KENYA: Against the odds

27/05/2010 | Michael Logan

Kenya’s economy may be back on track, but concerns remain over political instability, governance and the strength of the global recovery

Kenya’s economy is back on track after a growth plunge, sparked by the global economic crisis and the violence that followed December 2007’s disputed presidential election. But concerns remain that a slow global recovery and further political strife could limit the pace of growth.

GDP growth plummeted from 7.1% in 2007 to 1.7% in 2008 on the back of the post-election violence, which brought the country to a standstill for months, and the global crisis, which hit exports, foreign inflows and remittances. Provisional estimates from the ministry of finance put 2009 growth at 2.2%.

This year, however, the recovery is expected to gather pace.

“Kenya’s economy is beginning to emerge from the challenges of the last quarter of 2007 and the first quarter of 2008,” finance minister and deputy prime minister Uhuru Kenyatta tells Emerging Markets. “Kenya has the potential to grow at 4% in 2010.”

The IMF and analysts agree 4% is a realistic estimate, as prospects for growth improve in two key sectors: good rains after a two-year drought have improved the outlook for agriculture, which accounts for about a quarter of GDP, and tourism is expected to pick up.

“There is potential for both these sectors to exceed expectations this year, as the global recovery strengthens and the return of rains improves the prospects for agriculture,” Stuart Culverhouse, chief economist at the London-based Exotix, tells Emerging Markets. “We expect growth of 4.2% this year.”

So far, the signs are good. Tea production in the world’s largest exporter of black tea jumped 48% in January after falling by 4.8% the previous month, while coffee production jumped by 31.4%. The Kenya Tourism Board could not provide figures on how much it expects the sector to grow in 2010, but the consensus is that tourists are returning in growing numbers.

However, these sectors depend on factors outside Kenya’s control.

“The threat to economic recovery would be caused if the anticipated global recovery does not materialize, which would result in muted demand for Kenya’s exports of goods and services, particularly tourism,” Kenyatta says.

The volcanic ash cloud that closed European airspace in April makes just this point. According to the Kenya Flower Council, the flight ban cost Kenyan flower growers – who provide Europe with over 30% of its flowers – up to $2 million a day as thousands of tonnes of fresh blooms went to waste.

The prospect of a good harvest has also helped lower inflationary pressures, allowing the central bank room to cut interest rates in March and try to address another impediment to growth: private-sector credit uptake. Inflation fell to 4% in March from 5.2% in February, according to the Kenya National Bureau of Statistics.

The central bank said it expected inflationary pressures to remain low as it cut the base interest rate by a quarter of a percentage point to 6.75%. “The decline of any inflation threat meant that this policy stance should stimulate the supply of credit and anchor inflation expectations while supporting economic growth,” central bank governor Njuguna Ndung’u said accompanying the interest rate decision.

The central bank had shaved two percentage points off the benchmark rate since December 2008 before the cut, but banks have been slow to follow suit. The central bank said gross loans increased from Ksh771.7 billion ($9.96 million) in December 2009 to Ksh783.8 billion in February 2009, but that this fell short of perceived private-sector demand.

“While private-sector credit has grown both in volume and the number of loan accounts, the Monetary Policy Committee (MPC) observed that the cost of credit was still constraining adequate expansion of private-sector loans,” says Ndung’u.

CUTTING RATES

Analysts say growth could be held back if banks do not follow the MPC’s lead. “Perhaps the main barrier to stimulating growth is the reluctance of banks to lower lending rates to match the fall in the official bank rate,” says Culverhouse.

Commercial bank lending rates averaged 15% in February, but some banks are beginning to fall in line. The Co-operative Bank of Kenya cut its base lending rate from 15% to 14% on May 1, while Barclays Bank is cutting its rate from 15.75% to 13.75%.

Analysts say the private sector is ready to expand after a period of belt-tightening. The Nairobi Stock Exchange grew quickly in the first quarter of the year, with the NSE-20 share index up 25% at the end of March, while a study by market research firm Synovate the same month found business confidence had risen to 69%. On top of this, some 74 out of 100 chief executives and managing directors in Kenya, Uganda and Tanzania said they saw Kenya as an attractive investment destination.

