Category Archives: Kenya economic growth

Stanbic economic briefing for Kenya 2020

Standard Bank (Stanbic) Group Kenya released their Macroeconomic update in which they are cautiously optimistic about Kenya’s growth through the private sector. The presentation in Nairobi was done by Jibran Qureishi, the Regional Economist – Africa at Stanbic.

Highlights:

  • Stanbic economists believe that global growth will fall in 2020 and 2021 as central banks in advanced economies are tapped out and their ability to stimulate economies is limited. Chinese growth will slow to sub 6% in 2020 and be about 5.5% in 2021. Meanwhile, the US cut its rates three times last year but investments are still falling as the trade war with China has hurt growth.  
  • For Kenya, Stanbic expects 5.9% GDP growth in 2020, up from 5.6% in 2019. Three things that held back private sector over the last two years were interest rate caps, delayed payments by government and congestion at the Inland Container Depot (ICD) Nairobi.
  • Government policies should focus on private-sector driven economic growth.
    There is growth but where are jobs? Growth in the wrong place.  90% of new jobs are the informal sector and also in the service sector but these will not create a middle-income economy.
  • Tourism was resilient, earning $1.5 billion last year, but the potential is much larger and this depends on how much private investment the sector can attract. Kenya gets 2 million arrivals but Mauritius, Morocco, Egypt and South Africa get about 10 million in bad years.
  • Ambitious tax revenue targets embolden the government to spend more and tax revenue targets are still much larger than average collections.
  • If the government does not fix fiscal issues, this will lead to unpredictable tax rules which could hamper productive sectors
  • A move back to concessionary loans and away from commercial loans for the first time since the (President) Kibaki years is a welcome step.
  • The Standard Gauge Railway (SGR) may still get extended to Uganda but the government will have to build new ICD. It is not that China does not have money, but they are asking questions they should have asked 7-8 years ago.
  • Kenya traditional manufacturing has been an import-substitution model which has not really worked around the world. Better to shift from being protectionist and instead work towards growing exports which (excluding tea and remittances) have been stagnant – at $6 billion a year
  • Don’t focus on manufacturing too much and neglect agriculture, as a big part of that will come from agro-processing and adding value to agricultural produce.

Charles Mudiwa the CEO of Stanbic Kenya spoke of how the bank has aligned to the government’s agenda. They are a shareholder in the Kenya Mortgage Refinance Company, and 20% of their lending goes to manufacturing with another 9% going to agriculture & food security.

Stanbic was the lead arranger for the Acorn green bond that was listed on London’s LSE today. The bank also has a DADA program to promote women financially (with a goal to lend Kshs 20 billion) and is also supporting financial literacy training to musicians and Uber drivers.

Kenya’s Money in the Past: IMF Transparency Evaluation

Last week a team from the International Monetary Fund (IMF) released a Report known as the Fiscal Transparency Evaluation Update on Kenya. The country has had an on – and – off history with the IMF and World Bank and one of the key objectives of this report was to estimate Kenya’s balance sheet and take into account all the public sector entities which were believed to have grown significantly since 2014.

Size: The report found that there are 519 entities, including 213 extra-budgetary ones, 47 county governments, social security funds, the Central Bank and 14 financial intermediaries, and 136 public corporations. It estimates that assets are liabilities are 30% greater than in 2014.

The stock of Kenya’s public sector liabilities (mainly pensions) is high (at 30% of GDP) compared to other emerging markets and low-income developing economies and creates potential fiscal risks. Fortunately, it finds that Kenya’s public sector net worth, estimated to be -5% of GDP in 2017-18 is broadly comparable to other similar economies.

It cites some glaring issues. Nairobi County has the largest amount if negative net-assets followed by Mombasa and Isiolo, Garissa, then Murang’a. Nairobi inherited a loan it has been servicing but which still has a Kshs 3 billion balance. Also, Nairobi has guaranteed a Kshs 19.1 billion loan, which is in its books, but this relates to assets that were transferred to another entity – the Athi River Water Service Board.

PPP: Concern about public-private partnerships (PPP) projects: There are 78 PPP’s (67 by the national government and 11 by county governments) in the pipeline, worth $11.4 billion and it notes that no risk analysis is undertaken for pipeline projects, which are sizable and growing in number.

