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The handshake that rebooted Kenya's economy

By Dominic Omondi and Otiato Guguyu | Published Tue, April 3rd 2018 at 00:00, Updated April 3rd 2018 at 11:53 GMT +3
The historic Uhuru-Raila March 9 handshake at Harambee House. [File/Standard]

In summary

  • Politics had erected an economic blockade in Kibera, cutting it into two

Kibera, the political bedrock of former Prime Minister Raila Odinga, has become the thermometer of Kenya’s political temperatures, followed by Mathare, among other major slums.

When police quell riots here, the world media gets a field day telling all and sundry about what is wrong with the country and the continent at large as well as where the raw form of expression finds a voice - sometimes in the most violent of manners.

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The sprawling slum dissected into invisible political and ethnic boundaries is a cauldron of Kenyan interactions which had been one of a country completely fissured to the point of stroking the dangerous call for cessation.

Today, a visit to Kibera’s Kamukunji area is met by calm.

It is no longer the hotbed of near-militant political activities that sunk into plumes of teargas, stones, and burning of tyres during the electioneering period. It is bustling with commercial activities as if the intensive few months never happened.

The prevailing peace is a boon for Gilean Onditi who offers laundry services at Kibera Town Centre - a community-based initiative that supplies water to the slums, among other activities.

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He feels the new-found calm is a golden treasure for businesses.

“Business resumed in November 2017, but there was still some tension, so much so that we used to call our clients asking them to return,” says Onditi.

At times, they were forced to go for the clothes themselves as some clients feared being caught up in the melee. Things could easily get out of hand should you be suspected of belonging to the ‘wrong’ tribe or political party.

Political nemeses

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In perhaps the most bizarre of diplomatic grandstanding, one community chose to boycott food sold at Othaya Market as they did not want anything from their political enemies.

Politics had erected an ion curtain in Kibera, cutting it into two.

But the symbolic handshake between former Prime Minister Raila Odinga and President Uhuru Kenyatta has  thawed the tension, bringing the economic curtain tumbling like the Berlin Wall.

For President Uhuru and the technocrats around him, they realised that running a modern economy is complex and even when all other key economic variables remain unbroken, the psychology and perception played a bigger part in the unfolding economic rot.

Insiders who are familiar with the deal say fixing these twin problems has been Uhuru’s administration’s biggest headache that needed to be addressed urgently.

“The benefits of the new deal outweigh its cost,” noted an insider who declined to be named.

What has been very clear to Uhuru’s administration is that economic revival requires more than the strict round of belt-tightening or the suggested austerity measures.

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All the key economic indicators pointed south and things were getting worse by the day.

Kibera is a perfect microcosm of how the larger economy faired in the build-up to the August election last year as tensions flared.

 

Common products

The entire economy slowed down. At Toi Market, one of the largest informal markets, common products such as second-hand clothes for children were scarce. Most of the traders, estimated at about 5,000, were not restocking.

But so was the case with the larger, more sophisticated markets.

Central Bank Governor Dr Patrick Njoroge boldly admitted in an interview with CNN that the economy was in bad shape because of the political upheaval.

According to a poll done by Stanbic Bank in which procurement managers were asked about their decisions on whether to stock, employ and project output, the run-up to the elections was the worst time since Stanbic started the Purchasing Managers Index (PMI).

The PMI slipped to 47.3 in June from a 49.9 in May. In PMI, readings above 50 signal an improvement in business conditions on the previous month while readings below 50 show deterioration.

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“The reading went below the crucial 50 threshold for the first time in April 2017 due to weaker underlying demand conditions, and lower willingness to spend,” said Stanbic Bank Regional Economist, East Africa Jibran Qureishi.

The election itself was eventful.

The waiting did not end and what was expected to be one election became two. The Supreme Court annulled President Uhuru Kenyatta’s August 8 election, citing irregularities in the electoral process.

The political temperatures went up, polarising the country even further.

The pulse of the economy grew faint in the wake of the shockwaves that hit the country’s businesses, especially those listed on the Nairobi Securities Exchange (NSE).

After President Uhuru won the repeat election, with analysts predicting that the Supreme Court would uphold his win, investor cash started flowing into liquid counters.

On August 22, Safaricom - the biggest capitalised firm in the market - hit Sh25 per share, pushing market capitalisation — the total value of investor funds – to more than Sh1 trillion. But after the Supreme Court annulled the win, the market literally crashed as investors struggled to pull their money out.

Panic sells by foreign investors triggered a 30-minute halt at the NSE, with huge sales at Safaricom, Equity and East Africa Breweries causing a dip in share prices across several counters.

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And it got worse when Mr Odinga pulled out of the race and a legal circus ensued with no one certain about the economic implications arising from a political standoff.

The second elections did nothing to cool investors’ taut nerves - even as IEBC could not be allowed to take ballot papers to some areas considered to opposition zones and many people died out of the circus.

Even after the Supreme Court unanimously affirmed Kenyatta’s win, the opposition refused to recognise him as the President.

Instead, they went ahead and conducted their own mock swearing-in at Uhuru Park, with Odinga being ‘installed’ as the People’s President.

What should have been an innocuous democratic exercise insidiously, and violently altered the pulse-rate of the country’s economy.

This was followed by the Opposition telling their supporters to boycott certain products from industrialists - further slowing down the economy.

