2015 Quarter 1

2015 Quarter 1
Inflation – According to figures from the Kenya National Bureau of Statistics (KNBS), consumer price inflation increased in March, exceeding many
analysts’ expectations. The consumer price index (CPI) increased by 6.31% y-o-y in March, compared to a 5.61% y-o-y growth rate in February. The food and
non-alcoholic beverages sub-index continues to be the primary driver behind consumer price inflation, with the sub-index increasing by 10.96% y-o-y in
March compared to an 8.7% y-o-y growth rate in February.
Growth – We have revised Kenya’s real GDP growth forecasts to reflect the progress made with regard to infrastructure investment and the strong
performance of the non-tourism services sector. Our 2015 real GDP growth forecast has been adjusted upwards from 5.3% to 5.8%, while the 2014 growth
estimate has been revised from 5.1% to 5.3%.
Structural reforms – In early February, the Executive Board of the International Monetary Fund (IMF) approved a financing package which intends to
provide a policy anchor for continued macroeconomic and institutional reforms, and to act as a safeguard against potential exogenous shocks. The one-year
agreement is made up of a SDR353m (about $497m) stand-by arrangement and a SDR136m (about $191m) arrangement under the stand-by credit facility. It
should be noted that the Kenyan government intends to use the available funds only as a precautionary measure to support the country’s balance of payments
in the case of an external shock.
OPPORTUNITIES
STRENGTHS
Kenya plays a central role in East Africa as the largest economy and a gateway
The East African Community (EAC) trade bloc has a combined population of
into the region. The economy is diversified and the financial sector strong,
over 150 million and a combined nominal GDP of over $100bn.
with deep and developed domestic debt markets.
Deepening regional integration and improving infrastructure make Kenyan
Kenya is part of a region that contains a selection of the fastest-growing
companies well placed for regional expansion.
economies worldwide.
Potentially lucrative opportunities for investment in the services sector
Large, highly skilled, and educated workforce that ranks among the best in
(especially tourism, banking, telecommunications, wholesale & retail trade,
Africa.
and business process outsourcing).
Strong growth opportunities for commercial agriculture, agro-processing, and Kenya earns substantial foreign exchange from cash crops such as tea and
other manufacturing.
horticulture.
VULNERABILITIES
WHAT IS BEING DONE?
Terrorism is the most serious impediment to foreign investment and tourism.
The economy remains very dependent on rain-fed agriculture.
Dependent on hydroelectricity; oil-importing region.
Dependence on Europe for trade, remittances, and tourism earnings.
The government has taken severe steps to address the terrorism issue, which
could prove to be counterproductive in the long term.
Irrigation is increasingly being expanded to new areas, which should reduce
volatility in agricultural output over time.
New power plants using a combination of geothermal energy, co-generation,
coal, and liquefied natural gas will become operational over the next few
years, thereby reducing Kenya’s reliance on hydropower.
Export markets are becoming more diversified, with African and Asian
countries gaining in importance.
MEGA TRENDS
Population
45,010,056 (July 2014 est.); Age 15 - 64: 55.2%
Population growth rate (%)
2.7% (2013 est.)
Life expectancy at birth
Total population: 63.52 years; male: 62.06 years; female: 65.01 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 6.04%; People living with HIV/AIDS: 1.6 million (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 78.0%; male: 81.1%; female: 74.9% (2015 est.)
and write)
Urbanisation
Urban population: 24.8% of total population (2013); Urban population growth: 4.4% (2013)
Population below national poverty line
43.4% (2012 est.)
Unemployment rate
40% (2011 est.)
Employment (% of total)
Agriculture: 75%; Industry and Services: 25% (2007 est.)
Labour participation rate (% of total
population ages 15+)
67.3% (2013)
Business languages
English (official), Kiswahili (official)
Telephone & Internet users
Main lines in use: 204,356; Mobile cellular: 31.81 million; Internet users: 17.55 million (2013)
Sources: CIA World Factbook, World Bank, Trading Economics, ITU, UNAIDS & NKC Research
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Total
Kenya
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
189
144
90
178
187
122
147
0
Source: NKC Research
175
145
136
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
S&P
Fitch
Moody’s
B+/Stable
B+/Stable
B1/Stable
Standard & Poor’s (S&P) affirmed Kenya’s sovereign credit rating at “B+” on 7 November 2014. The outlook on the credit rating remains at stable, with the
expectation of improving economic prospects being counter-balanced by concerns about the implementation of devolution, and the effects this could have on
the country’s already sizable twin deficits, particularly the fiscal balance. The credit rating is supported by moderate external debt levels, a well-diversified
economy and strong private sector, a growing middle class, a well-developed local debt market, and acceptable levels of monetary flexibility. Earlier in the
year in July, Fitch Ratings affirmed Kenya’s sovereign credit rating at “B+” with a stable outlook, noting that rising security risk could limit future economic
growth potential, while infrastructural challenges and a deterioration in the business environment have also hampered economic activity. Factors that could
lead to a downgrade include a weakening in public finances, a sharp widening of the current account deficit, and a significant worsening in the political and
security situation. On the other hand, positive rating action could result from an improvement in policymaking and macroeconomic stability, a commitment to
fiscal consolidation, and additional reforms to improve the business environment and boost real GDP growth.