PPP projects are 13% of GDP and half of the amount relates to six projects that are at the procurement stage. These are the Nairobi Mombasa highway, Mombasa petroleum hub, Nairobi – Nakuru – Mau Summit highway, 140MW geothermal at Olkaria, road annuity programs, and a second Nyali bridge project

State Corporations: High-risk public corporations lost Kshs 23 billion in 2017–18. These were topped by Kenya Broadcasting Corporation which lost Kshs 9 billion. Its losses were equal to 436% of revenue and it has a net worth of Kshs -54 billion. Others were Kenya Railways Corporation (which lost 6 billion), Nzoia Sugar Company Limited -3 bn, and South Nyanza Sugar Company -2 bn. Also losing 1 billion each was the National Oil Corporation of Kenya (which was supposed to be an IPO candidate), Chemelil Sugar, Agro-Chemical and Food Co., Muhoroni Sugar, and the Nairobi City Water and Sewerage Co. These ten account for 95% of the loss-making entities.

Oil & Mineral prospects: Kenya has small reserves of natural resources accounting for 3.2% of GDP but non-oil mining could be 10% of GDP by 2030 with oil boosting it by another 1.5%. Neighbour Uganda has better prospects with greater amounts of proven oil (1.7 billion barrels in Lake Albert) and gas reserves and has taken steps to ensure transparency, establishing a sovereign wealth fund and moving towards joining the Extractive Industries Transparency Initiative (EITI). Uganda which has two major upstream projects – a domestic refinery and an export pipeline through Tanzania, is expected to start production after 2023 and reach a peak of 230,000 barrels per day.

Summary: The big headline so far is that approximately 500 projects are stalled with an estimated cost of Kshs 1 Trillion (12% of GDP).

Rethinking tax incentives in Kenya’s investment promotion efforts

A recent court ruling declaring the Kenya-Mauritius Double Taxation Avoidance Agreement (DTAA) void has sent Kenya back to the negotiating table with Mauritius. The court’s judgment is based on the fact that the DTAA was not properly ratified under Kenyan law. Kenya’s government argues that the treaty promotes investment and jobs; however, critics such as the Tax Justice Network Africa (TJNA), which filed this suit, argue that DTAAs rarely lead to any benefits for developing countries. TJNA argues that instead, they result in massive revenue leakage for African countries which outweighs incoming foreign direct investment (FDI).

Should countries, therefore, abandon the use of DTAAs? The answer more than likely lies in the middle: to bring real benefits to the economy and promote local market potential, countries should balance between the use DTAAs and other tax incentives such as special economic zones (SEZs).

Kenya’s DTAA with Mauritius was signed in 2014 with the hope of boosting foreign direct investment, but the benefits of the agreement were poorly defined from the outset. Similar to any policy, DTAAs must be rooted in clear and measurable objectives supported by equally clear policy levers to ensure that revenue generated from the resident country is not leaked through tax avoidance schemes like profit-shifting. Studies show that DTAAs signed between countries with asymmetric investment positions are less likely to lead to any benefits for developing countries. In the Netherlands, for example, DTAAs led to forgone revenue of at least USD 863 million for developing countries in 2011.

Given Kenya’s current budget deficit of USD 3.75 billion, it is critical that efforts to attract FDI such as DTAAs do not cannibalise local efforts to improve tax revenue. Numerous studies show that countries rarely achieve substantive FDI levels to make up for the revenue losses these DTAAs cause. The failed Kenya-Mauritius DTAA is not the first time a tax agreement with the island nation has been subject to controversy: in 2017, India reviewed its DTAA with Mauritius after reports showed that it had opened room for tax avoidance resulting in revenue leakage of about USD 600 million annually. In 2016 alone, Mauritian firms injected more than USD 50 million into the Kenyan economy, a 72 percent increase from 5 years prior. If the Dutch and Indian examples are any indication, Kenya could be losing far more. Lost corporate revenue is income that Kenya urgently needs to meet its development objectives. A shift to other tax incentives whose impact is more ascertainable may be more effective for many developing countries.

If the goal of DTAAs is to increase foreign investment in Kenya, they must be considered in conjunction with the broader ecosystem of policy instruments that can be used to increase tax revenues to achieve Kenya’s four priority pillars for economic growth. The government hopes to raise the manufacturing sector’s share of the GDP from 9% to 15%, and create 1.3 million jobs in this sector by 2022. To achieve this, governments should explore specific tax incentives that can provide direct benefits to these areas, such as special economic zones, which aim to maximise the “cluster effects” of activities through knowledge and supply chain integration, centralised access to critical infrastructure like roads and electricity, as well as enhanced support from local government.