Almost all the other major economic indicators blinked red. The economy in the first to third quarter slowed down. It was bleeding.

During the election period, the Nairobi County Government did not approve any building projects due to political jitters.

 

Building projects

According to the National Construction Authority (NCA), only 1,330 new building projects came into the pipeline in the first half of the current financial year, setting the stage for slower growth at the close of the year.

This was a 50 per cent drop from the 2,300 building projects that were approved in a similar period in the previous financial year, meaning at least 1,000 extra projects need to come into the pipeline to match the performance.

“The number of new projects has gone down about 50 per cent this year, according to the latest data we have,” said the NCA Manager for Regional Offices Stephen Mwilu at a press briefing in Nairobi.

According to I&M Burbidge Capital Ltd, deal-making in 2018 began on a slightly lower pace, with nine deals reported across the region worth $30 million (Sh3 billion) over the past two months of the year compared to 11 deals worth $958 million (Sh95.8 billion) in 2017.

“We attribute the decline to a muted transaction origination environment and more cautious decision making in the second half of 2017,” Chief Executive Officer Edward Burbidge said.

The election menace affected the Government too. During the election, Kenya was expected to pay of Sh77 billion Syndicated loan in October. Treasury had to ask for an extra six months until the election noise could settle.

But as the six months narrowed Treasury went to PTA Bank, now Trade Development Bank, and took another loan to pay off the syndicated lenders. 

But the government was still short of cash, having delayed disbursement to counties while the cost of running a new election depleted state coffers.

KCB Group Chief Finance Officer Lawrence Kimathi said that in the last quarter of 2017, the government was not paying suppliers, releasing money to counties or spending in infrastructure reducing the money in the market.

“Even this year, apart from the education fund and a bit of infrastructure we are not seeing much spend from government,” Kimathi said.

The government had to go back to the Eurobond market in the midst of the political storm trying to convince foreigners to give Kenya money while the house was not in order.

Transactional advisors to Kenya’s second Eurobond were quick to caution the bondholders in a prospectus that the decision by NASA not to recognise Uhuru Kenyatta as president posed a risk to their investment.

The transactional advisors included a group of four banks - CitiGroup, Standard Bank, J.P. Morgan and Standard Chartered Bank - that helped Kenya sell its 30-year Sh200 billion dollar-bond.

They noted that continued levels of political uncertainty in the country might affect capital markets, tourism, and foreign investment, as well as Kenya’s economy as a whole, a situation that would jeopardise the country’s prospect to pay back its debts.

With a slowdown in the economy, where there are more dollars leaving the country than entering, the country’s reserve of foreign currencies critical for repayment of external debts such as the Eurobond, would be depleted.

“Although some stability was achieved following the Supreme Court ruling in November 2017, political uncertainty remains as a result of NASA’s refusal to recognise Kenyatta as President,” read part of the prospectus prepared on February 28, six days after the National Treasury Cabinet Secretary Henry Rotich announced that Kenya’s Eurobond had been subscribed seven times.

“There is no assurance that instability will not increase again in the future, which may impact Kenya’s level of tourism and foreign investment or risk of sudden withdrawal of foreign deposits among other things, which in turn may adversely affect Kenya’s economy and its ability to service its debt, including the Notes,” added the prospectus.

A source close to the meeting between Kenyatta and Odinga intimates that Kenya was finding it difficult to market the Eurobond, thus the decision to price it expensively.

Former US President Bill Clinton while running for Presidency in 1992 is said to have popularised the slogan:  “It is the economy, fool.”

The magic handshake between opposition leader Raila Odinga and President Uhuru Kenyatta may not have been viewed by many as an economic move, but it may just turn out to be the one that got businesses off the ground.

“International goodwill and foreign policy are benchmarked political stability,” says Dr Scholastica Odhiambo, an Economics lecturer at Maseno University.

She adds that sometimes the aid that Kenya receives is pegged on democratic rights. “Social sectors such as education, health and security are highly donor-dependent,” adds Dr Odhiambo.

 

Pending bills

Apart from turning to the Eurobond to raise cash urgently to pay for loans that are fast maturing, the government had also delayed remitting cash to counties for lack of cash delaying payment of pending bills.

There have been fears in some quarters that increased political bickering was taking a toll on the economy, which saw the National Treasury Cabinet Secretary Henry Rotich announced that Kenya was broke, a statement he later on denied, saying he was quoted out of context.

While the country sank further in turmoil, her neighbours - Uganda, Tanzania and Ethiopia were attracting huge investments - estimated to be in billions of shillings.

Investor wealth at the Nairobi Securities Exchange which had been on a free fall since the beginning of the year as key stocks halted their price rally in the face of foreign investor selloffs and unimpressive financial results look promising.

By the close of business a fortnight ago, the Nairobi All Share Index (NASI), a market cap weighted index consisting of all the securities listed on the Nairobi Securities Exchange hit a fresh all-time high, to close at 191.67 points.

Pundits have argued, again and again, that for Kenya’s economy to bounce back the political uncertainty must go. It is the message Kenya’s transactional advisors for the recent Sh200 billion Eurobond that Kenya successfully issued gave to the bondholders.

Business delegations are optimistic about increased products after the handshake. Also set to reap big is tourism sector that due to increased ‘insecurity’ after some European countries travel warnings to their nationals not to visit certain parts of the country and towns.

 


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