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Renaissance Capital Expect Drought to Dampen Kenya’s Growth Momentum in 2011 Print E-mail
Thursday, 27 January 2011
Kenya’s 2011 economic prospects depend on the weather: There is a risk of deteriorating food security conditions in Kenya due to a combination of an early end to the 2010 long rains (February-June 2010) and the likelihood of poor short rains in the fourth quarter of 2010, owing to the expected effects of La Nina. A slowdown in the growth of the agricultural sector is thus projected for 2011. The impact on hydropower generation is likely to be limited compared with 2009, given that the rains did not fail, but were simply lower than projected.

Upturn in tourism to boost export earnings:
This expectation is premised on a recovering global economy and a weak shilling. Tourism arrivals increased beyond the psychological 1m in 2010. The recovery in net tourism revenue has lagged that of arrivals due to a decline in the share of high-end tourists from the EU. However, a continued improvement in EU tourist traffic, coupled with increasing traffic from new markets, is expected to support an improvement in tourism receipts in 2011.

Emerging twin deficit problem in 2011: Strengthening internal demand and an expansionary fiscal policy are expected to put pressure on the current account and fiscal deficits to widen in 2011. The government’s capital expenditure programme and recurrent spending pressures imply a wider fiscal deficit in 2010-2011 of 6.9% of GDP, from 2009-2010.

The shilling to weaken on the back of a wider current account deficit: Strengthening internal demand that will partly be met by imported goods and services will put additional pressure on the current account deficit. A fragile euro and a dollar affected by the second phase of quantitative easing from the US Federal Reserve in late 2010 are expected to moderate the shilling’s depreciation in 2011. However, the shilling is expected to be weak in relation to emerging market currencies. A weak currency is positive for the external price competitiveness of Kenya’s exports, which is especially favourable in an environment of recovering global demand.

More upside potential for credit growth in 2011: We expect credit growth to continue on its upward trajectory in 2011 on the back of strong growth in deposits, a stronger economy and an increase in liquidity.

Inflation to increase in 2011, but stay in single digits: Inflation is expected to increase in 2011, on the back of rising food price pressures, but it will remain in single digits, in our view. Conversely, food inflation is projected to peak at about 11% year on year in the first half of 2011 before moderating. The incline of food inflation reflects the negative impact of the early end of the long rains (February-June 2010) at the end of the 2010 harvest. Non-food inflation is also at risk of increasing in 2011, on the back of higher commodity prices, particularly for oil.

Political risk to rise in the run-up to 2012 elections: One big positive for next year’s elections is that they will be held under the new constitution, which was passed into law in 2010. One of the downside risks is that the summons made by the International Criminal Court (ICC) in December 2010 to six powerful politicians and civil servants implies that the stakes of the 2012 elections are even higher for the accused, who will want to ensure that they back a president who protects their political futures.

Another dry spell will dampen growth momentum: Kenya’s agriculture sector produces 25% of GDP and at least 50% of exports, including tea and horticulture. The economy’s health is thus intrinsically linked to the rain-fed agriculture sector’s performance. This was highlighted during the 2009 drought. The return of good rains in 2010 explains the 5.7% and 12.4% year on year expansion of the agriculture, and electricity and water sectors, respectively, in 1Q-3Q10, following contractions of both sectors a year earlier. An improved power supply boosted manufacturing’s growth to 7.8% year on year, up from 1.3%, over the same period. An early end to the February-June 2010 rainy season and poor rains in the fourth quarter of 2010 due to the La Nina weather phenomenon implies that agriculture’s growth momentum will be subdued in 2010. We thus expect real GDP growth to slow to 4.9% in 2011, from 5.3% in 2010.

Large twin deficits: Strengthening internal demand and expansionary fiscal policy will put pressure on the current account and fiscal deficits to increase in 2011. Higher real incomes, on the back of a lower inflation environment, are expected to push up domestic expenditure, including the demand for imports. Moreover, an increase in commodity prices, particularly for oil and food, is expected to put upward pressure on the value of imports in 2011. Fuel and food make up 20% and 12%, respectively, of merchandise imports. On the fiscal front, the government’s capital expenditure programme and recurrent expenditure pressures imply a wide fiscal deficit. Capex also implies imports of high value machinery and equipment. Both deficits are thus expected to remain north of 5% of GDP over the next couple of years.


This is the executive summary of Renaissance Capital’s Kenya 2011 outlook. Republished with kind permission.



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