Kenya 2018 Budget Breakdown from Barclays

Barclays Bank has released a detailed budget breakdown of Kenya’s estimates for the year 2018/19. This was at an event for corporate investment banking clients of Barclays with a theme of “demystifying the national budget.” and which came a few days after Kenya’s Cabinet Secretary (CS) for Treasury, Henry Rotich had delivered his budget speech and estimates for the year to the country’s parliament.

The Barclays budget breakdown team featured Samantha Singh a Senior Analyst – Macro Research, Barclays Africa Group, Anthony Mulisa (Regional Treasurer East Africa), Peter Mungai (Head of Tax, Barclays Kenya) and James Agin, (Corporate Investment Banking Director). Anthony Kirui the Barclays Director of Markets said that while other accountants and audits had done budget analysis that mainly looked at the tax implications, the Barclays budget breakdown would focus on macroeconomic issues that affect their clients.

Some Highlights 

Revenue Targets:  The Kenya revenue estimates for 2018/19 are very bold, aiming for Kshs 1.9 trillion of domestic revenue, which is 40% more than last year. This is premised on a projected GDP growth for Kenya this year of 5,8%, but which Barclays expects will be at 5.5%

Tax Increases: Some new measure include import duties on iron, steel, oils, excise duties on money transfers sugar, private vehicles, and revised capital gains taxes, withholding taxes and business permit taxes. The Barclays team said that the income tax bill 2018 replaces some 1974 legislation that has not kept pace with time also changes the VAT act, and stamp duty acts.

The budget also moves several items from being zero-rated to be exempt, which means that suppliers are prohibited from claiming refunds and this will result in higher costs of products will be passed on to consumers. Also value added tax (VAT) on fuel products kick in from September 2018, while Kerosene taxes will also go up to match those of petrol.

While the CS mentioned reconsidering the 35% income tax on individuals, he was silent on that of corporations which are now likely to go to 35%, the highest in East Africa. The Barclays team said that Parliament needs to critically look at this, as the average corporate income tax rate across Africa is at 28%, while globally it is 25%. Also, the modalities of a new 0.05% excise duty on financial transfers of more than Kshs 500,000 ($5,000) need to be clarified.

Managing Deficits: Kenya’s deficits have been widening and this is due to lower revenues and higher expenditure, especially of recurrent items. Still, the government targets to reduce the fiscal deficit from 7.2% to 5.7% of GDP. The fiscal deficit is about Kshs 600 billion for 2018-19 is quite large; which the government plans to finance it with a mix of domestic and external finance, but Singh said it will be more difficult for Kenya and other African economies to get Euro Bonds as US interest rates are rising.

She said debt was not necessarily bad, but it was more about where the money went, which should be towards development, but not for recurrent expenditure or to defend currencies. The team was also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget while development expenditure is 25% of the budget.

Barclays expect foreign exchange reserves to remain adequate but that with an IMF facility ending in September, Singh said that international investors would want to see Kenya affiliated with IMF and have some standby assistance (even though the IMF is not popular), or it will be hard for them to continue to finance the fiscal deficit.

Debt & Development: The Barclays team was concerned that 4 out of every 10 shillings raised this year will go to pay for debt, and they were also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget. They noted that two years ago, 33% of the budget was going to development; now it is down to 25% and that is still going to come under more pressure as public salaries and recurrent expenditure goes up unless the government strengthens its public finance management, ensure efficiency in the collection of taxes, cut waste & corruption, and ropes in a large part of the population who are not making a fair contribution – and the team opined that if these three measures were achieved, the budget’s ambitious targets would be met and this could even enable future tax cuts.

Local Industry & Manufacturing Support: The Kenya government plans to grow manufacturing’s share of GDP from 9% to 15%. This will be enabled by raising customs taxes on iron, steel, textiles, footwear in order to promote local industries by protecting them from cheap imports. The government has also come up with offer off-peak electrical energy schemes at lower tariff’s to encourage businesses to manufacture over 24-hours.

Interest Rate Caps: In his budget speech last week, the CS Treasury requested a repeal of interest rate caps and the Barclays team was hopeful that would be approved by Parliament, saying that the cap had resulted in unintended consequences that were detrimental to the credit sector – with small businesses being unable to access bank credit and that t had also complicated monetary policy decision making.

