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Kenya’s Economic Growth

By Cytonn Research Team, October 23, 2016

This month S&P, a global ratings agency, upgraded its credit outlook for Kenya from negative to stable, for both local and foreign currency long-term debt citing (i) sustained economic growth, (ii) reduced political tension, and (iii) stabilizing public debt, which is currently at 58.0% of GDP. This follows the IMF downgrading its Sub-Saharan Africa economic growth prospects to 1.4%, representing a 50% drop from the 3.5% recorded in 2015, attributing the drop mainly to:

  1. Declining oil prices, which has affected key commodity exporting economies such as Nigeria,
  2. Terrorism and humanitarian crimes, and,
  3. Critical drought particularly in Lesotho, Malawi and Zambia, as the main concerns.

Despite the expected drop in GDP growth for Sub-Saharan Africa, Kenya continues to record strong GDP growth, most recently coming in at 6.2% for Q2’2016. For our focus of the week, we highlight Kenya’s economic growth path: the expectations at the beginning of the year, the journey so far and finalize with our outlook.

East Africa as a region offers investors, developers, and entrepreneurs a host of opportunities, with low commodity dependence and vibrant capital markets. Of the various countries in East Africa, Kenya stands out due to the diversity and vibrancy of its economy; the hub for innovation, technology, financial services and real estate development.

At the beginning of 2016, the economic expectations were bullish, and pointed towards a stable macroeconomic environment supportive of growth, underpinned by expectations of a strong performance in the energy, construction, information and communication sectors, and the recovery of the tourism sector. The only concern was that the Kenya Shilling was expected to remain under considerable pressure because of increased capital expenditure to finance large-scale infrastructural projects but this was countered by the support from IMF through the Stand by Facility and the increased inflows to the country.

During the first and second quarter of 2016, GDP grew by 5.9% and 6.2%, respectively, driven by growth in the Agriculture, Transportation and Storage, Real Estate, Tourism and Wholesale & Retail trade, against expectations of 5.2% and 5.7% for the first and second quarter of 2016, respectively, as shown in the table below:

Sector

Q2'2015 Contribution

Q2'2016

Contribution

Q2'2015 Growth

Q2'2016 Growth

Weighted Growth Rate Q2'2015

Weighted Growth Rate Q2'2016

Weighted Change from Q2’2015 growth

Agriculture and Forestry

23.2%

23.1%

4.0%

5.5%

0.9%

1.3%

0.3%

Taxes on Products

11.6%

11.5%

5.8%

5.1%

0.7%

0.6%

(0.1%)

Manufacturing

10.7%

10.4%

5.1%

3.2%

0.5%

0.3%

(0.2%)

Real estate

8.4%

8.6%

10.2%

8.7%

0.9%

0.7%

(0.1%)

Wholesale and retail trade

7.4%

7.4%

5.2%

6.1%

0.4%

0.5%

0.1%

Education

6.8%

6.6%

4.5%

4.1%

0.3%

0.3%

(0.0%)

Transport and Storage

6.4%

6.5%

6.8%

8.8%

0.4%

0.6%

0.1%

Financial Intermediation

5.9%

6.0%

7.7%

7.5%

0.5%

0.4%

(0.0%)

Construction

5.1%

5.2%

11.2%

8.2%

0.6%

0.4%

(0.1%)

Public administration

4.7%

4.7%

6.3%

6.7%

0.3%

0.3%

0.0%

Information and Communication

3.0%

3.0%

7.0%

8.6%

0.2%

0.3%

0.1%

Electricity and Water Supply

2.5%

2.6%

9.2%

10.8%

0.2%

0.3%

0.1%

Professional admin

2.1%

2.1%

5.1%

4.8%

0.1%

0.1%

(0.0%)

Health

1.8%

1.8%

6.4%

5.3%

0.1%

0.1%

(0.0%)

Other services

1.2%

1.2%

2.8%

3.3%

0.0%

0.0%

0.0%

Mining and quarrying

0.9%

1.0%

8.6%

11.5%

0.1%

0.1%

0.0%

Hotels and Restaurants

0.8%

0.9%

(5.0%)

15.3%

(0.0%)

0.1%

0.2%

Financial Services Indirectly Measured

(2.5%)

(2.6%)

9.6%

8.6%

(0.2%)

(0.2%)

0.0%

GDP at Market Prices

100.0%

100.0%

5.9%

6.2%

5.9%

6.2%

0.3%

This year, the sectors that supported the growth include Agriculture, Transportation and Storage, Real Estate and Wholesale & Retail trade. Tourism (Hotels and Restaurants) has shown positive growth, an indication that it is well on track for recovery recording a growth of 15.3% in Q2’2016. Growth will continue to be driven by (i) Infrastructural spending by the government in the infrastructural and energy sectors, (ii) the devolved system of governance, which is expected to improve economic activities in different counties, (iii) a young and growing population, which will lead to (a) increased demand for basic services, including food, water and shelter, (b) increased number of people joining the workforce, increasing the disposable income levels in the economy while and contributing to the growth and development of consumer markets, and (c) increased appetite for investments by a younger, more educated population; and (iv) the growth of the middle class whose demand for goods and services, and hence an increase in their spending power, translates into a significant opportunity driven by consumption expenditure.

However, key hindrances to economic growth present themselves in the form of:

  1. Security: In recent years, terrorism has escalated in Kenya with Al-Shabaab causing havoc. The constant threat of terrorism has driven away tourists, causing certain countries to issue travel advisories against Kenya, which has led to loss in revenue for one of the country’s biggest GDP contributors, tourism. However, the government has invested a lot in security and terror events have significantly reduced improving external perception about the country’s safety;
  2. Political Stability: Economic growth and political stability are deeply interconnected. Political instability is often riddled by frequent switch of policies, creating uncertainty, which may reduce investment and hence negatively affecting macroeconomic performance. With the Kenyan Election scheduled for 2017, uncertainty still exists;
  3. Corruption: Kenya ranked poorly in the 2015 Corruption Perception Index released by Transparency International, coming in at 139 out of 168 countries. Per the index, Kenya retained the same score, 25 points of a possible 100, that it had in 2014. This score was attributed to Kenya’s continued dismal performance on the back of ineffective anti-corruption agencies;
  4. Export Growth: With improved exports, especially from tea and horticulture the country is set to benefit through (i) forex income which will eventually go into supporting the currency, and (ii) improved current account position which will reduce reliance on debt and spur sustainable growth.

For the economy to grow, the Kenyan Government needs to put up initiatives and processes to counter the above. We commend the government for improving the security situation in the country as well as cooling off the political temperatures through diplomacy. However, corruption is still a problem and the government needs to have a strong stance and act on it. The issue lies with sincerity of purpose, genuine efforts and the overall operating climate. Kenya has the structures, systems and processes in place but unless there exists a genuine will on the leadership’s part to succeed, any anti-corruption programme will remain a passive declaration. It is much more a mindset challenge rather than a question of fixing the system.

Our GDP growth outlook for Kenya for 2016 is estimated to come in at 6.0%, against expectations at the start of the year of 5.7%. This growth will largely be driven by Agriculture, tourism, energy and the Real Estate sector which are expected to grow at 2.8%, 7.0%, 7.4% and 9.0%, respectively.
 

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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.

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© 2017 Cytonn Investments Management Ltd