Business leaders’ confidence in the EAC economies in 2012 has taken a negative turn on the back of fears over Kenya’s political climate ahead of the general election while high inflation and interests rates are expected to hurt consumer demand.

At least 15 CEOs from Uganda, Kenya, Rwanda and Tanzania polled by The EastAfrican predicted harsh economic times in 2012. Such a dim outlook is expected to force business executives to keep a tight grip on expenditure to manage costs.

The business environment is expected to be further compromised by high inflation, currency fluctuations and rising interest rates, which could hurt lending to businesses and households.

Business leaders in Uganda and Rwanda are worried about how Kenya handles its looming election and the campaigns prior the polls.

They fear any violence and a general rise in political risks could hurt businesses and economies in the region as they rely on Kenya for imports of raw materials and essential commodities.

In 2008, violence in Kenya disrupted supply chains around the region, causing shortages of fuel and other commodities in Uganda, Rwanda and Burundi.

Last year saw regional economies struggle to stay afloat, with Kenya’s growth slowing down in the last two quarters. Stockmarkets have followed suit with the Ugandan and Kenyan indices losing while Tanzania and Rwanda have had a marginal gain.
In Tanzania, the biggest worry is the recent decision by the government to slap licence fees on businesses in municipalities.

Dar es Salaam business executives are also worried about political instability in light of pressure for a new constitution, which is expected to heighten this year.

While Uganda’s economy is expected to grow at 6.5 per cent in 2012, disagreements around the oil contracts and sharing of the spoils are expected to dominate the economic and political arena.

Researchers at Dyer and Blair  and business executives in Kigali reckon Rwanda will record the  greatest economic growth in the region owing to improvements in business environment. But the key downside risk here is the underlying tensions in Rwanda.

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SENI ADETU EABL Group Managing Director

2012 portends better opportunities for expansion into regional markets but we are not out of the woods yet with Kenya’s election related anxiety looming.

If the regional economies do not fully recover from the slump witnessed in the last half then definitely there shall be increased pressures on businesses to cut costs and rationalise their operations.

The ultimate test for businesses will be pegged on their agility and the ability to quickly adjust to the macro-economic challenges witnessed in 2011, some of which posed a crunch for many businesses.

Great scores are probably hidden in how such businesses respond to external risks and uncertainties and maintain focus on their strategic ambitions. Inflationary pressures may continue into the first half of 2012, shrinking any significant capital investments and expansions.

Patricia Ithau L’oreal East Africa chief executive officer

There can only be guarded optimism about 2012 if any, as early indicators don’t show this letting up for the better part of the year. On the shilling and high inflation, whatever gains have been made may not be sustainable. 

The risks lie in the high inflation across the region which will affect purchasing power and insecurity arising from terrorists attacks and threats which will hurt tourism for Kenya but which may present opportunities for rest of the region which are seen as safer.

The construction industry which has in the past few years been a key growth driver is certainly going to experience a slow down with the higher interest rates. The big retail businesses will continue to grow and the beauty products markets will probably hold up.

James Mwangi Equity Bank chief executive officer

Kenya’s economy is likely to grow at above 5 per cent in 2012.

Financial institutions across the East African region will only make more profits in 2012 if the interest rates will come down because borrowers are shying away from the increased rates and paying back twice the loan, therefore increasing defaulter numbers.

We expect that the Kenya shilling will stabilise by April and inflation falls to one digit, but Kenyans need to strike a balance between imports and exports to uphold the strengthening shilling.

Hopefully by March, as a bank, we will start employing to boost our human capital pool as we increase our presence in Kenya Uganda and South Sudan by opening more branches.  

Richard Byarugaba Managing director, National Social Security Fund Uganda

I am optimistic that Uganda’s inflation will come down with food prices abating and more foreign inflows helping to ease the current account balance and eventually curb inflation pressures.

Economic troubles in the European Union, however, carry the biggest threat to regional growth because of its entrenched role in the export trade, official aid and labour remittances.

Further shocks to the Eurozone will definitely dent regional currencies and export revenues.

Closer to home, the upcoming Kenyan election also poses big risks to the region’s economic outlook.

Government intervention in the economy will still pose big risks to growth because of the dangers of knee-jerk reactions against forces of demand and supply.

Charles Rubaijaniza Managing director, Uganda Clays Ltd

I anticipate high growth in the construction sector within Uganda and South Sudan in 2012. Large real estate developers like NSSF and National Housing and Construction Corporation (NHCC) are eager to pursue major projects this year and this will boost our sales turnover despite high interest rates.

Policy makers need to revisit the interest rate tool used in fighting inflation because it appears to be killing production activities.

The start of commercial oil production activities is still a big economic opportunity for Uganda alongside Bujagali hydropower dam which is expected to go live this year. Major risks include the exchange rate that could depreciate again to Ush2,800 and continued uncertainty in the Eurozone.

Moremi Marwa, Chief executive officer, Tanzania Securities Ltd

I am upbeat about the country and regional outlook for 2012. Tanzania’s strong domestic demand should support growth through 2012 despite double-digit inflation and challenges in the currencies and interest rates.

