As an emerging market, Kenya benefits from a number of competitive advantages, not only within East Africa but also within the wider continental context. The country has recently undergone a significant overhaul of its governmental system, devolving key powers to local counties, while a spate of underground discoveries have prompted new interest in the hydrocarbons sector. In recent decades, Kenya, which has long served as an entry point to the regional market, has earned a reputation as a business-friendly country with a robust private sector. The economy is also comparatively well diversified, with a large agricultural sector.
Indicators
The recent rebasing of GDP in 2014, which updated the base year used for calculating GDP and includes growth in key sectors such as agriculture, manufacturing, telecoms and real estate, shows that GDP now stands at $53.3bn, up from $42.6bn, and GDP per capita has been revised to $1246. The country’s growth rate in 2013 has been revised to 5.7%, above a previous estimate of 4.7%. Much of the 2013 growth was attributable to relatively low and stable inflation, and the establishment of county governments as public expenditure rose in line with the devolved system of government, according to an economic survey from 2014. Agriculture, wholesale and retail trade, transport and communication, and manufacturing led growth.
On account of the internal and external shocks of recent years, GDP growth has been uneven. From 2002 to 2007 the speed of expansion was faster every year, starting at 0.5% in 2002, rising to 7% in 2007 and dropping to 1.5% in 2008. It recovered slightly to 2.7% in 2009 and reached 5.8% in 2010. For 2014 the government forecasts 5.8% growth. The World Bank expects a 5.1% expansion in GDP, which would be less than elsewhere in East Africa, citing low government spending and the high cost of finance for the private sector. The IMF expects 6.3%. “The external and fiscal positions are now stronger, inflation has been tamed, the economy has maintained solid growth and rapidly expanding financial inclusion has given millions of Kenyans a stronger stake in the economy,” Christine Lagarde, the managing director of the IMF, said in January 2014.
The level of inward foreign direct investment (FDI) has remained low in comparison with other major sub-Saharan economies and is among the lowest in the East African Community (EAC) area, according to the World Bank. Its online data service shows Kenya’s FDI as a percentage of GDP at 0.6% in 2012, better than only three other African countries. Still, according to the Kenya Investment Authority, in 2013 the country received a total of KSh313bn ($3.6bn) in FDI, which was four times more than in 2012. As of April 31, 2014, the country had received KSh29bn ($330.6m), with manufacturing, agriculture, energy, mining, oil and construction being the leading sectors in FDI inflows.
Maintaining Strengths
Economic policy and overall governance remain strengths in Kenya relative to its peers, according to the World Bank’s Country Policy Institutional Assessment (CPIA). Kenya’s CPIA measure rose to 3.9 in 2013, up from 3.6 in 2007. The figure is the highest in sub-Saharan Africa, where the average CPIA is 3.2. However, despite the strong performance in terms of CPIA, a combination of corruption, regulatory confusion and bureaucracy have negatively affected the broader business environment. Kenya ranked 72nd in the World Bank’s “Doing Business 2008” survey and 137th in the 2014 report. President Uhuru Kenyatta has commissioned a task force to work on improving the business environment. The country had managed to improve to 136th in the 2015 survey.
The FDI issue may actually to some extent be a matter of inaccurate reporting. A 2010 survey by the Kenya National Bureau of Statistics (KNBS) found FDI was likely underreported by 50%. According to the KNBS, the country’s volume of trade fell by 2.2% in 2013, with exports down by 3% from KSh517.8bn ($5.9bn) in 2012 to KSh502.3bn ($5.73bn). The main exports are horticultural products and tea, while other leading exports include manufactured goods and raw materials. Total imports grew by 2.8% from KSh1.38trn ($15.7bn) in 2013 to KSh1.41trn ($16.1bn) mainly due to purchases of petroleum products, capital goods, food products and chemical fertilisers, which made up 58.4% of the total import bill. In 2013 Kenya’s current account deficit reached $4.50bn, up from $4.31bn the previous year. The country’s cumulative current account deficit improved to 8.09% of GDP by December 2013, down from a deficit of 10.45% in 2012, while the government’s borrowing programme for fiscal 2013/14 was consistent with monetary policy objectives, according to the Central Bank of Kenya (CBK).
Ahead of Kenya’s sovereign bond launch in June 2014, international credit ratings agency Moody’s assessed the country’s credit worthiness as favourable, giving the government and the bond a “B1” rating with a stable outlook. Similar to Moody’s, in July 2014 Fitch affirmed Kenya’s “B+” rating with a stable outlook, while Standard & Poor’s credit rating for Kenya stands at “B+”. Meanwhile, the country is set to benefit from a major demographic dividend, with close to 80% of the 44.4m Kenyans under the age of 35 and 37% between the ages of 15 and 35. However, unemployment remains an issue with an estimated 40% of the population – and around 70% of the young – unemployed.