Financial Behaviour: The team also discussed a draft financial markets conduct bill that was recently introduced as one of the alternative solutions to the interest caps and which is now going through public participation. They said that Barclays had given feedback on the bill which is likely to increase the cost of regulation through double licensing, and which is unclear on who it protects.  They said that the bill borrows from Western countries where there was aggressive credit expansion to people who should not have been borrowing, whereas here it is the opposite situation of there being too little credit.

Conclusion: The budget breakdown is a part of a series of sessions that Barclays will have on topical issues that impact their corporate clients, and another session will take place in Mombasa.

Interest rates debate as caps repeal is proposed

Kenya’s Treasury Cabinet Secretary Henry Rotich has signaled an end to interest rates capping, saying the interest rate controls have contributed to a slowdown in credit growth to the private sector and denied small businesses’ access to credit.

In his FY 2018/2019 $30.4 billion budget speech to the National Assembly on June 14, Rotich said the interest capping law had not had the intended effect but instead resulted in banks shying away from lending to riskier borrowers such as ordinary businesses and individuals who used to borrow at rates above the 14% that was set through an amendment of the banking law that was passed a year and a half ago.

Rotich observed that he would ask parliament to repeal section 33 (b) of the Act to enable banks to provide more credit to riskier borrowers. He added that the government was also proposing a credit guarantee scheme for micro, small, and medium enterprises, and new credit institutions through the creation of the Kenya Development Bank and Biashara Kenya Fund and other new laws to help protect consumers of financial products.

The interest rates debate continues next week with a session on Monday, June 18 at the Strathmore Business School that will facilitate debate on the impact of the interest rates ceiling and floor.

Organized by the Kenya Bankers Association (KBA), the Institute of Economic Affairs (IEA) and Fanaka Digital, among other partners, the televised session will feature perspectives from the Treasury Cabinet Secretary, MP’s Jude Njomo – who sponsored the 2016 banking amendment that capped interest rates, and Moses Kuria, who is a member of the Budget and Appropriations Committee.

The finances behind the World Cup 2026 hosting decision

This week FIFA announced its decision that the 2026 World Cup would be held in the Americas, and jointly hosted by the United States, Canada, and Mexico, who defeated a competing bid from Morocco in North Africa.

The 2026 tournament will be an expanded tournament, that will feature 48 countries and a total of 80 matches, a significant increase from the 2018 tournament which also began in Russia this week and which features 32 teams and 64 matches scheduled. The 2026 matches in the  Americas will be split with 10 in Canada, 10 in Mexico, and 60 in the USA, including every game from the quarter-finals onwards.

FIFA also published the report of their analysis of the bids leading to the decision on the World Cup award. FIFA reports that costs of hosting the event will be higher than the current one in Russia because of the increased number of matches, and that they expect over $2 billion revenue from the 2026 tournament which will be supported by strong hospitality sales and an expanded global TV audience. FIFA World Cups have four main revenue streams – media, marketing, ticketing, and hospitality.

The bids were judged on three measures of compliance assessment (submission of all documents such as agreements with host cities, stadiums, training sites, and airports), risk assessment (cost and revenue projection, and human rights impacts) and a technical evaluation  of infrastructural and commercial components (stadiums team & referee facilities,  accommodation, medical care, and transport).  FIFA also considered all the host city populations, altitude, time zones, and temperature and humidity in July when the tournament would be played.  Also, FIFA notes that only small proportion of soccer fans have an opportunity to attend a World Cup in person, with the vast majority following on TV – so an important measure is now for host countries to demonstrate capabilities and plans for first-class information technology, telecommunications, and an international broadcast center.

USA: 23 cities were included in the original US bid, and 16 will be used. The US benefited from having existing infrastructure, with all the stadiums proposed by the Canadian Soccer Association, Mexican Football Association, and the United States Soccer Federation already fully built and ready. The FIFA evaluation found that transport systems were excellent, but dependent on air transport, except on the U.S. East Coast where road and rail were also realistic options. Overall, transport was judged “fair to good” in 11 cities, but the infrastructure for transporting large crowds to and from stadiums was insufficient in 5 others. In the US bid, 11 of the proposed 23 stadiums have artificial turf, but they had committed to having natural grass for the tournament. All the cities  have enough accommodation for both organizers and players, but are limited in “in Los Angeles, Washington D.C. and Mexico City due to a relative shortage of top-tier hotels in the vicinity of those cities’ stadiums.” FIFA estimates it would cost them $1.92 billion to host the tournament in the US. 