Kenya, in making strides to use other tax incentives such as Special Economic Zones, should borrow lessons from its neighbours on reaping full benefits from SEZs. Rwanda, for example, has successfully leveraged SEZs to promote growth. In 2016, the Kigali Special Economic Zone (KSEZ) employed 2% of the country’s permanent employees, and accounted for 2.5% of all VAT reported sales. In Kenya, the government has already designated Mombasa, Kisumu, and Lamu as the future SEZs but to maximise their impact and avoid the development of enclaves, it is essential that firms in these SEZs interact with firms outside the zones and that the government ensures knowledge and best practices developed are shared across the economy.

Tax incentives alone will never be the sole factor attracting investors — to increase FDI, Kenya must continue to demonstrate strong market potential by providing business support and trade facilitation services. KPMG finds that Kenyan products are among the top four countries in Africa that score above the global average in terms of competitiveness on the international market; however, it still takes an average of 22 days to start a business — compared to 6.5 days in Egypt and 14 in Ghana — and poor availability of market data can complicate efforts at local expansion. To improve the country’s competitiveness, the Kenya Investment Authority should improve the availability of data for investors by working more closely with the Kenya Bureau of Statistics. Reducing business costs, for example, by bringing down the cost of imports for required goods or improving data quality to support manufacturing and value-added services will always outweigh lowering taxes.

The DTAA ruling prompts a careful re-examination of how to increase FDI without incurring unintended knock-on effects like tax avoidance. To do this, Kenya must enhance its capacity when negotiating bilateral agreements, and enact policies to support proper implementation of these agreements. In its use of tax incentives, it is critical that the scales are always tipped in Kenya’s favour. The impact of each incentive employed must be clear and measurable to ascertain that its benefits outweigh any associated costs.

A guest post by Bathsheba Asati and Faith Nyabuto of the Botho Emerging Markets Group. 

See also: The Kenyan Guide to Mauritius for business travelers.

Kobo360 and SWVL launch in Nairobi on the same day

On one day late in August 2019, two young disruptive, but non-competing, logistics companies had parallel breakfast events to mark significant milestones in Nairobi.

Kobo360: There was the formal launch of Kobo 360, the pan-African logistics company which has been operating for five months in Kenya. Kobo360 pairs cargo owners with transporters, enabling the seamless booking and transport of goods to destinations while lorry owners get extra business and revenue from the running their trucks on the company’s platforms.

Kobo360 aims to is introduce efficiency and predictability to the $150 billion Africa logistics industry through real-time data, by providing insurance & tracking, and all to facilitate trust in delivery and payments. They operate in Nigeria, Kenya, Togo, Ghana, and Uganda and make deliveries to other countries in West, Central and Southern Africa from port cities.

Founded in Nigeria, they view tech adoption as being  higher in Kenya and they want to use it as a launchpad for the East Africa region. Kobo360 has offices in Mombasa and Nairobi and currently have 3,000 trucks and access to 4,000 drivers on their platforms. They have raised funding from the IFC, Goldman Sachs, TL Com, Chandaria Capital, Verod, Asia Africa and WTI.

SWVL Kenya official launch: The same day as the Kobo event, SWVL also announced their official launch in Kenya with a Kshs 1.5 billion expansion of its Kenya operation. This is equivalent to $15 million which is a lot of money that will go towards increasing their route network offering of high-quality public transportation. The company which was started in Egypt in 2017 has been operating in Nairobi for six months now and recently raised $42 million from its investors including BECO Capital and Sweden’s Vostok New Ventures. It has gone from operating four routes on which passengers can book rides on SWVL shuttles to fifty-five routes now across Nairobi. Here is a rice review of using SWVL by a Nairobi commuter.

AVCA 2019 private equity and venture capital conference in Nairobi

The 16th annual conference of African Private Equity and Venture Capital Association (AVCA) was held from 1st -3rd April 2019 at the Radisson Blu Hotel in Nairobi. A guest post by Marcela Sinda.

This flagship conference event for the African continent had a fantastic kick-off and turnout, bringing together private equity and venture capital investors who handle a portfolio of over $1.5 trillion in assets. This was according to Kenya’s Cabinet Secretary for Trade, Peter Munya who officially opened the conference on behalf of President Uhuru Kenyatta. The goal of this kind of conference, he said, is to expose investors to the diverse prospective investment markets across the Africa as the continent was now being looked at as any other region, with the focus being around checking due diligence, ethics, looking at best practices and asking the same questions around deal sourcing.

