Category Archives: Kenya economic growth

Kenya 2018 Budget Policy and the Big Four

Kenya’s National Treasury has published the 2018 budget policy statement  (BPS) – titled “The Big Four” – creating jobs, transforming lives.

It has lots of mentions of the “Big Four” agenda which President Uhuru Kenyatta unveiled in his Jamhuri Day speech (December 12, 2017) which are targets of what his government will aim to achieve in its second term. According to the BPS, the “Big Four” Plan (items are) increasing the share of manufacturing sector to GDP; ensuring all citizens enjoy food security and improved nutrition by 2022; expanding universal health coverage; and delivering at least five hundred thousand (500,000) affordable housing units.

BPS excerpts; 

  • The BPS assumes that GDP will be between 6% to 7% over the next five years, and nominal GDP will rise from Kshs 6.7 trillion ($66 billion) in 2016  to Kshs 14.3 trillion ($139 billion) in 2022.
  • The BPS assumptions are premised on improved collections and efficiencies at Kenya’s 47 developed counties to collect revenues, and for them to have and adhere to realistic budgets. Also, that there be reductions in duplication of roles, resulting in simpler government structure. Counties wages as a percent of their revenue has been 37-38% for the last three years.
  • The BPS cites a goal to double income tax from Kshs 625 billion in 2016-17 to Kshs 1.26 trillion in 2021-22 and mentions that a review of Kenya’s income tax code will be completed by June 2018 to enhance tax compliance and ensure the stability of tax revenue. 
  • The BPS notes that interest payments over the same period will rise from Kshs 271 billion to Kshs 491 billion and wages from Kshs 336 billion to Kshs 563 billion. Elsewhere it projects that wages which were 30% of gross national resource in 2016/17 will progressively reduce in subsequent years down to 23.4% in 2021/22.
  • The BPS cites public-private partnership projects that will be undertaken during the 2018-2020 period such as a second Nyali bridge, Lamu coal plant, Lamu port (3 berths),  Lamu-Garissa-Isiolo highway, airport rehabilitation car parks, conference centers, affordable housing projects, and even a Likoni crossing aerial cable car.
  • There are also 22 energy projects – a mix of geothermal, solar, wind, from which the government commits to purchase energy. These include Lamu coal ($360 million per year) and the Lake Turkana wind (€ 110 million per year).

Some risks noted in the BPS include, counties failing to collect & remit revenue, and the Kenya Deposit Insurance Corporation only covers 9.2% of bank assets (the figure should be closer to international goal of 20% to protect against systemic bank risks). Others are terrorist attacks, natural disasters, climate change, disruptions to mobile money systems, unfunded pension liabilities, and most important the sustainability of public debt.

Oil Pipeline, Economics & Politics Part II: Lamu-Turkana

Yesterday, State House Kenya sent out a statement about plans for a new Kenya oil pipeline from Lokichar in Turkana to Lamu at the Kenya Coast which Total had now committed to build.

The statement comes at a time when Uganda which is believed to have larger oil fields that Kenya has committed to build an oil pipeline through Tanzania, rather than through Kenya. Also for Kenya which had planned to start oil shipments last year in a pilot project using trucks from Turkana to Mombasa, with Tullow, had that plan temporarily stall over infrastructure and political issues.

Blocks sweeten oil pipeline deal.

The Total offer will be sweetened by the provision of some oil blocks in Kenya. Total is in the processor completing an acquisition of Maersk Oil for $7.45 billion and doing the pipeline for Kenya is one way to get local approval for the deal from the local competition authority. 

Following Total SA’s commitment, the Government has consented to a proposed acquisition of the issued and to-be-issued share capital of Maersk Oil Exploration International (Mogas Kenya) in respect of Blocks 10BA, 10BB and 13T. – State House Kenya statement.
Total Kenya is listed on the Nairobi Securities Exchange and Total has been in Kenyan for over sixty years; the company’s operations include eight depots (five of which are solely owned), 2 LPG filling plants and 180 service stations.
The news comes after other oil developments including Total buying out a majority of Tullow’s oil developments in Uganda, leaving Tullow to concentrate on the oil pipeline through Tanzania.

