Stanbic to Kenya: Drop the Cap

We have had as slew of July PMIs today morning including Stanbic Bank's indices for Uganda, Kenya, Zambia and Nigeria - as well as the corresponding Emirates NBD and Standard Bank measures for Egypt and South Africa respectively.

Ahead of next week's election (August 8) the Kenya index was the most closely watched. There was something for both leading parties. The Jubilee government will have been disappointed that private sector activity continued to decline in July for the third month in a row with a reading of 48.1. However, it can point to the fact that the pace of contraction had moderated following the record low of 47.3 in July. There were also tentative signs that corporate sentiment may have bottomed out with firms reporting rises in inventories and new orders from domestic and foreign customers.

According to Stanbic, the recent softening in activity reflected electoral uncertainty, high inflation (although this has eased significantly in recent months from a high of 11.7% in May to 7.5% in July), and credit frictions. The latter are likely to have been driven by the government's interest rate cap which has weighed heavily on commercial bank lending growth. Stanbic argue that a peaceful election could usher in a recovery. However. any upswing would be significantly hobbled if the interest rate cap continues. As Stanbic put it:

"In the event that the interest-rate-capping law remains in place for longer, economic activity is unlikely to improve meaningfully over the near to medium term."

The South African index edged back into expansionary territory in July with a rise from 49 in June to 50.1. While this raises the odds of overall GDP growth recovering in 2017H2, it is worth bearing in mind that ABSA manufacturing PMI for July, which was published on Tuesday, indicated that output had slowed at its fastest pace in the sector since the global downturn in 2009-09. On the other hand, the Nigerian measure climbed to a two-year high of 54.8 from 52.9 in June. This supported the conclusions from corresponding Central Bank of Nigeria indices which were also released on Tuesday.

Private sector activity picked up in Uganda for the sixth month in a row with a 54.3 reading in July compared to 52.8 in June on the back of improved agricultural output. Output in Zambia increases at the fastest pace in the survey's 29-month history with a one-point rise to 52.5. This was the third month in a row of improvement and suggests that the recent cuts in the policy rate by the Bank of Zambia are feeding through to the real activity. Egypt's non-oil private sector contraction appeared to be stabilising with a 48.6 reading at the start of Q3 up from 47.2 in June.

There was also July inflation data for Ethiopia with the headline rate rising to 9.4% y/y from 8.8% in June. The July print is the highest since January last year and was driven by a 12.5% y/y jump in food prices up from 11.2% in June.

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