Institutional Reform
The biggest recent reform to the country’s governance system came in 2010 with the introduction of a new constitution. The new constitution included a number of amendments to the governing framework, but the most significant was devolution – the shifting of many key areas of state responsibility to 47 newly created counties. The change was driven by socio-political and economic reasons, but regardless, the impact on the business environment and growth will be profound. Crucially, the process will encourage not only greater local buy-in for health, education and investment policies, but will also spur greater decentralisation. Economic activity in Kenya has been historically concentrated in Nairobi, the capital, and Mombasa, the primary port city, while rural areas have traditionally been far poorer, in particular in the north.
Localities will now have a broader remit to pursue economic and commercial policies, including revenue-raising and investment incentives. The 47 new county governments will get part of their funding from state transfer payments but are also expected to generate their own revenue through licensing, fees and building up their tax bases. They are thus likely to focus on courting investment, and the Kenya Investment Authority plans a domestic version of the World Bank’s “Doing Business” rankings to incentivise this process.
“Devolution can be very beneficial for the country; however, in these formative stages, there seems to be some lack of coordination in regard to economic policies in some county governments and the national government initiatives. Now more than ever we need to apply international best practices and deepen our growth,” Francis Kariuki, the director-general of the Competition Authority of Kenya, told OBG.
VISION 2030: Kenya’s blueprint for development and future planning is called Vision 2030. It serves as an overarching guide to the country’s goal of becoming a middle-income nation by 2030, and requires annual GDP growth of 10% every year from 2012 to 2030. The plan’s reforms are grouped into three categories, addressing economics, politics and social elements. The plan was introduced in 2006, before the 2007 elections and the subsequent exogenous shocks slowed growth. However, despite starting at a tough time, the pace of implementation for Vision 2030 has gained momentum, with major reforms completed or under way.
The economic elements of Vision 2030 create significant opportunities for international investment, either with the government as a partner or in purely private ventures with local players. The economic pillar of the plan is structured around six sectors Kenya believes can contribute at least 10% to GDP as part of a diversified and modernised economy, including tourism, agriculture, wholesale and retail trade, manufacturing, ICT and financial services.
In each category the Vision 2030 plan outlines major market interventions designed to spur growth. These include new mega-projects such as resort cities and convention centres in tourism, and legal reforms to drive the agricultural sector to greater efficiencies and transition arid areas from rain-fed to irrigation-based farming. In the area of wholesale and retail trade, special economic zones are a key part of the plan. Kenya is already the largest economy in the East Africa region, and trade has historically been a major contributor thanks to the country’s geography. It borders three landlocked nations, Ethiopia, Uganda and South Sudan, and nearby Rwanda and Burundi are also without a port of their own. That makes Kenya, with its port at Mombasa, a crucial transit route.
Reaping Rewards
Agriculture is one of the main economic sectors earmarked for growth-oriented reforms in Vision 2030, with the overall goals including increases in efficiency, in land under cultivation and in inputs used. The country is the world’s biggest exporter of black tea, with production reaching 432,500 tonnes in 2013. Other main agricultural commodities include coffee, sugar cane, milk and horticultural products. For fertiliser, for example, a subsidy programme has been established and a feasibility study commissioned on the potential for local production. The area under irrigation rose from 119,000 ha in 2008 to 159,000 ha in 2013, a total that the government hopes to expand significantly – there are plans to irrigate more than 400,000 ha of land by 2017. The authorities want to boost production of staple crops such as maize, wheat and rice, and hope that farmers can raise yields enough to end reliance on imports.
The plan also seeks to establish Nairobi as a financial centre for the region. Attracting a large concentration of financial services has been a popular goal and Kenya’s prospects appear more feasible than most. Its capital is already a financial hub to a degree, as banks serving the region tend to base their teams there. Kenya believes it will go further after demutualising and commercialising the Nairobi Securities Exchange (NSE), and by introducing a greater variety of tradable securities, such as hedging and speculative derivatives, as well as Islamic financial services. Starting with real estate investment trusts in 2014, the NSE will move on to launching single-stock futures and other speculative tools, as well as hedging methods such as currency futures. When storage facilities are established for agricultural crops, futures based on them will be made available. In 2014 significant progress toward this goal has been achieved, as the NSE has seen the completion of an initial public offering of its own shares, which has undergone a transformation from a traditional mutual structure, allowing a reduction in fees and enabling the pursuit of a modern exchange-based strategy for growth (see Capital Markets chapter).
Risks
With the exception of a slowdown following the 2007 election crisis, Kenya has managed to sustain fairly robust growth in recent years. However, as with all emerging markets, there are a number of both domestic and exogenous risks to the overall outlook that if left unmanaged could constrain opportunities in the short to medium term.
Domestically, Kenya is looking to tackle a number of challenges common to regional economies, including improving governance, strengthening job creation and increasing local value addition. In the past two years, spill-over from instability in Somalia and more recently in South Sudan has resulted in increased security concerns in select areas along the northern border, and attacks in Nairobi, Mombasa and Lamu have disrupted the tourism sector and agricultural production. According to Martin Otiti, the managing director of British multinational security services firm G4S’s Kenyan operations, private companies have been able to play a prominent role in this area. He told OBG, “The law prohibits civilians from carrying arms, but many certified police officers are hired out to private firms. In this way private firms are able to conduct high-risk operations such as transferring money to banks and personal protections for high-risk individuals.”