 

DFI’s Role: Kenya is an increasingly attractive investment destination and according to AVCA data, it is the 2nd most attractive country for private equity investments in Africa over the next three years and hence an obvious choice to gather the industry players for this conference. The African PE sector has been shaped for decades by DFIs, and at AVCA 2019, there was some discussion about new DFI strategies for investment across Africa. Maria Hakansson, the CEO of Swedfund, noted that, as a community, DFIs could do so much more when it comes to anti-corruption, e-waste management, customer protection principles etc. and that Africa’s portfolio is constantly outperforming in terms of impact compared to other regions portfolio.

Djalal Khimdjee, Deputy CEO of Proparco said SMEs in Africa are essential towards job creation and achieving the sustainable development goals (SDG’s) and that 60% of the 1.5 million jobs that have been created in Africa every month come from SMEs and venture capital firms. He said that PROPARCO and French development agencies had committed £2.5 billion by 2022 to support African MSMEs, including £1 billion through private equity investments. 

Mathew Hunt, Principal at South Suez Capital shared that one of the reasons why investors are in Africa and especially now is because of the tech-driven growth that’s been on the rise in recent years. Venture capital investments are new in Africa and only a handful of funds have grown successfully.  The role of African Development Bank, said Robert Zegers, their Chief Investment Officer, was to now help support the industry and act as anchor investors in these funds as a lot of development agendas can be achieved by generating value through VC’s and great businesses.

The narrative throughout the discussion panels was around the real opportunities Africa presents for investment with building blocks in place such as improved policies, the rise in middle-income earners, the Africa Continental Free Trade Area, and enablers such energy, improved infrastructure and technology as pathways that cater for development needs. The most attractive areas for P/E investment were perceived to be consumer-driven sectors (financials, FMCG, agribusiness, healthcare and technology).

Deals Galore: VCs are willing and able to take risks and are looking to invest much more than they did previously. According to the  AVCA report 2018, VCs invested $725.6 Million in 458 deals a 300% leap in the total funding amount and over 127% increase in the number of deals as compared to 2017.  VC fund managers, therefore, need to have great entrepreneurial skills to identify numerous opportunities and create great pipelines for growth and expansion. This is the first generation of PE owners and from the lessons learnt, a good company always attracts a buyer and a great way for VCs to approach funding private companies is to ask; ‘if everything works out, how big can this be?’. But investors ought to be cautious not to misconstrue Africa as a single country with regard to investments, rather, and instead start by breaking down the micro trends in each jurisdiction and analyse the different risks.

Investments, not Aid: Charles Mwebeiha of Sango Capital urged investors to look at Africa while investing, like any other region in the world noting that many times, investing in Africa is made to sound like some sort of assistance. He offered that the issue should be whether returns can be made and reiterated that with good strategies, there is money to be made in Africa.

Women: It was also highlighted that having a gender-sensitive lens when investing is an imperative for an inclusive and fair investment strategy and that, especially in Africa, the number of female entrepreneurs supported is a key metric. There is an even split between male and female entrepreneurs on the continent but less than 2% of those women are getting formal funding as they are often working in hidden, informal sectors.

Exits: A major area of discussion was around exits. Carlos Reyes of the IFC,  pointed out that; “to prepare companies for exits, we try to improve reporting standards, corporate governance and we look at the bench – so if the entrepreneur leaves, who can come in? The succession process is quite important.” Exits are not the easiest but they are not deal-breakers and good exits can be achieved. At Leapfrog Investments, they evaluate exits right at the beginning, by sitting down with the owners to try to understand their dreams for the future so as to align funding with their plans for exiting.

Predictions: And finally, taking a forward look at the sector five years into the future, George Odo, Managing Director of AfricInvest Capital Partners observed that there would be more capital raised from African economies, more policy changes required to mobilise pension funds, much more experienced fund managers, and also more EA players paying attention to Ethiopia.

Glossary
AVCA – Africa Venture Capital Association
EA – East Africa
PE – Private Equity
LP – Limited Partners
DFI – Development Finance Institution
IFC – International Finance Corporation
PROPARCO – A Development Financial Institution partly owned by the French Development Agency
SME – Small Medium Enterprise
MSME – Micro Small & Medium Enterprises
VC – Venture Capital