RODRIGUES: 2018 will be a year of mixed fortunes for Kenya’s economy

Wednesday December 13 2017

Nasa-affiliated politicians at a press

Nasa-affiliated politicians at a press conference in Nairobi. Their coalition’s leader Raila Odinga said he intends to be sworn in as the ‘people’s president’. PHOTO FILE | NATION 

By PATRICIA RODRIGUES
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The 2017 election cycle has been unprecedented in many ways, with a historic annulment of the August 8 election by the Supreme Court and an opposition boycott of the subsequent October 26 polls.

For many months, Kenya’s businesses held their breath, waiting for the outcome of the presidential election.

And just as they thought it was all over now that President Uhuru Kenyatta has been sworn in for a second term, opposition leader Raila Odinga said he intends to be sworn in as the “people’s president”.

Although citizens have seen violent protests, we expect relative political stability and economic growth to pick up from early 2018.

There has been a sense of return to business as usual in Nairobi. Normal operations have resumed and foreign investors are again trading on Nairobi Securities Exchange, pushing the value of shares to a post-election high.

Ethnic affiliation

Nonetheless, President Kenyatta faces a challenging start to his second term, as the election period highlighted the reality that national politics remains driven primarily by ethnic affiliation.

The unprecedented low turnout in the October 26 election, amid an opposition boycott, underscored the deep divisions that remain between ethnic communities allied to either coalition.

Although these are unlikely to pose an immediate threat to stability, the President will need to work to unite the ethno-regional divisions to boost his legitimacy.

For 2018, the country’s economic outlook seems promising. President Kenyatta’s pro-business and pro-international investment approach is likely to continue, which bodes well for economic growth.

More populist policies, such as the cap on interest rates, are likely to be reviewed, while the country’s Early Oil Production Scheme is expected to resume in coming months with increased vigour.

The economy is expected to grow by 5 per cent, according to the International Monetary Fund, and the government is confident of seeing gains in agriculture following the end of a regionwide drought.
Meanwhile, the tourism sector, which is usually hard-hit by political uncertainty, saw a 10 per cent increase in arrivals in the past year.

In addition, despite the political uncertainty of the past year, Kenya was ranked third in sub-Saharan Africa in the World Bank’s Ease of Doing Business 2017 index, climbing 12 places and finishing at 80th out of 190 countries globally.

This is Kenya’s best performance on the index in over a decade and shows that reforms to bureaucratic processes and reduction of waiting times for investors are bearing fruit.

But the government’s focus on infrastructure investment is likely to be reviewed due to the need to repay national debt, which stands at 56.4 per cent of GDP.

Commercial debt

In addition, the administration is unlikely to root out corruption, given the vested business interests of some politicians.

These factors will work to dampen economic development in coming years, unless reforms are undertaken to decrease the government’s reliance on commercial debt and prevent the diversion of funds due to corruption.  

For international investors, this outlook means they could — and should — revitalise their investment plans for the region, which have been on hold since 2016.

Challenges

But, in the short term, it will be important to keep a close eye on the activities of the opposition National Super Alliance, especially its campaign to boycott domestic companies perceived to be allied to the Kenyatta administration and its attempts to form parallel governance structures such as its People’s Assemblies and Mr Odinga’s plan to be declared the “people’s president”.

In the event that such campaigns are successful, this would undermine social cohesion and raise political tensions. The government’s response to the formation of parallel governance structures may involve heavy suppression by security forces, posing risks to investors, given the security forces’ reputation for disproportionate use of force against civilians.

A sustained period of unrest prompted by anti-government campaigns would also disrupt supply chains for companies operating in the region that rely on the port of Mombasa, particularly companies operating in South Sudan and the Great Lakes Region.

Rising debt should be of concern, considering the government’s plans to raise a second Eurobond in the coming months. According to the Central Bank of Kenya, public debt had risen by more than 25 per cent in the past year, to $43 billion.

A significant amount of the commercial debt will mature in 2019, making 2018 a crucial year for the country’s economic performance.

Patricia Rodrigues is an analyst at Control Risks, Nairobi.