But Kenya’s economy is likely to maintain its current growth trajectory due to strong agricultural output and surging infrastructure spend
The world has witnessed two major events that are likely to shape Kenya’s economy and how economies in developing countries develop. First was the Brexit – a referendum that was held on Thursday 23 June 2016 to decide whether the UK should leave or remain in the European Union. Leave won by 52 per cent to 48 per cent. The referendum turnout was 71.8 per cent, with more than 30 million people voting. On Tuesday November 8, 2016, Donald Trump was elected the 45th president of the United States, a win that has been popularly described as ‘modern day political miracle.”
These two major occurrences described as the “politics of rage” by Barclays Africa Group Limited (BAGL) Chief Economist Jeff Gable are set to put further pressure on Africa’s economic growth.
Besides, strengthening of the dollar, rising finance costs, and lower capital flows were also highlighted as factors set to dampen the region’s growth, alongside reduced tourism spending and lower remittances.
Despite these external setbacks, Gable says strong agricultural output and surging infrastructure spend look likely to maintain Kenya’s economy on its current growth trajectory.
“With tourism arrivals having shown significant recovery during 2016 from the lows of 2015, the Brexit vote may now dampen that recovery in the short to mid-term,” he said. “But the far higher levels of infrastructure and oil investment, and strengthening agricultural output, mean GDP growth is likely to remain strong over the long term.”
Moreover, the country’s growth has created hundreds of thousands of new formal and informal sector jobs since 2011, in contrast to other African nations where GDP growth has not always been accompanied by job creation.
Kenya’s relative insulation from falling commodity prices, as a buyer rather than a supplier of many of the world’s fuels and minerals, sees the country’s economy now growing faster than the average for SubSaharan Africa, and running markedly ahead of the world’s average GDP growth.
Kenya’s growth trajectory
Against this backdrop, the country’s government and balance of payments deficits continue to be a “cause for concern”, with interest payments on government debt this year consuming some 20 per cent of the country’s tax revenues. However, “strong economic growth and better oversight bode well,” said Gable.
Nonetheless, “we expect a continued depreciation of the shilling into 2017, with the biggest risks related to elections and dollar strength,” said Gable.
Beyond the political risk, there is a real possibility of further market setbacks. “With more than a quarter of the bonds in major indices currently offering negative yields, global funds have moved into risk assets, notably gold and emerging markets. But as the scope for monetary policy nears its limits, any reversal could be sharp,” he said.
This could see investment funds withdrawing at speed from many African markets, putting further pressure on the Kenyan shilling.
BAGL produces annual market forecasts for SubSaharan Africa, as well as daily market commentaries, on its research portal ‘Barclays Live’.