Business conditions improve solidly in October
Kenyan private sector companies saw a solid improvement in business conditions in October, as new orders rose at a sharp rate, albeit slightly softer than in September. However, cash circulation issues continued to restrain business activity, leading to further backlog accumulation. Input price inflation slowed to a two-year low, allowing firms to reduce their selling charges for the first time since April. Output expectations weakened to a ten-month low amid reduced optimism for the future.
The headline figure derived from the survey is the Purchasing Managers’ Index™ (PMI™). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.
The headline PMI dropped from 54.1 in September to 53.2 in October, nonetheless signalling a solid improvement in the health of the private sector economy. The reading was slightly above the average seen across the series (which began in January 2014).
New business received by Kenyan firms was up sharply during October, despite a slower rate of growth compared to September. Surveyed businesses were encouraged by a strong inflow of new clients, often related to referrals from previous customers. It was also noted that efforts to improve marketing strategies and service quality helped to increase demand. Sales to foreign clients meanwhile rose at a sharp, and faster, pace.
Despite this, output levels expanded only marginally, with panellists continuing to mention that cash flow issues had stopped them from meeting demand. As such, backlogs of work increased further, marking the sixth successive month of greater capacity pressures.
In order to ease this pressure, firms raised employment at a solid rate in October. Stocks of purchases also increased, although the rise was the weakest since April amid an easing in new order growth. With competition among suppliers remaining strong, lead times were again reduced solidly.
Firms meanwhile benefited from a fall in fuel prices, which brought the rate of purchase price inflation down to a 40-month low. However, higher commodity prices due to a lack of supply, as well as faster salary inflation, meant that overall costs rose at a moderate pace.
At the same time, selling prices were reduced for only the second time in nearly two years. This was due to a number of businesses offering discounts to customers. That said, charges were lowered only marginally.
Looking ahead, expectations for future activity fell notably in October, posting the weakest optimism in the year so far. Nevertheless, a majority of panellists still expect output to rise over the coming 12 months, amid hopes of continued sales growth.
Jibran Qureishi, Regional Economist E.A at Stanbic Bank commented: "Private sector activity was softer in October as firms again lament what they term as ‘cashflow’ issues. We have in the recent past linked this to the combination of delayed payments of arrears owed to the private sector which was also compounded by the interest rate capping law. The imminent repeal of the interest rate cap is indeed a positive move and will embolden commercial banks to price credit risk again and more importantly for SMEs. That being said, other issues that have restrained aggregate demand continue to persist and ought to be addressed as well in order to bring down banking sector NPL levels and further supplement the improvement of private sector cashflows."
Sources: Stanbic Bank, IHS Markit.