East Africa’s listed companies are facing a decline in profits that could see both shareholders lose dividends and share prices go into a free fall.

Although some of the companies posted improved performances in the six months to June 30, analysts and global researchers predict a difficult second half, thanks to domestic and external shocks.

Key sectors of the region’s economies are facing headwinds after commercial banks reduced lending to farmers, manufacturers, builders, contractors, transporters and players in the tourism sector in an attempt to control ballooning non-performing loans.

Among the listed companies that recorded improved profits during the six months to June 30 are KCB Group, Co-operative Bank, CfC Stanbic Holdings, Housing Finance Group, Stanbic Bank of Uganda, National Microfinance Bank of Tanzania, Bank M of Tanzania, and Bank of Kigali, which were buoyed by increased interest on loans and advances.

Others were CIC Insurance, Tanzania Simba Cement, marketing and communications firm WPP Scangroup, oil marketer Kenolkobil and Acacia Mining plc, Tanzania’s largest gold miner.

But National Bank of Kenya and Rwanda’s Crystal Telecom recorded declines in profits while agricultural firm Kakuzi posted a loss.

READ: How non-performing loans reversed NBK’s performance

Slowdown in lending

In Uganda, lending to the private sector — a key indicator of the financial sector’s contribution to economic activity — has been slowing down since October 2015.

The Bank of Uganda partly attributed this to increased provisions for bad debts, a high interest rate regime and weakened domestic demand for goods and services.

Among the hard hit, according to the BoU, are traders, manufacturers, contractors and small and medium-sized enterprises.

In Kenya, similar sectors are facing tightened credit standards in the wake of the government’s failure to pay contractors and suppliers on time.

A survey by the Central Bank of Kenya showed that manufacturers have been affected by the challenging business environment while investors in the real estate sector have experienced low uptake of completed units.

“The cost of doing business in the region is still too high and this will make the region uncompetitive,” said Lillian Awinja, executive director of the East African Business Council.

“Double taxation is a big issue while the costs of power, fuel and credit are too high, making it difficult for companies to operate. Some companies are even closing down.”

Lending rates in Uganda remained at 23.54 per cent in June, despite the marginal easing of the monetary policy stance in April by the Bank of Uganda — reflecting the provision for bad debts, tight monetary policy stance and the structural rigidities in the financial sector, including the high cost of doing business.

The BoU reduced its benchmark lending rate to commercial banks by one percentage point to 16 per cent in April, 15 per cent in June and 14 per cent in August after holding it at 17 per cent since October 2015.

In Tanzania, a slowdown in credit has been noted in transport and communication, building and construction, hotels and restaurants and personal activities.

“NPLs cut across all sectors and are a reflection of slowed growth in some economic sectors,” said Teddy Pole, an Investment analyst at AIB Capital.

Political risk

According to a study by Business Monitor International (BMI), a Fitch Group Company, political risk in Kenya will pose the biggest threat to the economy as both the tourism sector and investor sentiment are hit by growing uncertainty in the run-up to the general election scheduled for August 2017.

Political uncertainty, according to BMI, will weigh on growth over the coming quarters, causing real gross domestic product growth to dip below six per cent in 2017 as levels of tourism and inward investment see mild declines.

“We believe real GDP growth will dip to 5.8 per cent in 2017, down from our projection of 6.2 per cent in 2016. However, we believe that any escalation in political risk will be temporary, and that the fundamentals of the economy remain sound beyond the immediate horizon,” said BMI.

According to the research findings, loan growth in Uganda will slow in 2016 as the effects of an aggressive tightening of monetary conditions in 2015 come to bear on the banking sector and the real economy.

“While we do not expect a collapse in credit growth on the scale seen in the wake of the BoU’s last major hiking cycle (2011-12), credit growth will be moderate in 2016 as borrowers grapple with the higher cost of capital and banks switch to safer and more liquid assets, notably high yielding government securities,” said BMI.

According to the Kenya National Chamber of Commerce and Industry (KNCCI), increased borrowing by the government from the domestic market through Treasury bills and bonds has denied private businesses access to affordable credit.

“The issue of interest rates is a big problem that is hurting businesses, forcing some of them to scale down their operations and lay off staff,” said Laban Onditi, vice national chairman KNCCI.

A cross-section of market analysts said high risk sectors such as construction, hospitality and transport are likely to be starved of credit.

“Looking at the current economic environment, there are a number of key issues that stand out. For banks, the current Bill that seeks to cap interest rates is of pivotal importance. If the president assents to it, we could see a raft of changes in how banks operate and price their lending products. That will trickle down to their bottom line,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.