The Kenyan capital Nairobi has long been a regional business and finance centre, and this has held true. “One reason Kenya rode out the last crisis is that multinational companies decided to make Kenya their regional hub despite the violence,” David Cowan, African economist at Citigroup, tells Emerging Markets.

But the Synovate study found most business leaders still say political uncertainty is the main threat to the economy.

The formation of Kenya’s coalition government in April 2008 ended tribal violence that had claimed over 1,500 lives and displaced over 300,000 people. But the government has since been characterized by infighting between prime minister Raila Odinga’s Orange Democratic Movement (ODM) and president Mwai Kibaki’s Party of National Unity (PNU). On several occasions, power struggles have brought the coalition to the brink of apparent collapse.

The latest worries revolve around Kenya’s long-overdue new constitution. A draft goes to a referendum in July, but business leaders are concerned the document could lead to the coalition partners turning on each other.

“We have the momentum and need to make sure we don’t have political instability over the next year or so,” Michael Joseph, chief executive of Kenyan telecommunications giant Safaricom, says. “If parties start to fight about the referendum, more unrest is possible. But I think it would only be a temporary step back.”

However, Kenyatta believes fears over short-term political problems are ill-founded. “Considering what happened after the elections of 2007, this concern is not unusual,” he says. “However, the political environment is stable, and it is unlikely to have significant impact on the economic performance.”

Longer term, the ministry of finance predicts growth will hit 2007 levels again by mid-2014. Before then, however, Kenya must navigate a presidential election, in 2012, which brings the risk of further violence and the attendant economic damage.

“More violence at the elections could set the country back 10 years, or at least Kenya will lose ground to countries in East Africa and beyond that are seen as more stable,” says Culverhouse.

The coalition agreed to address economic disparity and land issues; overhaul the police, judiciary and discredited electoral system; and deliver a new constitution – all reforms considered crucial to avoid more violence. Most of the processes are underway, but the squabbling has introduced delays, and time is short.

According to former UN secretary-general Kofi Annan, who brokered the deal that ended the violence, the government has until the end of this year to finish its reforms before politicking for 2012 begins in earnest and brings the process to a halt.

REASONS FOR CONFIDENCE

However, Kenyatta insists these concerns are just as unfounded. “We have made significant progress in the implementation of reforms,” he says. “We are confident therefore, that Kenyans are regaining their confidence in the government and its institutions, and therefore it is highly unlikely that there will be further violence in 2012.”

Also considered crucial to peaceful elections is the prosecution of key political and business figures accused of directing the violence. The International Criminal Court (ICC) in The Hague has launched an investigation that could see several high-ranking politicians in the dock. This, along with Kibaki standing aside at the end of his second term, means that the risk of violence is reduced, says Cowan.

“We will have a bunch of candidates, none of whom is the incumbent,” he says. “Obviously what happens at ICC going forward, taking out key players, will have a big impact.”

Joseph, however, believes the key to Kenya’s future lies not with an external judicial system, but with its own. Safaricom has gone from strength to strength despite the global and domestic challenges, but its chief executive believes Kenya’s hopelessly corrupt and inefficient courts are holding his firm back.

“The biggest challenge that people like myself have is impunity,” he says. “We are always fighting against people doing things incorrectly, stealing from the company. This happens every day. There is no way we can stop it, the judicial system is a mess.”

Kenya is regularly flagged as the most corrupt nation in East Africa. Graft permeates every level of society and there have been several scandals where ministers have been accused of helping to steal millions of dollars of public funds. Yet not a single high-level person accused of corruption has been prosecuted.

“Corruption is alive and well and doing very well in Kenya,” Joseph says. “The judicial system should have the courage to prosecute individuals.”

Yet despite all the problems and challenges, Joseph believes Kenya’s economy will flourish. “Here is a tremendous economy,” he says. “But the big thing is that the average Kenyan is very entrepreneurial and doesn’t just sit back and do nothing. We have tremendous potential.”

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