years

Kenya's economy indicates versatility

Posted on : Saturday , 20th January 2018

 In spite of the fact that President Kenyatta won the October election rerun, which had been ordered by the Supreme Court, almost half of the voting public did not show up for the poll on the directions of his rival, Raila Odinga, who boycotted the second poll. President Kenyatta had won the election held in August, yet it was considered to have been conducted improperly by the Supreme Court.
 
President Kenyatta might be forced to spend his second term in office trying to win over those who obeyed the other man. Most likely in light of this, after his introduction he immediately signed into law the County Allocation of Revenue Amendment Bill, which empowered the Treasury to disburse assets to the nation's 47 provinces. Postponement in release of the assets/funds had been hampering the work of the devolved administrations in the counties.
 
However, there are different issues he will have to battle with. Odinga plans to swear himself as an alternative president. A planned oath-taking in December was shelved after pressure from local and international stakeholders. Such activities by the opposition are a headache. President Kenyatta may need to contend with for his whole second term and almost certainly for all of 2018.
 
Renewed threat of secession 
Unfortunately, President Kenyatta has ruled out dialogue with the opposition. He could come around on this, but the opposition may not be similarly obliging. The renewed threat of seccession in the coastal areas, which are also strongholds of the opposition, is another thorn in the president’s side. President Kenyatta will have a hard task changing sentiment in this regard.
 
Set for take-off
The economy should move faster in 2018 after slowing due to the impact of the prolonged election process on supply and demand and the effects of drought in the first half of the year.
 
Despite these troubles, Kenya managed to hold steady. And it maintained a stable exchange rate throughout the prolonged electioneering period, World Bank economist Allen Dennis remarked with admiration in December. This resilience is likely to keep investor sentiment positive in 2018.
 
Adewale Okunrinboye, FX specialist at Ecobank Transnational, believes growth in 2018 will be hinged on improvements in agricultural output (25% of GDP) as better rainfall drives a recovery from drought in the first half of 2017.
 
“Outside agriculture, growth prospects revolve around Kenya’s ability to unlock gains from improving transport links and construction of the SGR [standard gauge railway] extension”, he adds.
 
At a presentation in December, the governor of the Central Bank of Kenya (CBK), Patrick Njoroge, shed more light on this, asserting that Kenya’s SGR would not only hasten the transportation of freight offloaded from the ports to warehouses but also reduce costs by about 50%.
 
Ecobank believes that even though growth will probably accelerate in 2018, it is likely to be subdued and perhaps come out at about 5.2%. This could be improved if reforms on the growth-stifling interest rate caps are carried out. Financial sector GDP expanded at its slowest pace in six years in 2017 because of the caps.
 
And then there is oil. Production in the two blocks in Turkana County could start at about 2,000 barrels per day in 2018. Considering how little oil may be produced and the challenging logistics required to transport it by road and rail until a pipeline is constructed, its effect on economic growth is not likely to be significant.
 
Debt concerns
Monetary policy should be easier in 2018. “A high drought-induced base in the first half of 2017 implies that inflation is likely to decelerate strongly in the first half of 2018”, says Okunrinboye of Ecobank.
 
Consequently, the CBK will probably cut its benchmark interest rate from 10% at end-2017. However, there is a complication for the CBK in this regard. “Given the rate cap in place, such a move is likely to induce further bank demand for government securities, which has driven a compression in short-dated yields in 2017 despite the ‘tight’ monetary stance by the CBK,” says Okunrinboye.
 
This a scenario the CBK would be keen to avoid, so a rate move may be dependent on how much progress is made with the hoped-for legislative amendment of the interest rate cap law.
 
On the fiscal front, Kenya’s debt burden is concerning. It is expected to be almost 60% of GDP in 2017, with debt servicing expected to climb to about 35% of revenue, and likely higher in coming years, as the authorities plan to borrow even more. For instance, in late 2017, the authorities asked for bids for a proposed $2bn eurobond in early 2018.
 
With warnings coming from the World Bank, IMF, rating agencies and others, the authorities may do well to take heed.  

Source : http://africanbusinessmagazine.com

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