In turn, Moody’s affirmed Kenya’s credit rating at “B1” with a stable outlook on 13 November 2013. More recently, on 24 March 2014, the agency noted that
Kenya's “B1” government debt rating and stable outlook balance robust growth rates against the economy’s relatively small scale, low average incomes and
weak, albeit strengthening institutions. Furthermore, the agency stated that structural reforms undertaken in the past four years underpin the country’s rating
and are reaping benefits across a multitude of areas – fiscal, monetary, labour market, financial sector, natural resources and infrastructure – and should
gradually bolster growth prospects and economic stability. Furthermore, the agency noted that the main risks to the rating stem from significant infrastructure
shortfalls, intermittent droughts and weak inflows of foreign direct investment (FDI), as well as a precarious regional security situation.
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of
Economic
Policy
GDP Growth
Weak
Relatively
diverse
Relatively welldeveloped
Good
Strong
Stock Market
Listed Companies
Liquidity
Nairobi Stock Exchange
64 (primary listings only) Liquid in African context
(NSE)
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Twin deficits
Below potential
Low
Sufficient
Market Cap
$25.13bn (Bloomberg,
April 13)
Daily Trading
Volume
38 million shares (midBanks; food & beverages
April)
Dominant Sector
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Advanced in African
context
Very liquid in African
context
91-day to 30-year
No
Yes
Macro-economic overview
Kenya is a well-diversified, relatively developed economy with strong growth prospects and sound economic policies. The country’s dominant position in
Africa’s most progressive trade block, the East African Community (EAC), will allow Kenya to take advantage of the region’s positive growth prospects, with
significant upside potential to economic development. The country’s solid manufacturing sector and well-developed services sector are well positioned to
benefit from regional development. Most economic fundamentals remain sound, with a positive GDP growth outlook, adequate foreign reserves, and a stable
monetary environment. The country’s wide current account and fiscal budget deficits do increase the country’s vulnerably to external shocks, but these
indicators are expected to remain at sustainable levels over the medium term. There have been concerns that the recent slump in international energy prices
may halt or deter the development of Kenya’s nascent oil sector, which would significantly reduce FDI inflows going forward. However, the onshore nature of
Kenya’s oil resources significantly reduces the costs involved in both exploration and drilling compared to offshore projects. In addition, the general reduction
in exploration activities globally will increase competition amongst oilfield services and infrastructure companies as these companies attempt to secure
business from the few regions that are still seeing an uptick in oil-related activities. These factors, combined with Kenya’s favourable geographic location on
the coast near Asian markets could limit the detrimental effects of lower oil prices on domestic oil investment. Still, significant downside risk to the
development of the sector remains. The remoteness of many Kenyan oil fields will require significant infrastructure outlays, including the construction of an
oil pipeline towards the coast. This could deter oil companies from developing the Kenyan oil industry over the short to medium term.
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Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
29.0%
Service/GDP
51.2%
Industry/GDP
19.8%
The agricultural sector fulfils a central role in the Kenyan economy, both as a source of employment as well as a provider of livelihoods through subsistence
farming. The sector provides employment to the majority of the country’s labour force, while also playing an important role in increasing food security. Tea,
coffee, and horticulture are the country’s most important agricultural products, generating a substantial proportion of the country’s foreign currency earnings.
Turning to the industrial sector, Kenya’s manufacturing sector is relatively strong when compared to countries that are in a similar phase of economic
development. The country is one of the top exporters of manufactured goods in the sub-Saharan Africa region, and we expect this to remain the case over the
medium to long term. In addition, the government’s ambitious infrastructure investment programme has boosted industrial sectors such as construction and
energy. Finally, economic production is dominated by the services sector, with a well-developed retail sector, a relatively sophisticated and growing
telecommunications sector, and a developed tourism sector.