Otiti also said structural challenges in terms of security services mean the private sector can fill in the gap. “With a significantly low number of police officers out of 90,000 actually available to fight crime, the private sector has a big role to play. The government must work alongside private firms on issues of surveillance and information sharing if Kenya is to have the capacity and security it needs,” Otiti told OBG.
Existing Challenges
The large size of the country’s primary sector in terms of both consumption and exports means that climate volatility and drought can drive up inflation and impact revenues. Imported inflation, chiefly through food costs, hurt the economy in 2011, for example, and left lingering effects in the form of high interest rates. They had soared with inflation and the current-account deficit in 2011, prompting the CBK to boost its benchmark lending rate from 6.25% to 18% in a three-month period. It has since come down, falling from 18% to 8.5%, although the commercial lending rate remains around 17%.
The challenges since 2007 have hampered the government’s ability to execute its long-term plans. It is currently following a path seen in other large African economies, in which development is guided by a long-term planning document that envisions a significant element of foreign investment, such as through public-private partnerships (PPPs). Kenya’s Vision 2030 specifies that achieving its goals requires 10% annual GDP growth from 2012 to 2030. However, growth has been roughly half of that since 2007, and at times far less. Despite the overall challenges, the country remains among a handful of economic leaders in Africa.
New Options
Kenya sold a dollar-denominated sovereign bond in June 2014, placing the country on a short list of sub-Saharan countries to have successfully tapped global fixed-income markets, including Nigeria, Ghana, Rwanda and Zambia. Pricing for sub-Saharan eurobonds has not been as favourable across the continent in recent years, in part a result of the US tapering its quantitative easing (QE) programme. During the height of the QE programme, African issuers benefitted from yields between 5% and 8%, but increasingly that is expected to rise. However, setting a new record for a maiden sovereign issuance in Africa, Kenya successfully tapped the eurobond market for the first time in June, selling $2bn worth at better than expected rates. The country originally sought to raise $1.5bn, but when bids totalled $8bn, the National Treasury ended up issuing two tranches: a five-year note with a yield of 5.875%, and a 10-year one at 6.875%. Around $600m of the funds will be spent to repay existing debt, while the rest will be used to fund infrastructure projects. The government hopes that the sovereign bond will help open up international bond markets to large corporate issuers.
Regional Infrastructure
Infrastructure is a significant focus for the government, and there are a number of capital projects already carried out and on the cards that look to not only reinforce domestic growth, but also improve regional integration. One example of this is The East African Marine System (TEAMS), a subsea fibre-optic cable that brought terrestrial internet connection to global networks in 2009. TEAMS was completed as a PPP in which the government initially took an 85% stake and Etisalat, an Emirati network operator, 15%. Etisalat built the cable, and Kenya then linked usage to ownership, selling off small ownership and access packages to internet service providers domestically and in Uganda.
In the area of transport infrastructure the major project is a planned $25bn railway corridor from Lamu, on Kenya’s northern coast, through South Sudan and terminating in Ethiopia. There will also be feeder roads and a deepwater port at Lamu. The overall effect would be to complement the existing railroads from the port at Mombasa – known as the northern corridor. This is a crucial transport link for East Africa because it serves seven countries: Kenya, Uganda, Rwanda, the Democratic Republic of Congo (DRC), South Sudan, Ethiopia and Tanzania. Improvements on this line have included extending the route from Kampala, Uganda to Tororo in the west of that country and Gulu in its north.
An oil pipeline is also part of the project, as both Kenya and Uganda will soon become producers. The Lake Turkana Basin in north-west Kenya is being explored by Tullow Oil, and estimates as of January 2014 are that there is at least 600m barrels of commercially exploitable reserves there. Production may come as early as 2016, according to recent estimates, as output could at first be transported on trucks until rail or pipeline capacity is available. In a regional context, Uganda and South Sudan would also be winners if a pipeline to Kenya’s Indian Ocean coastline were available. Trade and transport will be facilitated in the future by the increasing progress of the EAC, the regional integration organisation that has already established a common tariff regime and is planning for a common currency and federated state. Current members include Kenya, Uganda, Tanzania, Rwanda and Burundi.
Outlook
Kenya’s long-term narrative highlights the country’s importance in the region, its devolution plan and the development of an energy economy. Focus on these areas is increasingly possible now that the government has tamed inflation, improved its current account buffers and put in place plans to avoid excessive deficit on operations as opposed to development projects to facilitate economic growth, according to Fitch. “Economic policy-making has improved since 2011 when excess liquidity in the domestic banking system contributed to sharply rising inflation,” the agency said in January 2014, when it left its sovereign ratings unchanged and its outlook stable. “An increase in government spending and a more stable political environment should support infrastructure investment.”
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