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2011: The good, the bad and the ugly

FINANCIAL STANDARD
By | January 4th 2011

By John Njiraini

It is the only year in recent history that Kenyans are starting with a certainty that food will be in plenty.

The assurance by the Government that there will be enough food to last for at least the next eight months is undoubtedly good news, and offers some sense of calm and stability.

But even as the country goes into 2011 looking more confident, seasoned economic analysts are cautious that little tranquility is expected.

From the political arena, the socio-economic sphere to the business community, 2011 is a year that most Kenyans contend will be a defining moment in many aspects and could be a precursor in shaping the status of the country this decade.

It is imperative to note from the onset that there will be a close correlation of events in 2011, in that what happens in the political field could have direct impact on the economy compared to recent years where the economy has largely remained immune to political upheavals. While economic fundamentals appear clear and compelling, market sentiments indicate that the year promises to have things that are good, not so good and the usually ugly spots that commonly feature in our political arena.

This is because 2011 will not just be another year with a memorable signature on November 11, when the calendar will read 11.11.11.

First, this will be the year when the country will be rehearsing in preparation for the 2012 General Election, which will offer a critical transition as President Kibaki exits the political scene and passes on the mantle of leadership.

The political arena will be abuzz with alignments and realignments as politicians engage in elaborate schemes with guns pointed at the Kibaki succession game plan.

No doubt that after three years of being forced to work together in a coalition, this promises to be the year when the tolerance in the Grand Coalition Government will be severely put to test, as political party heavy weights — ODM and PNU — renew their rivalry with unprecedented vigour.

Besides, there are also the possibilities of foreign investors adopting a guarded approach on Kenya, something that could in effect slow down foreign direct investment in a country in dire need of new job opportunities.

It is also critical to note that as the year progresses, global rating firms might stamp the country with a ‘risk’ tag, making it impossible for Kenya to raise money in the international market.

In the latest rating by Standard and Poors, Kenya was assigned a B+ rating, up from plain B due to conducting a peaceful referendum last year.

Despite the impact of politics on the economy, another factor that could significantly pose major challenges for growth is oil prices in the international arena.

Analysts predict that this year, the world could witness a return of runaway prices of crude in the international market driven by strong global demand, push by oil producing nations for higher prices, the return of speculators and increasing tensions in the Middle East due to Iran nuclear programme.

Oil prices

Numerous international firms like Goldman Sachs have projected that the price of crude will surpass the $100 per barrel mark this year though currently the price stands at around $91 per barrel.

The last time when the price of oil surpassed the $100 mark was in 2008 when prices soared to a historic high of $147 before crashing to about $30 due to the global economic crisis.

That a return of high oil prices would be catastrophic for the Kenyan economy is not disputable. Though the Government has so far introduced price controls in the local market to contain the greed of oil marketers, a surge in global prices would not spare the country.

In connection with the succession politics, one man will play a central role in orchestrating the unfolding events.

Luis Moreno-Ocampo, the chief prosecutor at the International Criminal Court (ICC) will significantly impact the local political scene, as he pushes ahead with the case against the six Kenyans he accuses of being the masterminds of the 2008 post-election violence.

Two of the accused, Uhuru Kenyatta and William Ruto, harbour presidential ambitions.

Uhuru is also the Finance Minister, a position that makes him the captain of the country’s economy.

In the midst of this potentially explosive political scenario, the economy and the business community will be forced to swim in a turbulent environment, something that would definitely test the resilience of the country’s recovering economy.

Though analysts are optimistic that the economy, which has largely recovered from the effects of post-election violence and global economic crisis will continue on a growth trajectory, the momentum could encounter major roadblocks in 2011.

"For 2011, we project a gross domestic growth of 5.3 per cent and even six per cent if no shocks occur," states the latest World Bank assessment on Kenya’s economic outlook.

On its part, the Government anticipates the economy to grow by at least 5.7 per cent in 2011.

"Real GDP growth for 2010 and 2011 is projected at 4.5 per cent and 5.7 per cent respectively," said Uhuru in this year’s fiscal budget.

Business community

With the country having enough food, something that in effect will translate to low food prices and low inflationary rates, these growth projections do not seem far-fetched.

But there are fears the mayhem anticipated in the political scene, compounded by the Ocampo equation, could negatively impact on economic growth, as the local business community might be forced to tread cautiously, as far as new ventures and expansion programmes are concerned.

Apart from the turbulence expected in the overall economy, some specific sectors are also anticipated to witness a high degree of commotion, which in effect could impact on the earnings of companies in these sectors.

In particular, the bitter wars for market dominance in the information, communication and technology sector will assume new highs as service providers take on each other.

In the mobile telephony sub-sector, a further reduction in interconnection rates to Sh1.44 in 2011 will result in further decline of calling rates and intense rivalry among operators, while the introduction of number portability in April could have far reaching implications on subscriber loyalty.

Still in the ICT sector, small players in the broadband market will continue to feel the misery in the hands of big boys, something that might push mergers and acquisitions as the only survival tactic.

Havoc will not only reign in the ICT sector, but also in the energy sector, particularly the petroleum sub-sector.

Low prices

After the introduction of price controls late last year, oil marketing companies will this year be faced with the unavoidable possibilities of declining margins. This might force them to fight back, probably by hoarding products or even result in the exit of yet another multinational.

In the agricultural sector, all signs indicate the possibilities of maize farmers taking to the streets to demonstrate against low prices.

Though currently the National Cereals and Produce Board is buying a 90kg bag at Sh1,800 down from Sh2,200 sometime last year, the expected bumper harvest could result in a further decline in prices.

In the struggling manufacturing sector, the perennial challenges of high cost of energy, poor infrastructure, counterfeits and illicit trade will continue to impact on earnings and expansion.

But while all signs point towards a not so rosy 2011, it will, however, not be all gloom.

Encouraging developments will be witnessed in the quest for deeper integration within the East Africa Community (EAC), as the common market takes shape and member states acknowledge integration is key for faster growth and development of the region.

The bloc could also welcome a new member, southern Sudan, if the country’s citizens vote for separation from the North in a referendum scheduled for Sunday. Already southern Sudanese leaders have expressed interest to join the EAC bloc.

Also encouraging is the revelation that this year could see the signing of a comprehensive protocol that will define trade between the EAC and the Europe Union considering that the long running negotiations on the Economic Partnership Agreements could finally come to a close.

In terms of specific sectors, the banking industry will this year experience yet another year of impressive profits though a slowdown in economic activities owing to the expected heated political temperatures could take centre stage and impact negatively on profitability.

According to the Central Bank, pre-tax profits for the banking sector for the nine months ending September 2010 stood at Sh53.2 billion, a record earning compared to Sh49 billion realised the previous year. This shows that profits by individual banks have grown by between 40 and 100 per cent.

Public offerings

Besides the banking sector, other sectors expected to continue on a growth path this year include retail, building and construction sectors.

In the tourism sector, 2011 could offer a mixed bag. Though Tourism Minister Najib Balala is on record as stating that the country expects two million tourists this year and earnings to hit Sh100 billion, this will largely depend on how events in the political scene unfold.

This is because the slightest signs of instability could result in travel advisories from key destination markets, something that could ultimately impact on the delicate sector.

The contrasting events this year will ultimately be reflected on the performance of the Nairobi Stock Exchange.

Though 2010 witnessed the NSE 20-share index close the year at 4,432.60 points, the outlook this year is not promising despite several companies lined up for public offerings.

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