Morocco: The bid to host the 2026 tournament was tied to an ongoing government plan to use sports to drive national unity and cohesion and would play a key role in accelerating the country’s economic development and that this would extend to non-sports infrastructure.  All guarantees and hosting agreements were submitted and compliance and in accordance with the FIFA template and the Morocco government gave undertakings that all 12 cities would have stadium infrastructure and sufficient accommodation for the towns. They also guaranteed that 13,838 rooms in university residences would be converted to 3 and 4-star hotels by investing $20,000 to $20,000 per room for conversion. Accommodation would also extend to cruise ships berthed in Morocco.

Morocco proposed 12 host cities with two stadiums each in Marrakesh and Casablanca. Casablanca would serve as the main airport, with Marrakesh as the second, and there would be ten airports available for international access with and connectivity Morocco’s proximity to Europe and the country’s ability to handle huge numbers of tourists during the peak summer season shows its capability to cope – such as the Tangier Med Port which has traffic levels of 3 million visitors in 2017.  There was also high-speed rail transport between Tangier area with Rabat, Casablanca, and Marrakesh, there are 18 trains per day between Casablanca and Fez and they also proposed a new rail line between Marrakesh and Agadir that would be completed by 2025.

Morocco proposed World Cup venues

But FIFA judged that of the 14 stadiums proposed by the Morocco 2026 bid, nine are still to be built. Also for Morocco only 2 (Agadir and Grand Stade de Marrakech) of the 14 stadiums have accommodation that meets or exceed the minimum requirements for general accommodation, and FIFA’s formula is 5, 4, and 3-star hotels located within a two-hour drive to the venues. They also knock off 20% of the top capacity number to get a realistic measure of the rooms

FIFA also found that hosting the tournament would place a lot of pressure on Casablanca airport to act as the main international gateway and hub for domestic flights .. between them, Casablanca and Marrakesh airports are forecast to handle a total of around 24 million passengers (15 million and 9 million respectively) per year by 2026. The other airports are expected to handle another 13-15 million passengers between them, bringing the total to around 40 million. These numbers alone are below the threshold of 60 million .. and would not meet FIFA’s minimum requirements..  While Morocco has announced 25 new bus rapid transit (BRT) systems and various new tramways, it was not clear (to FIFA) if they would be ready by 2026 (FIFA: Out of the 14 stadiums proposed, only seven (the Casablanca Stadium, Agadir, El Jadida, Oujda, Rabat, Tangier and Tétouan) would appear to have clear and viable transport concepts and accessibility options)

Morocco was projected to raise $690 million from tickets and $380 million from hospitality and the report estimates that organizing the World Cup contest in Morocco would cost FIFA $1.82 billion mainly comprising payments for commercial (including TV operations), administration, services (including IT) and team services.

Summary: Morocco is in the 2018 World Cup, unlike the USA. While the world is polarized now,   there have been a few comments endorsing the American win, with the assurance that, in 2026, President Donald Trump will not be in office, even if he wins re-election in two years time. But with the 2022 tournament set for Qatar, it would be a tall challenge to have the 2026 tournament in the immediate vicinity, and though Morocco is on a different continent than Qatar (the report cites a FIFA rule that continents where tournament are being staged i.e Europe (Russia) and Asia (Qatar) were not eligible to bid  for hosting, Morocco’s geographical proximity and similar circumstances to Qatar were probably swaying qualitative factors in the final decision.

Also see this old guide to Casablanca, Morocco.

Asoko reviews Flower Farms (Floriculture) in Kenya

Asoko Insight has published an interesting review of flower farms and the floriculture industry in Kenya showing trends for the region and new markets for what has been a steady export for the country. It is Interesting that the Netherlands is considered the world’s largest producer of flowers with a 45% of the export value, followed by Colombia 17% and Ecuador 10%. Kenya has 9% of the global flower market, far ahead of Uganda and South Africa in Africa.

