East Africa's credit slowdown threatens economic expansion

Bank credit to the private sector in Kenya, Tanzania and Uganda is growing at the slowest pace in well over a decade. And while the authorities have eased monetary policy and, in Kenya’s case, capped commercial interest rates to encourage more lending, analysts including Standard Chartered Plc’s Razia Khan aren’t expecting a turnaround any time soon.

“Credit growth is slowing as businesses and consumers that borrowed more than they could otherwise afford now struggle to repay or refinance loans,” said Chris Becker, frontier strategist at Johannesburg-based brokerage Investec Prime Services.

The International Monetary Fund in February cut its growth forecast for Kenya’s economy to 5.3 per cent in 2017-18 from a prior estimate of 6.1 per cent, citing the credit slump and factors including a drought.

While the fund has kept its projection for Tanzania at seven per cent this year, the outlook is at risk if there’s a “prolonged slowdown” in credit growth, it said in January. The virtual standstill in credit growth in Uganda, where the economy is expected to expand 5.5 per cent this year, is creating an “air of uneasiness and uncertainty,” the lender said.

Tanzania’s economy probably expanded by 6.9 per cent in 2016, compared with a government’s estimate of 7.0 per cent, weighed down by weaker credit growth and a slower pace of budget implementation, the World Bank said Tuesday.

Credit to the Kenyan private sector grew 4.9 per cent in December, the slowest pace since 2003 and compared with a record 35.9 per cent in 2011, according to central bank data compiled by Bloomberg. In Tanzania, the increase was 5.2 per cent in January, the lowest since 2000, while in Uganda it was 7.5 per cent in February, after growing less than 10 per cent most of last year and even contracting in two months.

While economies in the region have been boosted by an improved regulatory regime and more investment in railways, ports and telecommunications, growth will slow unless banks increase lending, said Jacques Nel, an economist at Paarl, South Africa-based NKC African Economics.

“If companies are unable to borrow, consumers are not accessing credit, it’s a dampener on growth,” he said.

The credit slowdown in Kenya was triggered by a cash crunch in 2015 that caused a spike in government bond yields, sparking demand for the securities by lenders. The collapse of three Kenyan banks in eight months heightened risk aversion that was further exacerbated by the central bank asking lenders to reclassify some loans and increase provisioning for bad debts.

As a result, non-performing loans surged.

In Tanzania, banks have an “elevated cautiousness” about lending as non-performing loans increased to 9.5 per cent of total advances in 2016 from 6.4 per cent previously.