CONTACTS: +254 726879488 (Mobile)
+254770 455 116 (Office)
By Monica MUEMA
Kenya’s economic growth is forecast to remain strong in 2023, which will allow for a drop in unemployment and an increase in incomes, stimulating consumer spending, according to latest findings by Fitch Solutions.
Kenya’s unemployment rate reached 4.9% of the labor force in December 2022 (latest available data), down from 5.8% in June. Prior to the Covid-19 outbreak, the level of unemployment was hovering around 5.0%, and we expect this trend to re-emerge in 2023.
Despite having a large working-age population, Kenya suffers from myriad binding restrictions on the size of its labor force.
These include a low proportion of working-age people in employment, a small urban population and low life expectancy.
In the economic hubs of Nairobi and Mombasa, there is a large base of low-skilled workers, which benefits labor-intensive industries; however, the lack of workers with specialized skill sets means that businesses continue to import workers from abroad in order to fill more technical positions at additional costs.
The low base of formal employment will continue to limit income growth and therefore consumer spending.
“The main risk to our positive consumer outlook for 2023 is related to the weak performance of the Kenyan shilling. Should the currency devaluation continue, imported price pressures would push up consumer price inflation, constraining household purchasing power,” notes the report.
Interest Rate Risk
Interest rate risk arises for debt or bond owners from the fluctuation in interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
Over the past two years, interest rates have risen from historic lows, where households and consumers took on significant amounts of debt, to higher levels than pre-Covid. Differing by type of debt, many financial institutions carry significant interest rate risk on these kinds of products. This has the potential to spill over into different sectors.
Households and consumers are servicing this debt at significantly higher rates, with the risk of impacting already strained disposable incomes. These elements can mean a negative wealth effect for households, which can quickly lead to consumers cutting back on discretionary spending.
Between March 2022 and March 2023, Kenya’s central bank hiked the interest rate aggressively from the level of 7.0% that had been maintained for two years to 9.5%.
Following the latest 75 basis point hike at the end of March 2023, our Country Risk team expects the central bank to hold the rate at this level over the rest of the year.
However, risks to this forecast are tilted towards further tightening in 2023. Should the shilling’s depreciatory trend not ease by mid-2023, the central bank would hike the policy rate further in an attempt to support the currency.
The currently high interest rate, which is above pre-Covid levels, will raise the cost of servicing debt for Kenyan consumers and thereby reduce the funds available for spending on goods and services.
This is especially the case for large loans such as mortgages and vehicle finance, where a small interest rate hike leads to a large absolute increase in the monthly repayment.
However, everyday debt, such as consumer accounts at retailers, credit cards and personal loans, have higher interest rates and can quickly make a big difference in terms of household budgets.
Total credit to households in Kenya reached KES520.1bn in February 2023 (latest available data), up from KES482.6bn a year prior.
Of this amount, KES385.6bn (74.1%) was attributed to non-mortgage loans to households. This indicates that Kenyan consumers are increasingly relying on everyday credit to fund their lifestyles, which will require them to set aside more and more of their income for repayments.