Kenya’s economy expanded by 4.4% in Q3’2017, slower than both Q1 and Q2 2017 growth rates of 4.7% and 5.0%, respectively and slower than 5.6% growth recorded in Q3’2016. This was due to (i) slower growth in the agriculture sector at 3.1% as compared to a growth of 3.8% recorded in Q3’2016, due to the effects of the 2016/17 drought, and (ii) a slowdown in the growth of the financial intermediation sector, which expanded by 2.4%, down from 7.1% recorded in Q3’2016. The table below shows the sectoral contribution to the overall GDP growth, of which real estate was the main driver with financial & insurance dragging down the growth;

The following are the key take-outs from the results;

• Sectoral Contribution – Agriculture and manufacturing were biggest losers of sectoral contribution to GDP, losing 30 and 20 percentage points to 18.8% and 10.2% from 19.1% and 10.4% in Q3’2016, respectively. Real estate was the most improved sector, increasing its share by 0.4% y/y to 9.0% from 8.6% in Q3’2016. This is an indication that the economy is becoming a more diversified, reducing its over-reliance on the agriculture sector, with other sectors such as real estate and information & communication gradually gaining ground;
• Growth in the Real Estate sector – the Real Estate sector performance continued to improve during the quarter, having grown by 8.9% compared to 8.5% in Q3’2016. Once again, the sector recorded the biggest increase in contribution to GDP, gaining 0.4 percentage points to 9.0% from 8.6% in Q3’ Growth in the real estate sector continues to be underpinned by strong fundamentals such as (i) the large housing deficit of over 200,000 units annually, (ii) continued improvement in infrastructure, and (iii) demographic trends such as the growing middle class, rapid urbanization, rapid population growth and the youth bulge (21 to 35 years) that supports the performance of different real estate themes;
• Further decline in the Financial & Insurance sector growth - Financial & insurance sector slowed down further, recording a growth of 2.4% in Q3’2017 from 7.1% in Q3’2016, and 4.3% in Q2’2017. The slow-down in the financial services sector can be attributed to (i) a slow-down in private sector credit growth that recorded an average annual growth of 1.6% in Q3’2017 following the enactment of the Banking (Amendment) Act, 2015, as compared to the Q3’2016 average of 5.9%. This is despite the lending rate declining to 13.7% on average from 16.5% in Q3’2016, and (ii) a decline in the earnings per share (EPS) growth of the Kenya listed banks by 8.2% down from the 15.1% growth recorded in Q3’2016;
• Agriculture sector starts to recover –Growth in the agriculture sector slowed to 3.1%, as compared to 3.8% in Q3’2016, with its weighted contribution to growth declining by 10 bps to 0.6% in Q3’2017, down from a contribution of 0.7% in Q2’2016. Growth has however improved from (1.3%) and 1.3% recorded in Q1 and Q2 of 2017, which indicates the beginning of a recovery as weather conditions continue to improve. This reflected in a decline in the inflation rate to an average of 7.5% in Q3’2017 as compared to the 10.8% witnessed in Q2’2017 as food prices declined. Growth was driven by (i) increased tea production, which grew by 7.4% to 102,600 metric tonnes (MT) from 95,500 MT in Q3’2016, and (ii) an improved fishing sub-sector whose production grew by 21.2% to 24,600 MT from 20,300 MT produced in Q3’2016. The sector’s improving growth was mainly dragged down by a decline in the export volume of coffee to 9,400 MT from 10,900 MT in Q3’2016, a 13.8% decline;
• Decelerated growth in the Manufacturing sector – Growth in the manufacturing sector has declined to 2.1% from 4.4% in Q3’2016 and 2.3% in Q2’2017. This resulted in a decline in contribution to GDP growth to 0.2%, down from 0.5% in Q3’2016. The sector’s growth was dragged down by non-food manufacturing, while processing of food items like maize meal, wheat flour, soft drinks and edible fats boosted growth in the sector. Duty on maize imports was waived by a government subsidy in order to induce a decline in maize flour prices that contributed to rising food inflation especially in Q2’2017, hence leading to an increase in production of maize-processed products; and
• A minor challenge in recovery of the Tourism sector– The tourism sector has exhibit double digit growth since the first quarter of 2016, with accommodation & food services growing by 13.1% since then. However, during the quarter, growth declined to 7.3% from 13.5% recorded in Q3’2016. Growth was pulled down by a 6.7 percentage point decline in growth of tourist arrivals to 7.7% in Q3’2017 down from 14.4% in Q3’2016. We view this as a small glitch in the sector’s path to full recovery and accelerated growth, probably brought about by the political uncertainty and slight period of insecurity in the country during the quarter.

Q3’2017 was mainly plagued by political uncertainty, which slowed down business activity during the quarter. Inflation improved to an average of 7.5% as compared to the 10.8% witnessed in Q2’2017 as food prices declined due to improved weather conditions and government subsidies on imported maize, while interest rates and the currency remained relatively stable. Given Q4’2017 has had a more favourable operating environment compared to Q3’2017, with key economic indicators such as inflation, interest rates and currency remaining relatively stable, we expect Q4’2017 GDP growth to be better than Q3’2017, and we expect growth to come in at 4.6%, with average GDP growth for 2017 coming in at 4.7%. The expectation of slower growth in 2017 than in 2016 is attributable to:

1. slower growth of the agriculture sector on average,
2. subdued growth in the financial & insurance sector brought on by the interest rate caps which will reduce corporate earnings for commercial banks,
3. the political uncertainty witnessed in Q3’2017, which forced investors to take on a wait and see stance, and
4. slow private sector credit growth.

Kenya remains a fast growing and well-diversified economy, with an average annual GDP growth rate of 5.9% over the last 7 years. We expect the 2017 GDP growth to come in between 4.5% and 4.8%, supported by (i) government continued expenditure on infrastructure, also boosting growth in the construction sector, (ii) the continued recovery of the tourism sector, and (iii) the continued growth of the real estate sector.