Kenya’s Economy Has Much Riding On Polls

The Kenyan government is often giddily optimistic about GDP growth forecasts – remember the confident prediction that 2008 GDP growth would be in the same range as 2007 figures, pronounced in the middle of the post-election crisis? This year, however, the predictions are quite sober with 3.5% to 4.5%. That’s not a complete standstill, and it’s certainly better than the 1.5% of 2008. But it also means that the 2010 recovery of 5.8% has stalled, and that 2012 will be around or worse than the quite uneventful 4.4% of last year. I had a look at the data from the latest economic survey to figure out where the economy would go this year:

Bank managers always seem to look pretend-concerned no matter what, even when they announce the most fantastic financial results. In 2011, the financial sector’s expansion slowed down to 7.8% from 9.0% in 2010, but that is still very solid growth. Interest rate income was high thanks to the CBK trying to control price pressures, but that may have been a short-term benefit: there are concerns that demand for loans will slow down, so there’s a reason for bankers to look concerned again. Properly concerned.

The building and construction sector trundled along tamely at roughly the same growth rates as in the previous year: 4.5% in 2010 and 4.3% in 2011. Manufacturing growth, in contrast, slowed down from 4.4% to 3.3% thanks to high prices of inputs, including fuel, and the reduced availability of agricultural inputs. Tourism is one of Kenya’s main foreign exchange earners and 2011 revenues grew by 32.8%, which is good news. The hotels and restaurant sector actually grew faster, accelerating from 4.2% to 5%. However, the figures for the first quarter of 2012 show a slowdown in the sector, a marginal decline of 0.5%, which may get worse throughout the year if visitors stay away over security concerns, whether related to the next election or terrorism.

Overall growth in the agricultural sector was a disappointment: it fell from a sound 6.4% in 2010 to a feeble 1.5% in 2011 due to the regional drought, and high prices for inputs didn’t help. Agriculture contributes more than 20% to Kenya’s GDP, so it’s a key sector – lower agricultural output feeds through to manufacturing performance, for example. Just as importantly, it provides an income, directly or indirectly, for a much larger share of Kenya’s population. So when sector growth falls behind the growth rate of the population, then this has a negative impact on average per capita incomes and affects purchasing power, which again feeds through on the wider economy. Good news is that thanks to high commodity prices, overall export earnings from agricultural commodities rose by 24.7%, offsetting the decline in volumes in several commodities.

There are some unsupportive external conditions that affected the economy last year and will continue to do so this year. And the Kenyan government can do little about them in the short to medium term: Demand from European markets is subdued. Kenya can and does try to open new markets, but this is unfortunately not something that happens overnight. Similarly, oil prices are high and will continue to stay high. Kenya is in the process of diversifying electricity sources and might – probably will – end up with its own oil, but again, this is a matter of years.

And then there is the general weather dependence: no rains, no harvests, lower exports, higher electricity costs, inflation up, spending for famine relief up. Of course there are things you can to soften this, including, for example, irrigation. But again, these are structural changes in the economy, and even with a competent government, not one busy party hopping and throwing coffins over at funerals, it would take time.

The outlook for 2012 is not all positive. There are a lot of same-old risk factors: High fuel prices, subdued European demand, Kenya’s infrastructure challenges, corruption, and it looks like the shilling might throw a wobbly again. Monetary policy will remain tight for a few more months. On the upside, agriculture and hydroelectricity will bounce back after the rains.

But there are some fresh risks. The latent threat from terrorism seems to have become more pronounced recently, which is bound to affect tourism revenues. And I expect a slowdown in overall business as everyone sits down to wait whether the next election is peaceful. The quality of public spending, already unimpressive, will deteriorate further as everyone scrambles for campaign money.

In my opinion, the election is the deal maker or deal breaker for Kenya: Will it be a grown up affair where everyone votes, a government is formed, and we’re all moving on swiftly? Or a repeat of 2007/2008? If the latter, it will be worse than the first time round, and I think we’ll be looking at a Cote d’Ivoire scenario. If the former, Kenya is still stuck with a host of challenges: corruption, insecurity, crumbling infrastructure, the massive expenditures for decentralisation of government, and the transition to the new constitution. But I also think there will be a surge in investment, both from local and international business. Kenya’s economy is inherently very resilient, and so well placed for the growing investment interest in the EAC. I’m currently 50/50 on the outcome of either scenario.