The Inside Track to East Africa's Economies
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RenCap: Agricultural Recovery to Push 2012 GDP Growth to 4% Print E-mail
Tuesday, 27 November 2012
Agricultural growth to strengthen in 2H12, similar to 2H10
A strong recovery in agriculture is expected to boost real GDP growth, by the experts we met, in 2H12 (following weak growth of 1.9% YoY in 1H12). Kenya’s agricultural production should typically be higher in 2H as this is when the harvest for the longest rain season falls. The late start to the ‘long rains’ in 2012, which usually begin in March, and heavy rains in parts of the country initially led us to believe that 2H12 agricultural production would be tempered.

But we heard otherwise from the experts we met. They actually believe Kenya’s agriculture performance in 2012 will mirror that of 2010 when its growth strengthened to 7.9% YoY in 2H10, from 4.7% YoY in 1H10, which helped boost real GDP growth to 6.6% YoY, from 4.8% YoY, over the same period. The IMF projects real GDP growth of c. 6% YoY in 2H12, from 3.4% YoY in 1H12, which would lift 2012’s growth to c. 5.0%, from 4.4% in 2011.

We are now more confident about agriculture’s 2H12 performance, but not as optimistic as the IMF about GDP growth, partly due to credit growth’s sharp slowdown. We have thus upwardly revised our 2012 growth projection to 4.0%, from 3.7% initially.

Credit growth drops to 8% YoY in September

This was much lower than our expectation of an early double-digits bottom. This implies that the 5-ppt cumulative cut in the policy rate in 3Q12 failed to stem the slowdown in private sector credit growth from 18% YoY in June to 8% YoY in September.

This is particularly negative for the economic sectors most exposed to credit including trade, real estate and construction. Financial services’ performance is also likely to have remained subdued in 2H12. The upside is that the experts we spoke to expect credit growth to have bottomed in September, after spiking a year earlier at 37.2% YoY. Tentative signs of a recovery are thus likely to begin in 4Q12 and become more pronounced in 1Q13, however, off a lower base. We maintain our YE12 projection of 13% and forecast high-teens credit growth for 2013.

Why is the current account (C/A) deficit still wide?
A C/A deficit of 10.1% of GDP for the year to June vs 9% a year earlier was a lesser concern among the policymakers and development partners we met, largely because it was well financed, which partly explains the shilling’s stability YtD. The central bank in particular was pleased with the shilling’s stability, which it partly attributed to the tightening of regulations, including the stemming of the reverse carry trade.

Credit growth’s sharp slowdown also led some to believe that the wide C/A deficit was less due to consumption and more to higher capital equipment imports for oil prospecting.

However, the latest data tell us otherwise. Machinery and transport equipment imports only grew by 2.7% YoY in the year to June vs 23% YoY a year earlier. That said, there is evidence that imports of consumer goods slowed – manufactured goods, which we believe includes a sizeable share of consumer goods, increased by 15% YoY vs 24% YoY. Imports’ growth of 15% YoY in the year to June 2012 was largely due to oil, which grew by 27% YoY.

We project a C/A deficit of 12% of GDP for 2012 (vs 13.2% in 2011). The upside is that strong capital inflows have helped finance the C/A and improve FX reserves to 4.2 months of import cover in November, from 3.4 months a year earlier. This explains the resilience of the shilling and the upside to our YE12 projection of KES88/USD1. As long as the oil price remains firm, we see limited narrowing of the C/A deficit in 2013 and a moderately weaker shilling as interest rates fall.

Inflation to pick up, but remain benign in 2013
While there is an expectation that inflation will pick up in 2013, after slowing to 2-3% at YE12 (by our estimates) the general view was that inflation would remain low – which is in accordance with our expectation of single-digit inflation in 2013. The IMF projects inflation of 5% in mid-2013.

One of the risks to this outlook is the rise in global food prices. The price of wheat and maize has increased by 24% and 17%, respectively, in the year to October 2012, while the price of rice has remained relatively flat. By one estimate, 30% of Kenya’s wheat consumption is produced locally. That said, wheat only makes up 20% of Kenya’s cereal consumption, while maize makes up two-thirds of Kenya’s cereal consumption. Cereal reserves have improved compared with a year earlier, according to an expert, which reduces the requirement for food imports and exposure to global food prices.

We thus believe inflation will largely remain below 10% in 2013, barring a severe drought. We think this implies further scope for rate cuts to 8% at YE13.

Likely to be an Odinga vs Kenyatta race

A September opinion poll shows Prime Minister (PM) Raila Odinga holding steady with 36% of the poll and Deputy PM Uhuru Kenyatta gaining ground with 30%. The current vetting of new judges – which is at best expected to be completed by February 2013 – may have significant implications for the presidential candidacies of Kenyatta and former Agriculture and Higher Education Minister William Ruto, who will stand trial next year at the International Criminal Court (ICC). If they are found to be ineligible, Odinga's presidential prospects are likely to improve against the Deputy PM Musalia Mudavadi, and Vice President Kalonzo Musyoka, going by local polls.


Republished with permission. For more information, contact Yvonne Mhango
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