Also see part I of Oil Pipeline, Economics & Politics.

2018 Kenya macro prospects are largely positive

Kenya’s economy is projected to grow by 5.6% from 4.7% last year, Stanbic Bank economists projected on Thursday. The Kenya macro economy was supported by improved performance in the agricultural and tourism sectors rippling down to the manufacturing and services sectors.

Pic from KenyanWallStreet

Jibran Qureishi, Stanbic’s Regional East African economist explained the Stanbic Bank Kenya Purchasing Managers Index (PMI) served as a leading indicator as it vindicated itself over the quarterly GDP growth rate. He underlined the importance of the government’s focus on credit growth to the private sector, improved agricultural policies, the balance of payments and exchange rate.

Recent ranking in the ease of doing business report, end of the political impasse, improved efficiencies in ports and expected increase in foreign direct investment (FDI) would hopefully promote the economy over the 6% year on year growth target which Kenya has only achieved five times since 1980.

However, Kenya’s debt service costs which are mainly external and fiscal consolidation needs to be thought about more carefully for a better and consistent economic performance and Mr. Qureishi warned that the biggest downside risk to the growth outlook would be slower private sector credit growth and fiscal consolidation. He stated that the introduction of IFRS 9 (replacing the IASB 39)  will make the credit growth drought recovery sluggish although the demand side for credit is improving and that the government also needs to develop a sound industrial policy which would have productivity gains rather than increasing expenditure on new infrastructure projects.

In summary:

  • Inflation likely to fall in H1.18 and thereafter edge higher as 2017 short rains have been good.
  • Expected rebound in the agriculture sector.
  • KES to be steady in H1.18.
  • GDP growth likely to recover in the near to medium term.

Here’s a recap of other recently-released economic forecast reports on Kenya.

Barclays launches the Africa Financial Markets Index 

Barclays launched their first edition of the African Financial Markets Index (AFMI) that ranks and compares the depth of financial markets in seventeen African countries. The countries were score against six broad pillars of (1) Financial markets depth, (2) Access to foreign exchange,  (3) Market transparency & the regulatory environment, (4) Macroeconomic opportunity, (5) Enforceability of agreements and (6) Capacity of local investors.

South Africa came out on top of the AFMI with 92 out of 100. It was classified as a highly developed market but (with a) challenging macroeconomic outlook; It was followed distantly by Mauritius (66), Botswana (65) and Namibia (62).

Kenya was ranked fifth (59), just ahead of Nigeria (53) Ghana (49) and Rwanda (48), and Kenya was found to be the most sophisticated in East Africa due to innovations and reforms by the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA).  Kenya’s scores were quite consistent across the six pillars with recent developments including the de-mutualization and the IPO of the NSE, the launch of a first exchange-traded fund by Barclays Kenya, and the launch of the M-Akiba bond.

Kenya is the seventh largest stock exchange by market capitalization and sixth by bond listings. But George Asante, Managing Director and Head of Markets at Barclays Africa said that Kenya lacked deep-pocketed market-makers who could broker deals, and take price risks and also that Kenya needed to develop a primary dealership network. He added that the participation of local investors in long long-term investing was quite limited and local investors are critical as they buffer volatility caused by foreign investors. Assets were concentrated among buy-and-hold investors, rather than pension funds and insurers. Kenya’s domestic institutional investors have $12.6 billion of assets but this only works out to  $173 per capita and he suggested that Kenyan markets and regulators needed come up with more securities listings, instruments, and innovations.

Barclays Bank of Kenya Managing Director Jeremy Awori said that “The AFMI will be produced annually to drive conversations, track progress and address gaps in financial markets.” Already countries like Rwanda and Morocco want to use the index data to improve their financial markets.  At the tail end of the AFMI was Egypt, Mozambique, Seychelles and Ethiopia. Ethiopia was scored as “a fast-growing economy but with no financial markets depth or local investor capacity.”  

