Kenya’s economy is on the road to recovery

By Jackson Okoth

Kenya’s economy is on a positive growth trajectory. That is the judgment from leading fund management firms, investment banks, economists and the World Bank.

Although the estimated GDP growth of between 3-4 per cent is still below the country’s potential, when benchmarked against competing economies in East Africa, the economy is expected to make a strong recovery this year.

"The key drivers of this upturn will be the trickle down effects of recovery in the global economy, which could stimulate tourism, and demand for agricultural exports," said Dominic Kiarie, MD British American Asset Managers (BAAM).

Treasury’s implementation of the fiscal stimulus package is also expected to drive up consumer spending, as employment opportunities created in public projects up incomes.

The economy is just climbing out of a two-year slump following post-election violence, and last year’s global credit crunch.

The result of these multiple shocks including prolonged drought, and high fuel and food prices, impeded economic growth. The situation was made worse by poor rainfall, which raised food prices and crippled hydropower generation.

A December World Bank economic update on Kenya, said the country is on the mend, despite experiencing four major shocks in the past two years.

"The good news is that Kenya is one of the few countries in the world that grew faster in 2009 than it did in 2008," says Johannes Zutt, the World Bank Country Director for Kenya.

"But the growth rate of 2.5 per cent (last year) is well below Kenya’s potential, and does not even match its population growth," he added.

The growth rate last year improved from a low of 1.7 per cent in 2008, but is still low compared to the peak of 7.1 per cent achieved in 2007. For 2010, the Bank foresees a growth rate of 3.5 per cent.

Strong prospects

Prospects of strong growth are already appearing in the equities and long-term debt market, as foreigners troop back in search of higher returns.

"There is renewed optimism and improved sentiments in the equities markets," said Onchera Maiko, General Manager, British American Asset Managers(BAAM).

Players in the long-term capital business see the entry of Citadel, a private equity firm in Egypt, into the Kenya-Uganda railway as a sign of renewed interest in the region.

Moreover, the change in the method used to calculate inflation, and the introduction of a new basket of goods constituting the Consumer Price Index (CPI) is also expected to transform the economy into a low-inflation zone, further boosting the country’s attractractiveness to investors.

Inflation is forecast to remain between 6-7 per cent for most of the year, as improvements in rainfall, and infrastructure lower official figures further.

The fall in official inflation numbers is expected to increase attraction in the fixed-income securities market, as long-term bonds become more attractive.

Available figures indicate that over Sh100 billion worth of transactions were made in the secondary bond market last year. December had the highest number of transactions, worth Sh15 billion.

"The appetite for fixed income instruments is going to increase, partly due to the low inflation rate, and partly due to the recently introduced automated trading system," Maiko said.

Analysts expect the upper and lower end of the yield curve to drop and shift further downwards in 2010.

However, American Investment Group (AIG), a leading fund management company warns that the rejection of the proposed constitution could derail the economy’s recovery this year.

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