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Potential pitfalls that could hold back the economy in the New Year

By Patrick Alushula and Macharia Kamau | Updated Sun, January 1st 2017 at 00:00 GMT +3

 

 

In 2016, the economy was majorly characterised by slowed private sector borrowing, job cuts, subdued earnings and heightened political exchanges.

It was, however, not all gloom as it also enjoyed low fuel prices, a fairly stable shilling, rebounding of the tourism sector and reduced incidents of terror attacks.

The economy closed the third quarter with a 5.7 per cent growth, being a decline from the six per cent posted in a similar quarter last year. It was also a decline from the 6.2 per cent posted in the second quarter of this year.

As it turns a new leaf into 2017, the economy may face different threats that could force a rethink in the planning of the country’s affairs to avoid another challenging 12 months ahead.

Oil prices appear headed for a recovery, especially with a rare show of unity from the Organisation o Petroleum Exporting Countries (OPEC) and 11 non-OPEC members to cut on output.

While OPEC members want to cut supply by 1.2 million barrels per day, their counterparts have approved to cut their supply by 558,000 barrels daily.

Kenya now faces a possible increase in the import bill once the deal is implemented in the New Year.

On the day the deal was signed, the price of Brent crude - the global benchmark for oil prices - soared to $57.89 (Sh5,911) per barrel, being the highest price in 17 months.

About a quarter of Kenya’s import bill goes to petroleum products. This makes the country exposed to shocks from global oil prices, especially with local consumption rising since 2010.

Latest data from Petroleum Institute of East Africa (PMIEA) shows that while in 2010 Kenya consumed 4.05 billion litres of oil, in 2015, consumption hit 5.88 billion litres. This is a growth of 45 per cent.

So far, in the six months to June, the country has consumed 2.98 billion litres. This translates into a 30 per cent increase compared to a similar period last year

According to the Kenya Economic Survey 2016, the country spent Sh226.1 billion on petroleum imports as oil prices started easing.

This was substantially lower than Sh335.7 billion, which was the billing in 2014 and Sh321.9 billion in 2011. In 2011, a barrel of oil was selling at an average of $111.26.

If the current rally in oil prices continues, the import bill will rise, widening Kenya’s export to import deficit. PIEA Chairman Powell Maimba said the trend of oil prices may make the work of planners difficult.

“It is now very difficult to determine the movement of oil. Economic forecasting by the Government is becoming very tough. I do not envy the budgetary team as it prepares the budget,” said Maimba.

a widening deficit could also put pressure on the shilling that enjoyed relative stability in 2016.

The influence of August 2017 elections, the actions of the US Federal Reserve (Fed) and Donald Trump’s presidency all come with the potential of affecting the shilling’s performance against the dollar and other global currencies.

In mid-December, the Fed raised its interest rates by 0.25, the raise being the second in a decade. This s likely to put pressure on other currencies, including the shilling, since the US dollar is a denominator for most business transactions in the world.

According to Barclays Africa Head of Research and Chief Economist Jeff Gable, who spoke before the hike, global currencies will lose value of between four to five per cent against the US dollar in the next 12 months.

For Kenya, Mr Gable said, he sees election fever and a strong US dollar condemning the local currency to a low of Sh106 to the dollar, a 15-year low since October 2011 when it was at 106.75 to the greenback.

That may throw Central Bank of Kenya (CBK) into action to utilise the over Sh700 billion (import cover of less than five months) foreign exchange reserves to stabilise the shilling.

Not Overly anxious

US President-elect Donald Trump has vowed to give Americans “the strongest economy anywhere in the world” and build infrastructure that is “second to none.”

One way of doing this, he says, is to cut corporate tax to 15 per cent from current 35 per cent. This will make US an attractive destination to do business and as more people transact in the US dollar, it will gain more strength.

On the Nairobi Securities Exchange (NSE), where majority of stocks lost their value in 2016, Chief Executive Geoffrey Odundo says the coming General Election may harm the shilling as well as the bourse, at least in the short-term.

“We are not overly anxious of the events. We have a feeling the pre-election and post-election events will have temporary impact on our market,” said Mr Odundo, adding that he expects the proposed electoral reforms to mitigate the impact.

The forthcoming elections, therefore, will be another major threat to the economy, with businesses taking caution while planning for the year.

In 2017, international rating agency, Fitch, projects a six per cent economic growth, up from 5.8 per cent in 2016, but sees uncertainty around the elections as a downside risk.

“The possibility of under-performing tax revenues and increased current expenditures around the August 2017 General Election represent a downside risk, although this is balanced against Kenya’s history of under-executing capital expenditures,” said the agency.

Captains of industry who spoke to Business Beat were cautiously optimistic. They noted that while the elections would cause a disruption and see private sector invest scaled down, the huge expenditure on infrastructure projects by the Government would to an extent cushion the economy and see growth remain at the projected levels of six per cent.

Kenya National Chamber of Commerce and Industry Chairman Kiprono Kittony said the lobby remains upbeat but also cautious about the economic growth.

He said growth would mostly be driven by major infrastructural projects and the multiplier effect to the economy.

“We say this but with caution on the disruptions that every election year brings, especially in reference to the political risks associated with elections and inflation that normally accompanies the occasion,” he said.

Despite the noise emanating from the political sphere, added Mr Kittony, the political scene in Kenya is approaching maturity.

Elections’ uncertainty

“Although there will be upheavals here and there, we expect everything to remain normal. As has been the trend, business expansion across all sectors may be put on hold as investors adopt a “wait and see” attitude as a matter of caution,” he said.

Chairlady Kenya Association of Manufacturers (KAM) Flora Mutahi said businesses may avoid making major investments until the electoral process is over.

“It might mean that business slows down a bit as both local and international investors either stall ongoing projects or delay in starting new ones due to the uncertainty brought about by the electioneering period,” she said.

However, Safaricom CEO Bob Collymore said while investors are cautious, the economy might still achieve the projected growth rates of about six per cent on the back of Government spending on infrastructure.

“We anticipate that economic growth will slightly slow during 2017 as investors take a more cautious approach ahead of elections. But we continue to align with the World Bank’s projections that Kenya’s GDP will grow at six per cent in 2017. This growth will be supported by macroeconomic stability, public investment in infrastructure and improved agricultural performance,” he said.

The World Bank in its October update on the Kenyan economy said its is likely to grow at 5.9 per cent in 2016 and rise to six per cent in 2017. The National Treasury has also recently revised its forecast for 2017 from 6.5 per cent to six per cent.

Corruption, which remains an irritable thorn in the Jubilee government’s flesh, will be another threat to the economy. Towards the end of 2016 during the State House Summit on Governance and Accountability, President Uhuru Kenyatta reacted angrily to his critics’ accusations of inaction in the fight against graft, saying: “What do you want me to do?”

The Auditor General has in his reports already pointed out that a lot of Government funds are being spent without proper accountability at both the national and county level.

Other than being a challenge to the economy, graft will be a major election issue that might scuttle his re-election bid.

According to the Society for International Development (SID) in a report tracking anti-corruption efforts by the Jubilee Government over the last four years, its stand on corruption might be critical in deciding the 2017 elections.

“Jubilee administration’s anti-corruption performance in the last forty-five months has been less than impressive,” said Associate Director at  SID Kenya Houghton Irungu.

Therefore, 2017 may turn out to be another depressing year. Investors assuming a wait and see mode may translate into little or no new jobs created, economic growth hitting a slump and profits shrinking.