Real GDP Growth & Net FDI/GDP
1.4
9.0
Source: NKC Research
8.0
1.2
7.0
1.0
6.0
0.8
5.0
0.6
4.0
0.4
3.0
0.2
0.0
2.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
In a recently released economic update for Kenya, the World Bank raised its GDP growth forecasts for the East African giant, noting that lower international
oil prices will boost domestic consumption while expansionary fiscal policy is set to support industry. More specifically, the Bank now expects the Kenyan
economy to expand by 6% in 2015, up from the previous forecast of 4.7%. According to the report, oil at a baseline price of about $65/bbl may increase real
GDP growth by as much as 1.2 percentage points in the current calendar year. Increasing spending power will boost private consumption, which could in turn
have a positive impact on investor sentiment in the country. Staying with investor sentiment, there have been concerns that the recent slump in international
energy prices may result in a downturn oil-related FDI into Kenya. However, in recent market updates, Tullow Oil and Africa Oil – the companies currently
driving the oil sector in Kenya – said they plan to drill six basin openers in Kenya in 2015, while more than a dozen additional wells, including exploration
wildcats and appraisals, are expected to be drilled this year.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
Main Imports: % share of total
2016F
Machinery and transport equipment
Oil
2014E 2015F
2016F
Machinery and transport equipment
32.11
34.01
32.73
Oil
24.14
22.97
20.22
Manufactured goods
15.37
16.34
15.95
Chemicals
14.35
14.63
14.29
2014E 2015F
2016F
Manufactured goods
Chemicals
Tea
Main Exports: % share of total
Horticulture
Manufactured goods
Coffee
Source: NKC Research
0.0
2.0
4.0
6.0
8.0
Tea
17.74
17.93
17.46
Horticulture
13.72
13.09
12.75
Manufactured goods
11.07
10.96
11.13
Coffee
3.80
3.72
3.67
According to the most recent figures from the Central Bank of Kenya (CBK), total exports in the first 10 months of 2014 reached $6.1bn, reflecting a growth
rate of 3.9% y-o-y. Agricultural goods remain the country’s most salient exports, particularly tea (down 14.3% y-o-y to reach $1.1bn) and horticulture (up
12.5% y-o-y to reach $817m). Manufactured goods also made a notable contribution over the period, reaching $611m, albeit 12.6% y-o-y lower than the 2013
figure. In turn, total imports amounted to $18.4bn over the January - October period, reflecting a 7.1% y-o-y increase. Machinery & transport equipment was
the largest import category over the period, amounting to just under $6bn, followed by oil imports ($4.1bn). Overall, this resulted in a merchandise trade
deficit of $12.3bn over the first 10 months of 2014, which is 8.7% y-o-y wider than the 2013 deficit.
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Current Account & Budget Balance
(% of GDP)
-2.0
-3.0
-4.0
-4.0
-6.0
-5.0
-8.0
-6.0
Source: NKC Research
-10.0
-7.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
Looking at the current account, the wider trade deficit in the first 10 months of 2014 was partly offset by a substantial surplus in the services account. The
services surplus grew by 9.6% y-o-y over the January – October 2014 period, reaching $6.9bn. While tourism receipts dropped by 11.1% y-o-y over the
period, reaching $794m, this was more than offset by an increase in other private services inflows, which more than doubled to reach $1.7bn. In addition, the
current transfers account also recorded a substantial surplus over the period, reaching $3bn, while the income account continued to record a marginal deficit,
reaching $334m. Overall, this resulted in a current account deficit of $5.4bn for the first 10 months of 2014. This figure is 7.6% y-o-y wider than the 2013
deficit. Turning to government finances, the Kenyan government recently released its medium-term Budget Policy Statement (BPS) in which the authorities
review the progress made with regard to the 2014 BPS. According to the statement, implementation of the 2014/15 fiscal year (FY, starting July) budget is
progressing well despite initial challenges. Adequate measures have been taken to ensure that priority programmes are fully implemented. More specifically,
fiscal outcomes by the end of December 2014 have been generally satisfactory and underlying macroeconomic assumptions maintained.
Average CPI (% change, y-o-y)
16.0
Source: NKC Research
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The Monetary Policy Committee (MPC) of the CBK decided to maintain the country’s benchmark interest rate at its February meeting. In the final meeting
governed by Njuguna Ndung’u, the MPC decided to maintain the policy rate at 8.5%, a level at which it has been since May 2013. The decision was largely
expected, with all 11 analysts surveyed by Bloomberg forecasting the preservation of the current rate. Consumer price inflation (at 6.31% y-o-y in March)
remains above the CBK’s medium-term target of 5%. Monetary authorities were thus not able to continue the expansionary monetary policy which
commenced in July 2012. In the February MPC statement, the committee noted that the divergent monetary policy paths taken by major advanced economies
may cause volatility in global foreign exchange markets, which could have domestic spill-over effects. More specifically, increasing pressure on the shilling
exchange rate could have inflationary effects through higher imported inflation. Overall, the MPC concluded that current monetary policy measures together
with the favourable impact of lower international oil prices continue to support price stability.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Josphat Mwaura – designation is Partner
Tel +254 20 280 6100
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
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such information or opinions.
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