Firms freeze expansion plans on economic woes, high costs

The majority of Kenyan firms have frozen expansion plans in an economic setting where operating costs are rising. PHOTO | POOL

The majority of Kenyan firms have frozen expansion plans in an economic setting where operating costs are rising amidst persistent cash flow challenges, analysis of findings of a monthly private sector survey shows.

A modest two in every 10 companies have reported plans to increase branches, raise output capacity or add new products in the next year in monthly surveys done between July and October by American analytics firm, S&P Global, on behalf of Stanbic Bank.

The findings of the resultant Stanbic Bank Kenya’s Purchasing Managers Index (PMI) show business confidence amongst surveyed firms in manufacturing, construction, wholesale and retail, services, and mining has been weak since July.

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This has come at a time when businesses are grappling with a record-high rise in input prices in a decade, pressured majorly by fuel and material costs.

About 46 percent of firms that participated in the survey, based on responses to questions sent to about 400 companies, said costs had risen in October compared with the prior month.

Those in the construction sector cited the highest growth in input prices but were the most optimistic about growth.

The upbeat outlook for companies in the construction space has come at a time the Ruto Administration has prioritised investment in affordable housing projects supported by the 1.5 percent levy on workers’ earnings, matched by employers.

“Business expectations for the coming 12 months remained muted in October, with firms showing a modest degree of positivity that was little-changed from September,” analysts at Stanbic and S&P Global, wrote in the latest PMI report for October.

“The Future Output Index recorded little movement from the previous two readings, although it was still solidly above the survey-low set in April.”

Kenyan firms have since last year been battling rising operating expenses largely due to soaring prices of fuel, electricity, and raw materials amidst amid weakening shilling against major global currencies as a result of lingering global supply constraints amid a persistently weakening shilling against major global currencies and taxation pressures, including the 1.5 percent housing levy on gross payrolls.

“Most businesses are scaling down their operations in Kenya or even relocating due to the high cost of doing business in Kenya thus escalating the level of unemployment,” Stephen Waweru, a senior manager for tax services at consultancy and audit firm KPMG, told the Business Daily in August.

“This, coupled with the global inflation, has forced businesses to observe austerity measures in order to stay afloat in the midst of these global economic shocks.”

Firms reported a “marked drop” in demand for goods and services which they linked to elevated inflationary pressure and cash flow difficulties.

That prompted them to further cut output levels, according to the composite PMI Index, resulting in layoffs at a scale last witnessed at the peak of Covid containment measures in June 2020.

“Cost-of-living pressures and cashflow difficulties saw customer demand declining, while weaker output and lower workloads led to an increased rate of job cuts. Meanwhile, Kenyan businesses reported burgeoning inventories, and therefore raised their selling prices in October to protect their profit margins,” Christopher Legilisho, an economist with South African-based Standard Bank, the parent firm of Stanbic Bank, wrote in the PMI report.

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“Encouragingly, firms involved in new export orders remained robust, with greater demand from both Africa and Europe. However, business expectations for the next 12 months are quite weak.”

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