Kenya’s 2017 Macroeconomic Fundamentals

NAIROBI (Capital Markets in Africa) – The year 2017 is shaping up to be a year of stable growth, despite being an election year in the country. In this article, we highlight and discuss the macroeconomic fundamentals in Kenya, the key opportunities in different sectors of the economy, and finally discuss the key challenges facing the growth prospects of the country. Kenya is one of the fastest growing economies in the Sub-Saharan Africa region, with an expected growth of 6.0% in 2016, an increase of 0.4% points from the 5.6% GDP growth recorded in 2015; and 5.7% in 2017 as per the projections of Cytonn Investments. The chart below indicates the country’s GDP growth over years, having achieved an average GDP growth of 6.0 % over the last seven years:

Kenya is currently, as it did in 2016, is experiencing a stable macroeconomic environment, supported by (i) a stable inflation rates, which remained within the target of 2.5% – 7.5% set by the government to average 6.3% in 2016, (ii) a stable interest rates environment after enactment of the Banking (Amendment) Act, 2015 and (iii) recovery of tourism sector. Most importantly, Kenya has established itself as one of the most diversified economies in the region, with a number of key sectors driving growth, including construction, tourism, and agriculture. Over the recent decade, the sectoral contribution to GDP by the top five sectors has been on a decline, which indicates a diversification of the economy by boosting contribution to economic growth across different sectors. The table below indicates changes in the top five sectors contribution to the GDP over the last sixteen years:

Kenya’s attractiveness as an investment destination has been affirmed by Moody’s, which improved the country’s credit rating outlook in 2016 from stable to positive while S&P improved the country’s credit rating outlook from negative to stable. Despite the upcoming elections in August this year, the country maintains its attractiveness to foreign investors, supported by improved ease of doing business. In the most recent Ease of Doing Business Rankings, Kenya was the most improved country recording an improvement of 16 places to rank position 92 out of 190, which is a build-up from last year’s improvement of 28 places to position 108 from 136 in 2015. This improvement is attributed to improved (i) ease of accessing electricity, (ii) ease of registering property, (iii) protection of minority investors, and (iv) ease of resolving insolvency.

In addition to the ease of doing business, Kenya has underlying potential and immense opportunities driven by strong demographic trends, which include rapid urbanization and a growing middle class, financial services penetration and improved market regulation.

“Kenya has established itself as one of the most diversified economies in the region, with a number of key sectors driving growth, including construction, tourism and agriculture.”

Potential sectors on our radar 
Given the positive factors driving the economy, the following are the sectors which we believe will drive growth in 2017:

• Real Estate: The sector has proven to possess great potential, having delivered high returns averaging 25.8% in 2016 across all themes, with the best performing themes being retail and offices with average yields of 10.0% and 9.4%, respectively. In 2017, we expect key drivers of real estate to be (i) supporting demographic trends such as the rising middle class, rapid urbanization and population growth, (ii) an effective housing deficit of over 200,000 units per annum for the low to middle income market, and (iii) competitively high returns of above 25.0% over the last 5-years.
• Energy: The Kenyan Government remains optimistic with regards to turning Kenya around from an oil importing country to an oil exporting country by the year 2020. The groundbreaking events already carried out in the oil reserve areas indicates that investment in this sector remains on the upside. Kenya’s renewable energy sector also presents numerous opportunities as it continues to attract private equity investments with growth being driven by: (i) increased demand, with the peak demand in 2015 being 1,512 MW coupled by an annual growth of 7.0%, (ii) investor friendly regulations put in place by the industry regulators, and (iii) high potential for wind, solar and geothermal energy generation in the country.
• Infrastructural Development: Kenya is undertaking multiple projects geared towards the achievement of Vision 2030 such as the (i) Standard Gauge Railway (SGR) connecting through Kenya to Uganda, (ii) redevelopment of the Northern Corridor linking the landlocked countries such as Uganda, Rwanda and Burundi with Kenya’s maritime port of Mombasa, and (iii) Lamu Port-South Sudan-Ethiopia-Transport (LAPSSET) Corridor Project, which are all set to strengthen Kenya’s position as a gateway, and a transport and logistics hub to the East African sub-region.
• ICT: Technology continues to drive growth in the country with Kenya being the lead on Fintech solutions in the region with over 70.0% of the country’s population having access to financial services. The sector will remain attractive to investors as it is supported by (i) government’s support for innovation, (ii) increased exposure of Kenya’s tech products to the global market and foreign investors, and (iii) relative ease of entry into the sector.

“The year 2017 is shaping up to be a year of stable growth, despite being an election year in the country”

Threats on our watch list 
As indicated above, there are a number of factors driving growth in 2017, and a number of sectors that are set to benefit from that growth. Below we look at the risks and challenges that may hinder the development opportunities in Kenya. These challenges include:

Political Tension: Given 2017 is an election year; the rising political heat may result into lapses in security, which may negatively affect tourism sector. Sluggish Demand for Exports: The country has been experiencing a declining value of exports especially tea and coffee as the current account deficit continues to widen and with oil prices set for a resurgence in the global markets, Kenya sets in for a huge imports bill as a result of a widening the current account deficit. This is likely to worsen the strength of local currency against other global currencies.

Global Markets Stabilization: The global strengthening of the markets such as the US and improving Eurozone is set to attract investors out of the frontier markets such as Kenya thus reducing the level of foreign participation in public markets coupled with a depreciating local currency as a result of the dollar strengthening globally.

Rising Government Debt to GDP: The country debt to GDP ratio currently stands at 53.0% just above the IMF threshold of 50.0%, and is expected to rise with an expansionary fiscal policy, thus affecting Kenya’s sovereign credit rating and attractiveness to foreign investors due to an unfavorable outlook in reference to debt sustainability.

The slowdown in Private Sector Credit Growth: The private sector credit growth has been growing at a low of 4.6% as at October 2016, the slowest growth in over eight years from a high of 25.8% in May 2014. This remains a key challenge to development in the country with the capped interest rates set to have a profound effect on the sector moving forward thus slowing down economic growth. Corruption: The country continues to experience numerous cases of misappropriation of public funds both at the county and national government levels and this presents numerous risks to economic development as it limits the capacity of the government in utilizing tax payers’ funds towards the improvement living standards of citizens.

Kenya’s to grow at most by 5.7% in 2017 
Despite the above challenges, Kenya remains resilient to economic shocks prevailing in the region to put forth a positive economic growth and to remain an attractive destination for investments supported by current macroeconomic stability and a positive outlook in the long-term. Given Kenya’s diversified economy, when one sector fails to deliver, there is always one that steps and supports the strong growth. It is due to this that we are of the view that in 2017 Kenya will deliver a GDP growth of between 5.4% – 5.7%.

“World Bank Group estimates Kenya to grow by 5.9 percent in 2016 and forecasts 6.0 percent and 6.1 percent growth for 2017 and 2018 respectively.”

This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.

Contributor’s Profile
John Ndua serves as an Investment Analyst at Cyton Investments Management Limited, having graduate of Cytonn Young Leaders Program (CYLP). He has 2 years experience, focussing largely on the Public Markets segment, within the Sub-Saharan Africa (SSA) Financial Services Sector and Countries Macro Economic analysis. John holds a BSc. in Actuarial Science from the Jomo Kenyatta University of Agriculture and Technology (JKUAT) and is a candidate in the CFA Programme.