CEOs brace for economic slowdown, survey shows
The private sector is bracing for a tough third quarter of this year beginning July to September on account of the August elections, the exchange rate concerns and inflation, new surveys show.
A survey by the Central Bank of Kenya (CBK) in May shows that business activity in 2022 Q3 will remain flat, with demand/orders, production volumes and sales decreasing or remaining at the same levels for a majority of respondents.
High input prices are expected to persist, compounded by the Russia-Ukraine conflict, according to the CBK Chief Executive Officers’ Survey that targeted CEOs of over 500 private sector firms.
“Besides increased political activity, respondents were concerned about the cost of doing business and the economic environment (inflation and exchange rates),” it says.
Firms, it adds, expect to mitigate constraining factors in the economic environment, through management of costs and risks, diversification of their businesses and digitisation of their operations.
“The results show that the CEOs continue to be concerned about increased political uncertainty in the run up to the 2022 elections. Respondents are also concerned about the business environment/cost of doing business and the economic environment,” the survey shows.
“On the latter, firms are particularly concerned about the stability of the Kenyan Shilling and inflation,” the report says.
This comes on the back of shrinking services as businesses reported a drop in activity for the second consecutive month, with the latest S&P Global Kenya Purchasing Managers’ Index (PMI) registering a fall of 48.2 from 49.5 a month earlier.
“Economic activity in Kenya contracted for the second consecutive month in May due to inflationary pressures that resulted in a drop in customer demand and a reduction in firms’ output. Input price inflation remained at an 8-year high driven by rising fuel prices, higher taxes, and input shortages,” noted Kuria Kamau, Fixed Income and Currency Strategist at Stanbic Bank.
The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) dropped below the 50.0 no-change mark in April, falling to 49.5 from 50.5 in March.
The 50.0 mark separates growth in activity from contractions and readings below 50 show a deterioration.
“Business confidence dropped to a record low for the third straight month in May, amid increased uncertainty over supply chains, inflation, geopolitical tensions, and the resulting impact on sales in domestic markets,” reads the survey findings.
Investment bank EFG Hermes last week was quoted saying that the Kenyan currency could drop to 122/123 to the US dollar further fueling inflation.
Inflation could also be driven by a reduction in global oil supplies after the European Union agreed to ban Russia oil from their imports.
The reduction in the number of infections experienced in the last few months has, however, resulted in Covid-19 becoming a lesser concern.
According to the CEOs the impending elections are expected to slow down demand or orders and production volumes for the majority of respondents.
“Sales growth, sales prices and the number of full-time employees are, however, expected to remain at largely the same level for several firms,” the respondents added.
Purchase prices are expected to remain elevated as supply chain bottlenecks and high input costs persist.
The respondents, however, ruled out the possibility of price increases saying there is a demand problem in the market.
“The scope for passing this on to consumers in the form of higher prices of goods and services sold remains limited as firms expect higher costs to negatively impact demand,” the findings show.
However, most firms remain optimistic that business activity will quickly pick up after the conclusion of the elections.
Rising input costs continue to constrain production volumes, especially for firms in the agriculture and manufacturing sectors where respondents reported a general increase in the prices of goods purchased.
Additional reporting by Steve Umidha