Guests at the launch included Jeffrey Odundo, CEO of the NSE, and Paul Muthaura, CEO of Kenya’s CMA. Muthaura said the CMA had a master plan to make Kenya a choice destination for capital flows by 2023, while Odundo said the NSE has broadened its  revenue and product base (by introducing REIT’s, ETF’s, M-Akiba and next derivatives, and a new law to govern securities lending), and was working to make Kenya more visible. They are active members of the Africa Securities Exchange Association and will host a “Building African Financial Markets” seminar in Nairobi in April 2018. They also plan to join the World Federation of Exchanges.

The AFMI report can be downloaded here from the Official Monetary and Financial Institutions Forum website; OMFIF produced the report with Barclays Africa

Barclays Africa Macro Economic Report

Africa is poised for third wave of growth that could return it to the Africa rising heights that preceded the global financial crisis. These are some of the highlights from a report released by Barclays Africa in Nairobi on their macro economic outlook for 2017-2018.

Barclays Africa Chief Economist Jeff Gable said that global growth was 3.7% and is at its strongest in 5 years with the growth synchronised in all regions – US, Europe (strongest in a decade), Asia (recovering from 2017), and Latin America (coming out of recession). Global concerns include the politics of rage and nationalism waves, US political uncertainty (with President Trump),  China’s economic adjustments and fluctuations in commodity demand.

Africa has shown itself to be resilient and is receiving foreign direct investments (FDI) flows at levels not seen in a decade. South Africa gets the top share of FDI (followed by Morocco, Egypt,  Nigeria, Kenya), with most deals coming from the USA – 91 investments (followed by France, China, UK, Dubai) but with the largest source of funding, by far, from China ($36 billion).

Gable sees African countries as better able to address macro economic conditions this time around, such as through making infrastructure pay off by focusing on smaller affordable achievable projects (such as Uganda oil and Tanzania gas), diversifying commodity-driven economies, and managing foreign exchange and debt with the lessons learnt from the earlier dip. He expects that a majority of African countries will continue to grow at a faster pace than in recent years and that average growth will be 4% across the continent.

Some risk concerns are that not many African countries can afford to pay for what they are spending and they are exposed to continued outside borrowing at a time that Sub-Saharan Africa credit ratings are declining and there are discussions about uncertain macro economic policies from Angola, Mozambique, Nigeria, Tanzania South Africa, and Zambia as well as other discussions on political strains in Ethiopia, Kenya Tanzania, Uganda, Zambia, and Zimbabwe.  Another concern is that climate change will disproportionately affect Africa. 

Earlier in the day, Barclays Bank of Kenya Managing Director, Jeremy Awori cautioned on the year-old interest rate cap law in Kenya that had constrained private sector growth, and bank earnings He said banking industry earnings had shrunk 8% as at the third quartet of 2017,  compared to average growth of 15% in previous years and that private sector credit may have shrunk during the year.

Barclays Africa Macro Economic Report launch.

Other highlights of the Macro Economic Report:

  • Kenya’s credit rating has been stable since 2010, but Moody’s are now reviewing it for downgrade (due to to large deficits, high borrowing costs, and policy uncertainty). What concerns Moody’s is not Kenya’s debt size, but its replacement of long-term concessionary debt with short-term commercial debt.
  • Barclays Africa forward exchange rate forecast for the Kenya shilling to the US dollar is 106 at the end of 2018, 108.5 in 2019, and 110.8 in 2020.
  • Interest rate caps have been tried in many countries besides Kenya. The intent is the same, but Kenya’s Central Bank won’t be able to do anything about interest rate caps until next year.
  • For Kenya, tourism and agriculture (after the drought) are moving up, but manufacturing is lagging, and the Purchasing Managers Index (PMI) showed dramatic improvement in December 2017 after plunging to lows in October 2017 during the election season.

The annual Macro economic report was produced by the Barclays Africa research desk. It will be followed by another release by Barclays – of their Africa Financial Markets Index which is a survey of 17 African stock markets.