  • Export-oriented: Kenya flower exports earned $813 million (Kshs 81 billion) in 2017 according to Kenya’s Horticultural Crops Directorate and these are growing at 11% per year. Kenya’s 2018 economic survey has these cut flowers, 160,000 tones of them representing 71% of horticultural earnings; much larger than vegetables and fruits at Kshs 24 and 9 billion, respectively. Most flowers are grown for export, while domestic demand is but a small fraction that comprises purchase of low grade products. 
  • Producers: There are 236 companies actively growing flowers, 24 are large, and these include Oserian Development, James Finlay, Carzan, Primarosa, Vegpro Group, AAA Growers, Mount Elgon Orchards, Flamingo, PJ Dave, Kariki, and Timaflor. Producers need certification to break into export markets and sell at premiums. Large farms market their flowers to sister companies and contract smaller farms who also have the option of using international wholesalers.
  • Netherlands: FloraHolland is the largest flower auction in the world and has historically Europe has been the main destination of Kenya’s horticultural trading, but the report  mentions that some large Kenyan producers are bypassing the Dutch auction system, directly supplying bouquets and loose flowers to large Western retailers such as Walmart and Tesco who focus on delivery, reliability, and traceability, not just price. Primarosa was recently in the news pushing for the Kenya floriculture industry to set up its own flower auction.
  • Ethiopia: The report also compares the floriculture industry of Kenya and Ethiopia which has been in the news due to the long-running Karuturi versus Stanbic bank case which has highlighted that some flower farms are shifting their floriculture interests and investments to Ethiopia where there are less labour (union) and tax issues in production. Kenya’s flower exports in 2016 were $690 million compared to $190 million for Ethiopia. That said, it has not been smooth sailing for Karuturi in Ethiopia so far.  

Read more in the Asoko report (PDF) on Kenya’s floriculture industry.

Ethiopia privatization window opens

Several weeks of rapid news has seen Ethiopia privatization of state enterprises proposed as one of several changes to sustain what has been one of Africa’s fastest-growing economies. This all comes in the wake of a new era under Ethiopia’s new prime minister, Dr. Abiy Ahmed Ali, who is leading change within the country and outside, such as on his recent visit to Kenya.

In the last few days the Ethiopian government has lifted a state of emergency, signaled an effective cease-fire with Eritrea, released long-jailed political prisoners, reshuffled security leaders, launched e-visa’s for all international arrivals with a view to dropping visa requirements for all other African nationals, and opened the Menelik palace to tourists among other changes, which have drawn comparisons or Abiy to Mikhail Gorbachev in Russia in the 1980’s.

The surprise was statements about plans for the massive Ethiopia privatization program in which the government would sell minority stakes in roads, logistics, shipping, and prime assets like Ethiopian Airlines, which just took delivery of its 100th aircraft, a Boeing 787, and which is the centrepiece of a logistical, tourism and business hub plan for the country. The program would also extend to two sectors that have been off-limits to foreign investors up to now;  banking and telecommunications.

For comparison, a 2012 list of Eastern Africa’s largest banks had the Commerical Bank of Ethiopia as the largest in the region followed by National Bank of Mauritius and KCB in Kenya, and at last measure (2017) had about  $17 billion of assets, 1,250 branches, and 16 million customers. And in telecommunications, Ethio Telecom, a government-owned monopoly has about 20 million customers in a country with population of 107 million (many of them children), but still a low penetration rate. 

Ethiopia privatization of state enterprises is not a new item, but it is one which the government has put side as it pursued an industrialization model that has seen the building of new infrastructure, new factories, industrial parks, agro-processors, leather parks, vehicles manufacturers etc. but which has not been equally felt by the country’s large and young population – and this has seen wide-spread protests and a state of emergency that ushered in a new leadership with a new prime minister (Abiy). 

It also came after a lengthy story in the FT – Financial Times on the state of Ethiopia’s economy which cited the fatigue that China has with large investments and some projects that are operating below capacity coupled with the high government debt and shortage of foreign currency  – Two investors said that Sinosure, China’s main state-owned export and credit insurance company, was no longer extending credit insurance to Chinese banks for projects in Ethiopia as willingly as it used to. It notes that imports into the country are four times that of exports from  Ethiopia leading to the shortage of foreign currency.

The changes in Ethiopia could also be a warning to other African counties that have been molded in a similar way to Ethiopia model, with heavy borrowing from China and building infrastructure and mega-projects for the future.  When the Ethiopia privatization program starts it’s unclear who will benefit and if Chinese companies will be given priority given that they have invested for a long period in Ethiopia compared to other new companies, such as Vodacom and MTN, who are excited about the prospects that are now opening up