's progress on fiscal consolidation, and movements in real lending rates for signs of improvement or further deterioration.
• Factor in the elevated risk of debt distress (65.5% debt-to-GDP) and potential for further fiscal measures, including tax reforms, when assessing investment opportunities and risk exposure in Kenya.