Agriculture, banking sectors to experience depressed growth due to COVID-19 in 2020

Agriculture, banking sectors to experience depressed growth due to COVID-19 in 2020

Agusto & Co. Limited, a leading Pan-African credit rating agency, has categorized sectoral impact expected due to COVID-19 in Kenya.

The agency forecasts that Kenya’s Big 4 Agenda will be sacrificed as more resources are channeled towards curtailing the spread of the coronavirus. Gross Domestic Product (GDP) growth is also expected to fall below 2% should the COVID-19 pandemic and attendant lockdown be sustained beyond the second quarter.

Agriculture, manufacturing, tourism and financial services will experience high levels of disruption with ICT experiencing the least. On the back of this, the Kenyan Shilling is also expected to depreciate by around a 10% range to the dollar and hover between Kshs 103 to Kshs 109 for the rest of 2020.

“With a total of 535 confirmed cases recorded in Kenya as at 5th May 2020, we hope that the number of daily new cases flattens out to ease the short term macroeconomic impact. The Kenyan economy is in dire need of stimulus packages (domestic and international), to cushion the adverse impact of the slow growth on businesses. We recognize that President Kenyatta has recently signed into law economic palliatives to shield the country from large shocks and we expect the relief measures to immediately begin to address the negative impact of the COVID-19 pandemic on businesses and households,” said Ikechukwu Iheagwam, Country Manager, Agusto & Company Limited.

Agusto & Company Limited anticipates disruption in the following ways:

One of the sectors (see table 1 below) directly affected by the spread of COVID-19 pandemic is Agriculture and specifically the horticulture and floriculture exports. With limited international and regional flights and weak demand (and low commodity prices) in major markets in Europe and Asia, Kenya’s tea, coffee and cut-flowers exports are challenged, leading to mass layoffs within the sector. Farms may also struggle to service their loans with most farms currently running at capacity of less than 50%. Nonetheless, disrupted local harvests in major European, Middle Eastern and Asian markets is bound to drive up demand for fruit and vegetables. This will however be challenged by limited outbound air freights due to the Government’s restriction on travels due to COVID-19.

In March and April 2020, demand for essential and pharmaceutical goods surged as Kenyans continued to buy items both for precautionary and reactionary motives. Barring the immediate implementation of the Government’s economic palliatives, we expect the real impact of COVID-19 on manufacturers of essential and pharmaceutical goods to be felt from the second half of the year as household and business income and spending starts declining.

Banking and Financial Services
We also expect the banking and financial services sector to witness a tepid performance in 2020 with projected fall in earnings. This will especially be felt among the vulnerable SMEs segment given their limited capacity to service existing loans in these difficult times. Hence, we project an increase in banks’ non-performing loans though moderated by expected loan restructurings (or outright interest waivers) including the moratoria being advocated by the Government.

Table 1: Impact of COVID-19 on key sectors of the Kenyan Economy

Source: Agusto & Co. Research

Economic Indicators
Agusto & Co. notes that the horticulture and floriculture exports play a key role in earning foreign exchange along with tourism and the hospitality sector for the Kenyan Government. With these sectors currently challenged due to COVID-19 pandemic, Kenya’s foreign reserves is expected to be depleted at a faster rate to circa $6.7 billion by end of 2020 thus putting a strain on the Kenyan Shilling. On the plus side, it also expected that the foreign remittances from Kenyans abroad and receipt of foreign currency loans from international lenders would have a cushioning effect on the declining earnings from agricultural exports and tourism services.

Notwithstanding the above, Agusto & Co. believes that Kenya’s resilient macroeconomic fundamentals, well diversified economy, relatively stable local currency compared to many other African countries, comfortable foreign exchange reserve buffer against short-term external shocks and the country’s position as the leading business hub within the East African Community, provides comfort that Kenya’s economy will navigate through this unprecedented times as long as the approved economic palliatives are implemented without bureaucratic delays.

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