Lower oil prices are masking Kenya's under-performance in export sector

The gap between what Kenya pays for imports and what it receives for exports has been reducing.

But according to analysts at Renaissance Capital, this narrowing in the country’s current account deficit is largely a result of reduced spending on oil, and could easily be reversed when oil prices start improving.

Oil accounts for more than a quarter of the country’s imports. In 2014, a barrel of oil cost an average of $97 (Sh9,834 at current exchange rates), but almost halved to an average of $45 (Sh4,562) last year.

In February, the Kenya National Bureau of Statistics (KNBS) reported that the current account deficit narrowed from 9.8 But according to Renaissance Capital, which focuses on emerging markets like Kenya, this narrowing deficit is unsustainable.

“The shrinking of the import bill masks the under-performance of Kenya’s export sector,” the firm said in an analysis sent out to investors last week.

Positive impact

It noted that in 2011, exports as a percentage of gross domestic product (GDP) came in at 13.7 per cent, but this has since dropped to 9.6 per cent in 2015.

Data shows there has been a decline in Kenya’s biggest exports — tea, horticulture and manufactured goods, which account for half of the total products the country sells abroad.

The positive impact of tea prices recovering last year was eclipsed by a fall in the quantity of the crop that was produced. The decline in prices in 2011 and 2012 was partly attributed to a fall in demand in Egypt — one of Kenya’s biggest markets — which experienced a wave of civil unrest.

Growth in the manufacturing sector, which is the country’s biggest non-agricultural sector, has also slowed down.

Year-on-year growth slowed to 3.6 per cent in the first quarter of 2016. In a similar quarter in 2015, it registered growth of 3.9 per cent compared to a 6.4 per cent slump in the first quarter of 2014.

This dip pushed manufactured exports as a percentage of GDP to 1.8 per cent last year from 3 per cent in 2011.

“With inflation starting to pick up, we think there is upside risk to interest rates over the next 12 months. This may worsen the outlook for manufacturing. A concurrent increase in oil prices would significantly increase the risk of high ... current account to GDP deficits being restored,” warned Renaissance Capital.

Inflation rises

Inflation rose to a three-month high of 6.4 per cent in July from June’s 5.8 per cent, while oil has shown signs of recovery in the second quarter of this year, rising to about $48 (Sh4,866) a barrel.

In an Economic Update report on Kenya, the World Bank had also noted that Kenya’s current account position was largely supported by low fuel prices. It said the county has to address structural weaknesses in the economy to increase exports as a share of GDP, as well as reduce non-essential imports.

Renaissance Capital added that the increased allocation for infrastructure in the 2016-17 financial year implies the slowdown in machinery and other imports in the first quarter of 2016 is unlikely to be sustained.

“Our current account to GDP deficit projections of 5.4 per cent in 2016 and 6.0 per cent in 2017 assumes an oil price of $45 and $50 per barrel, respectively,” concludes the investment and research bank.

This is close to the Central Bank of Kenya’s (CBK) projections. In May, CBK Governor Patrick Njoroge said the current account deficit, as a percentage of GDP, was expected to drop to 5.5 per cent in 2016 before ticking up again to 5.8 per cent in 2017. The current account balance as a percentage of GDP gives an indication of the level of international competitiveness of a country’s products.