Kenya economy slows in Q2 over election shocks

What you need to know:

  • The economy grew by 4.3 per cent in the quarter ending June 2013, compared to a 5.2 per cent growth the previous quarter.
  • The country could be headed for tougher times this quarter with current projections by international credit rating agencies indicating that the country might face slower growth following the terrorist attack on the Westgate Mall, Nairobi on September 21.
  • The International Monetary Fund and the government project the economy will expand by between 5.8 and 6 per cent this year, meaning it could now grow by only about 5 per cent.

Kenya’s economic growth slowed by nearly one per cent in the second quarter 2013 over election early this year, hurting key sectors like hospitality, wholesale and retail trade, the statistics body said.

The Kenya National Bureau of Statistics (KNBS) said Tuesday the economy grew by 4.3 per cent in the quarter ending June 2013, compared to a 5.2 per cent growth the previous quarter.

The expansion was slower than the 4.4 per cent reported in the second quarter of 2012.

KNBS however said growth was driven by expansion in agriculture and forestry, manufacturing, electricity and water supply, construction, transport and communication and financial services.

Hotels and restaurants sector however contracted by 11.4 per cent for the period ended June 2013 compared to a growth of 2.9 over the quarter ended June 2012 as booking dropped in the period leading to and after the March 2013 elections.

The country could be headed for tougher times this quarter with current projections by international credit rating agencies indicating that the country might face slower growth following the terrorist attack on the Westgate Mall, Nairobi on September 21.

Moody’s, the rating agency last week said that while it expected the country to lose 0.5 per cent of potential GDP growth though the national credit rating was unlikely to be affected.

The Central Bank of Kenya (CBK), in its latest assessment on the economy said there remain risks to the macroeconomic outlook emanating from the global economy.

“Economic activity in the Eurozone remains weak while the instability in the Middle East and North Africa (Mena) could escalate. Following the instability in the Mena region, international oil prices rose between June and August 2013 which contributed to the increase in domestic fuel prices” said the Central Bank in a statement on September 3.

“Foreign exchange inflows from tea exports to the region, which account for about a third of Kenya’s tea exports, could be affected. These developments coupled with the high current account deficit remain a threat to macroeconomic stability” said the CBK adding that the implementation of the new VAT measures from last month will contribute to short-term increases in inflation, but the effects will be mild.

On Monday, KNBS said inflation rose at the highest rate in 15 months ––from 6.67 per cent in August to 8.29 per cent last month.

The International Monetary Fund and the government project the economy will expand by between 5.8 and 6 per cent this year, meaning it could now grow by only about 5 per cent.

KNBS said agriculture and forestry sector expanded by 5 per cent for the period ended June this year compared to a growth of 2 per cent for the similar period last year while the manufacturing sector grew by 4.3 per cent compared to 2.1 per cent.

The electricity and water supply sector grew by 12 per cent compared to 7.9 per cent over the previous period while the construction sector recorded a significant growth of 6.7 per cent during the quarter under review compared to 1.1 per cent growth over the second quarter of 2012.

“Hotels and restaurants recorded a significant contraction while wholesale and retail trade’s growth slowed albeit marginally. The hotels’ economic slowdown experienced in the first quarter of 2013 spilled over into the second quarter mainly through low booking by international visitors” said KNBS.

“The low bookings were mainly linked to uncertainties over the country's General Election held in March this year”.

Moody’s gave a B1 stable rating on Kenya in November last year but has not placed the country on a watch list, Standard and Poor’s rating for Kenya is B+ stable while Fitch has assigned Kenya a B+ positive.

“We expect this high profile attack to be credit negative and will adversely Kenya’s growth and fiscal revenues, most directly through its effect on tourism,” said the rating agency in a research note.

The ratings agency said that the bombing of the US embassy by al-Qaeda in 1998 and post-election ethnic violence in 2008 both resulted in sharp declines in tourism receipts and the same was expected to happen again after the attack on the Westgate Mall.

“As a result we expect a sharp decline in tourism receipts this year, reducing GDP growth by about 0.5 percentage points in the 2013-14 winter high season. We expect the effect on arrivals to be concentrated in the leisure tourism sector, particularly from Europe, which accounts for about 45 per cent of arrivals,” said Moody’s.

KNBS said that the second quarter of 2013 was characterised by low inflation rate, which averaged at 4.37 per cent compared to an average of 11.78 per cent that prevailed during the second quarter of 2012.

This was helped by lower food and fuel prices as well as a stronger shilling which strengthened against all its major trading currencies except the euro during the review period.