Fund manager predicts bleak future for economy

By James Anyanzwa

A toxic combination of political uncertainty, inflation, global recession and the Government’s decision to cut spending spells doom for the economy.

A fund manager has forecast the economy to grow by between 1.5 per cent and two per cent this year down from the previous projection of 3.3 per cent.

According to AIG Investments, the current political instability and disruptions could severely undermine efforts to salvage a weak economy. "Broad-based weaknesses in key economic sectors, adverse weather conditions and political risk precipitate a downward revision on growth rates," Edward Gitahi, the company’s senior investment manager told The Standard yesterday.

He was speaking during the company’s first quarter briefings on the financial markets performance.

Gitahi said much of the slowdown in the economy is attributed to the sluggish performance of the Agriculture, Manufacturing and Tourism sectors.

He said inadequate rainfall would hurt agricultural production, while persistent inflationary pressures may impact negatively on consumer spending, forcing the manufacturing sector to cut production capacity and lay off people.

Future growth

"Any cut in development expenditure on account of fiscal pressures could undermine future growth and reduce attractiveness of Kenya as an investment destination," said Gitahi. According to the company’s statistics, tea production fell by five per cent in the first two months of this year compared to a similar period last year.

Milk deliveries dipped by more than eight per cent in a similar period last year.

The number of tourist arrivals at the Jomo Kenyatta International Airport plummeted by 15.7 per cent in January compared to December last year.

Electricity consumption, a major indicator of economic activity, dropped by 3.8 per cent in February.

However, coffee sales increased by more than 69 per cent to 12,000 tonnes in the first two months of the year compared to a similar period last year.

Gitahi said the drought conditions have dealt the country the hardest blow by sustaining inflation at the current high levels forcing consumers to cut back on discretionary expenditure in favour of food. He said the global economic slowdown is expected to impact negatively on tourist arrivals.

Stock market decline

The stock market declined by more than 30 per cent in the first quarter of this year as measured by NSE 20-Share Index.

However, the market recovered remarkably in March recording a gain of about 13 per cent, buoyed by relatively good earnings results on some selected counters and cheaper valuations.

The market decline was attributed to several factors including continued sell off by foreigners and retail investors on increased risk aversion and governance concerns within the stock brokering and investment banking fraternity.

"Investor confidence is very low at the market and until we see changes in terms of the proposed reorganisation of the CMA and NSE, the market will remain sluggish," said Peter Wachira, the company’s vice-president and senior investment manager. He says the stock market recovery this year hinges on overall economic growth outlook and earnings growth momentum.