I expect domestic demand to remain the main driver of growth in 2012, in spite of rapidly rising food and energy prices eroding disposable income. In addition, gold production has increased substantially since the opening of the Buzwagi mine in June 2009, and mining is likely to continue to underpin GDP growth.

I expect fiscal and monetary policy to remain stimulative in 2012, although the authorities will need to move towards a more balanced policy mix over the medium term.

Ken Mwai Head of business/Managing Director at IwayAfrica Uganda Ltd

It is going to be a very tough year for many sectors in 2012. The Kenyan and US elections are also likely to weigh heavily against investor appetite in the region, depending on how they are handled.

In the ICT sector, some Internet service providers might be forced to close as a result of many firms cutting back on expenditure tied to telecommunications and Internet services, a trend that could propel consolidation in the ICT sector for the sake of survival.

I expect inflation, interest rates and the exchange rates to stabilise later this year on account of strong policy actions.

Maurice Toroitich Managing director, KCB Bank Rwanda

Growth in EAC is likely to be sluggish in the coming 12 months owing to the effects of inflation and high interest rates.

Most companies are likely to reassess their strategies in light with the current high levels of interest and are most likely to be cutting back on new investments in order to manage cash-flows and service existing debts

The private sector is likely to contract due to the high cost of borrowing and a high exchange rate that might impede expansion of manufacturing capacity. This might be exacerbated by limited access to affordable long term capital by lending institutions.
Faustin Mbundu, Chief executive officer, Private Sector Federation, Rwanda

Rwanda’s biggest risks will be external. Rising inflation in neighbouring countries poses significant risks in the form of imported inflation. As a landlocked country, political and economic instability could hurt Kigali’s growth. However,  we expect the sound macroeconomic management that has kept inflation and interest rates under control in the country to continue in 2012.

This should give private sector players an opportunity to mobilise more resources and invest more.

The planned investments in the tourism sector such as global hotel chains should boost Rwanda’s tourism potential. 

I expect the positive trend witnessed in the export sector last year to continue. With the entry of Equity Bank and venture capital funds access to credit should improve and this will spur new investments and boost household spending.

Michael Shirima, Chairman, Precision Air

Recovery in Tanzania is unlikely in 2012 due to inflation and increasing governments. All in EAC countries are in the same pot in relative terms. The solution is to cut bureaucracy and promote market economy vigorously.

More action needs to be taken on change of paradigm about private business, mind-set and rationalising regulations.  Increase in investment may be just marginal.

Certainly if economies shrink unemployment will rise.

The private sector is capable of reducing unemployment but that requires positive fundamentals in macroeconomics.

The new generation has energy to invent and invest in private businesses but it lacks role models, motivation and enthusiasm. However, if deliberate measures are taken by the government and the private sector (engine for economic growth) to address the existing challenges, in 2012 the light may appear at the end of the tunnel.

Muhamad Damji, Deputy managing director, Catic International Engineering,  Tanzania

Tanzania’s economy is unlikely to grow this year as the government has decided to reintroduce the business licenses in this budget which were previously voted out to ease business for investors.

In 2012, however, transportation, construction, tourism and energy will be the biggest drivers of the economy.

The progress made on regional integration will define the risks and opportunities in partner states. Tanzania needs time to integrate as it is far behind other countries in education and skilled labourers.
Alexander Wanjohi, Managing director, Chartis Uganda

I believe poor implementation of Common Market protocols and continued uncertainty in the Eurozone might have an impact on Uganda’s economy and that of the region in 2012.

Unemployment is still a big challenge but large local investments worth more than $20 million could mitigate the crisis.

If Uganda were able to bring its exchange rate to Ush2,000-Ush2,300 against the dollar and inflation close to 10 per cent in 2012, this would stimulate consumer demand significantly. Uganda needs to work harder in promoting insurance penetration that has remained below two percent of GDP.

Charles Ogutu, CEO, Rural Livelihood Development Company, Tanzania

The region remains uneven with subdued economic growth and high unemployment and buoyant economic activity and emerging inflation pressures. Distressed labour markets will remain the headache for Tanzania’s outlook in 2012.

Projections show slower economic growth given the lingering downside risks in the form of rising inflationary and overheating pressures, a sudden reversal of capital inflows and sharp fluctuations in commodity prices.

The greatest risk to economic growth in the short and medium term is the growing fiscal deficit and the implied potential need to raise bridging funds.

Wolfgang Fengler, World Bank chief economist for Kenya

It is hard to tell the risks facing farmers, tourists, companies and households in the election year but clearly business and households are watching very closely.

The scenario after the 2008 post-election violence was that farmers were unable to plant, tourists rerouted their vacations to other destinations, companies held back their investments, and households reduced their consumption.

In terms of the pre- election scenario, this year a lot will also depend on how the run up to the elections plays out. Kenya’s economy has an effect on the others in the region as we saw after the last elections but this is not guaranteed since Uganda, Tanzania and Rwanda can still do well. But of course everyone will benefit if Kenya does well in the region.

Our projection is for Kenya to grow at 5 per cent, and Uganda and Tanzania to grow at 6.2 and 6.7 per cent respectively.

Reported By Mwaura Kimani, Mike Mande, Berna Namata, Scola Kamau, Joseph Mwamunyange, Emmanuel Were, Leonard Magomba and Bernard Busuulwa