Construction sector to suffer in budget cuts shows report

Friday, October 11th, 2019 00:00 | By
Workers at construction site. Photo/COURTESY

The construction industry is expected to record slower growth this year weighed down mainly by a freeze in public spending on mega projects and the ongoing crackdown on graft, a Fitch Group unit has said.

Fitch Solutions, a leading provider of credit market data, analytical tools and risk services said in a new report that lack of progress on interest rates cap will also likely affect the growth of the industry.

It said due to these hurdles it has revised the growth rate of the sector which comprises buildings, roads and railway to 6.1 from 8.6 per cent recorded last year in the short-term, amid signs that the industry is slowing down.

“Uncertainty caused by this sudden suspension of funding will weigh on the construction sector going forward and could prompt further downward revisions to our growth forecast over the coming months,” Fitch Solutions added in the report.

It said the ongoing graft crackdown, which has led to the suspension of funding to some projects will definitely slow down the pace of growth in the industry thereby slowing it down.

The report said the arrest and subsequent suspension of National Treasury Cabinet Secretary, Henry Rotich on corruption charges related to procurement procedures for the construction of two dams will also contribute to a slow down in the sector. 

It said Kimwarer and Arror dams scandal are likely to raise the bar on procurement scrutiny and in the process delay allocation of funds to national infrastructure projects and subsequently pull back construction.

“While Rotich denies any wrongdoing, the disruption caused by the arrest of such a high profile member of the government, and the one responsible for allocating spending to national infrastructure projects, will compound the other ongoing issues in Kenya’s construction sector,” the report added.

It further said the interest rate cap impasse between MPs and the Executive means continued lack of cheap credit to the private sector, resulting in incomplete and delayed projects.

Parliament for the second time last month rejected Treasury’s bid to scrap the ceiling on interest rates.

Through the Departmental Committee on Finance and National Planning, the lawmakers amended the Finance Bill, 2019 by re-introducing the provision on capping interest on loans which the suspended National Treasury CS Rotich had expunged.

Treasury had sought to repeal section 33B of the Banking (Amendment) Act, 2016 so as to enhance the flow of credit, strengthen financial access and monetary policy effectiveness.

However, despite Rotich’s assurance that they had put in place some reforms to “optimise lending to the private sector,” lawmakers were unconvinced that banks have learnt their lesson.

Fitch Solutions said i had also revised down its short-term outlook for construction sector growth in Kenya due to the lack of progress on securing financing for the final sections of the Chinese-backed Standard Gauge Railway (SGR) and the recently announced suspension of capital spending by all government agencies and parastatal.

Caleb Mugendi, assistant manager at Cytonn Investment agrees with the findings of the financial services firm but adds that the decline witnessed in the construction industry in Kenya is caused by a delay to issue permits in various parts of the country.

Significant reduction

The revision by Fitch Solutions is a significant reduction from recent years, where growth averaged 10.3 per cent annually, largely as a result of the SGR.

However, Fitch said it has maintained its outlook for construction growth in 2020 and beyond, as a number of smaller-scale projects, largely in the power and road sectors, continue to work through the pipeline.

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