Potential Effects Covid-19 on Economic Growth of the Country

The world’s economy is already feeling the heat of the coronavirus (Covid-19), with several economic activities brought to a halt following the confirmation of at least 340,000 cases and close to 15,000 deaths globally.

In Kenya, several key economic sectors are set to be affected, which could see the country’s GDP affected downwards by 10 to 25 percent, according to a recent report by investment firm Cytonn.

The key sectors of the economy affected by the Coronavirus pandemic include Tourism, Agricultural, and Manufacturing which were hit the hardest hit due to shutdowns in major markets and the disruption of the global supply chain. Combined, the three sectors accounted for 43.8 percent of Kenya’s GDP in 2018.

Read: Kenyan Shilling Down To A Seven-Month Low Over Coronavirus Pandemic

“Based on the impacts witnessed so far, we believe that Coronavirus may have a 10 to 25 percent impact on GDP growth for the year 2020. The 10 percent impact is an optimistic case in the event the outbreak is contained, and a 25 percent impact in the event it is not contained. As such, the coronavirus could reduce Kenya’s GDP growth to a range of 4.3 percent to 5.2 percent for the year 2020 depending on the severity of the outbreak and economic implications for Kenya,” Cytonn notes in the report.

In just one week, the shilling depreciated by 4.2 percent against the US Dollar during the week to close at Ksh105.1, from Ksh102.4 recorded last week, making it a 4.5-years low, prompting Central Bank of Kenya (CBK) to sell dollars to limit the losses.

There are also expectations of inflationary pressure emanating from the effects of Coronavirus, driven by supply-side shortages owing to lockdowns across the globe which have disrupted supply chains, further heightening cost-push inflation.

Read: Safaricom Not Charging MPesa Transactions Below Sh1,000 For 90 Days Over Coronavirus Outbreak

This week, Kenya Bankers Association (KBA) announced that commercial banks will provide relief with the loan repayment tenor extended by a period up to 12-months for all personal loans that were current on March 2, 2020 and a possible loan restructuring for SMEs and corporate borrowers, a further indication of the defaults expectations.

However, Cytonn predicts that the effects of the coronavirus pandemic are expected to negatively affect the financial sector.

“We expect to see increased caution on lending especially to businesses that rely on imports hence inhibiting private credit sector growth due to the high risk of credit default, with the possibility of heightened non performing loans if the pandemic is to continue,” adds the report.

Read: Co-operative Bank Profits After Tax Up By 12.4PC, Hits Ksh14.3 Billion

Despite the corona pandemic, liquidity in the money market has remained relatively favorable with the interbank rate averaging 4.2 percent, below the 4.3 percent average for the entire year so far.

“We believe favorable liquidity conditions will persist in the money markets, following the drive by the Government as well as the industry players to discourage cash transactions in the economy in favor of mobile money transactions, card payments, and internet banking to reduce the risk of transmission of Covid-19 via hard currency,” adds Cytonn.

Last week, mobile money service providers waive costs associated with the transfer of money between their mobile wallets and bank accounts.

“However, given the prevailing environment and movement of funds away from the equities market, towards investor perceived safe havens such as bank deposits, government instruments and gold, we do not expect any changes in deposit rates, given that supply of funds towards the banking sector will not be affected,” adds the report.

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