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Investment slows down as Kenya govt turns to businesses to fill public purse

Saturday October 20 2012
kenya

Business leaders have resorted to managing costs while delaying large investments

Kenya’s businesses face a bleak year-end as the government turns to them to fill the empty public purse.

Confidence in the economy appears to be waning as business leaders confront with economic uncertainty, higher taxes, costly funds and high cost of production. Moreover, as election fever grips the country, investment is slowing down ahead of the March 2013 poll.

A survey released by audit firm PricewaterhouseCoopers (PwC) showed Kenyan business executives are worried by government regulations, economic uncertainty, exchange rate and rising energy costs.

The factors, business people said, were the biggest threats to business in the remaining part of the year, with at least 81 per cent of executives polled saying the level of risk to businesses had risen compared with the same period last year.

This is in line with a worldwide trend, as 80 per cent of executives polled globally cited risk as having increased.

Business leaders have as a result resorted to managing costs while delaying large investments; this wait-and-see phase is expected to continue until April next year.

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“There seems to be a slowdown in some sectors. Most businesses are now focusing on leaner processes to minimise operational costs, “ said Vimal Shah, managing director of regional edible oils maker Bidco. “While we don’t foresee a major crisis, businesses don’t want to get it wrong,” added Mr Shah, saying several businesses have frozen new projects.

Analysts said with growing expenditure needs and a relatively weak economy, the scope for the government to raise taxes was narrowing, meaning existing businesses could be slapped with higher taxes in coming months. This could choke off the economy’s feeble recovery, said Razia Khan, head of research at Standard Chartered Africa.

Kenya is currently hard pressed for funds to support key programmes such as the ongoing war against the Al Shabaab militants in Somalia.

It also faces its most expensive ever general election next year under the devolved system of governance. The Treasury has been left with a huge financing gap after giving a Ksh21 billion ($250 million) pay increment to teachers and lecturers. As a result, it has turned to banks, telecoms and beer makers for more taxes to raise the funds.

Two weeks ago, Finance Minister Robinson Githae introduced a 10 per cent excise duty on mobile money commissions and alcoholic drinks, hoping to raise at least Ksh4.5 billion ($53.6 million) to boost the public purse. Data shows Kenya’s economy in 2012 has been sluggish with first half economic growth falling below 3.5 per cent on the back of high interest rates.

While over the past few months the macroeconomic indicators — inflation, interest rates and the shilling — have been improving, the uncertainty associated with the forthcoming general election is beginning to dampen growth prospects.

“The big concern is that devolution — as much as it has other merits — will make it more expensive to run the government. Growth is recovering, but the economy remains relatively weak. So it’s not clear that there will be more scope to raise taxes, as that might choke off any recovery that does get underway,” said Ms Khan.

These are the fundamentals that the Central Bank of Kenya will be working with when its Monetary Policy Committee meets on November 7 to chart fiscal and monetary policy. The CBK warned in its meeting last month that global oil prices and a weak global economy remained a threat to the Kenyan economy. A September Business Leaders Confidence Index survey by Ipsos Synovate showed while a majority of executives felt the economy was doing much better than last year, when high interest rates, a weak shilling and high inflation hurt growth, uncertainty over elections is hurting the outlook.

The survey showed business leaders were downbeat over the prospects for the next six months with slightly more than a third — 37 per cent — having a positive outlook compared with 40 per cent who believe the worst is yet to come. Only a fifth — 22 per cent — of the respondents believe the economy will stay the same.

Elections in Kenya

The economic environment is expected to be further vitiated by disrupted budget cycles that could see the government spending less in the first half of 2013. This would deny businesses the crucial income they derive from selling goods and services to government.

Elections in Kenya have previously been conducted during the first half of the fiscal year and as such were usually less disruptive to the operations of the government. With the election slated for March 2013, in the second half of the fiscal year, analysts are warning that government spending could slow.

The cheerier news though was that month-on-month inflation fell to 5.32 per cent in September from 6.09 per cent in the previous month.

Analysts at PineBridge Investments project that the government machinery will be focused more on ensuring a smooth transition in the face of a changing administrative structure under the new Constitution than on spending budgeted funds. “Usually, there is increased activity as ministries rush to implement budgeted projects before the end of the fiscal year in June. Government expenditure absorption rates may fall below the average of 57 per cent and 80 per cent for development and recurrent expenditure respectively,” said Pinebridge.

Uncertainty over the coming elections has convinced many executives that economic recovery will take longer than previously thought, leading to cost-cutting initiatives. While the cost-cutting measures may bear fruit for shareholders, the impact on spending will result in reduced demand for goods and services and a decline in production.

Weaker earnings

This would undermine the ability of the economy to create new jobs and curb layoffs, leading to a vicious circle of job losses.

A number of listed firms have reported weaker earnings, with the numbers offering insight into the strength of the economy, and have now trained their sights on cost cutting. On Wednesday, Uchumi Supermarkets announced its pretax profit dropped 21.7 per cent to Ksh403 million ($4.74 million) for the year ended in June due to high costs and subdued consumer spending due to high inflation earlier in the year.

Last month, Kenya Airways, listed on three exchanges in the region, saw its profits after tax drop 53 per cent in the year to end— March to Ksh1.66 billion ($19.4 million). Kenolkobil reported a Ksh3.9 billion ($46.4 million) loss, one of the biggest in corporate Kenya, for the first six months of the year driven by foreign currency losses, increased financing costs and falling international oil prices.

The profit drop reflects the tumultuous environment in the first half of 2012 when the full impact of the high interest rates, inflation and volatile currencies, which persisted in the last quarter of 2011, was felt.

Uncertainty over the general election and fears over governance structures also represent a threat to Kenya’s bid to raise more funds through a Eurobond.

The country recently doubled its planned debut sovereign bond to $1 billion after postponing it to the 2013/14 fiscal year from the 2011/12 fiscal year.

“The government will need more cash for recurrent expenditure especially if elections go to a run-off and to fund the expanded government,” said Ms Khan. “This is a big concern, as it could squeeze out capital expenditure. In the near-term especially, it remains the only way that the authorities are likely to be able to meet the cost of devolved government. If they can’t raise taxes, or borrow a whole lot more to fund recurrent expenditure, then they may well have to cut capital expenditure to make room for greater recurrent expenditure.

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