Kenya: Kenya Finance Profile

Economic Overview

Strong growth but below potential

Growth of GDP accelerated to +5.8% in 2010, half reflecting recovery from the adverse impact on the economy of the end-2007 elections and the violence and poor security that followed. Annual GDP increase was above +4% in 2011, 2012 and 2013, compared with a long-term annual average +3.8%.

Potential increase from 2011 has been restricted by a challenging external environment, inclunding weakness in some key European markets. However, infrastructure projects have maintained buoyancy in the construction sector. In addition, Kenya (the major regional economy) benefits from increased integration within the East African Community, which provides an extended market for prospective businesses seeking an even wider marketplace. EH forecasts GDP increase of around +5% in 2014 and +5.5% in 2015.

Indeed, economic increase could be additional rapid, given a relatively smooth election in 2013 and perceptions that domestic political stability has improved. However, Kenya is susceptible to periodic terrorist attacks, inclunding the high profile shootings in the Westgate shopping mall in 2013 and occasional targeting of tourists. Such events have largely short-term adverse consequences on the economy but are a limitation on the country’s succcess of its full potential. The major political parties are not separated by deep-seated differences in their basic market-friendly approaches to governance. As such, elections (as in 2013) tend not to result in the introduction of marked differences in policy direction and this gives domestic and international investors a degree of confidence.

Large current account deficits but external deficit ratios are manageable and import cover is supportive

Kenya’s external accounts are volatile, reflecting the economy’s vulnerability to local (climatic and security) and world developments (the latter inclunding commodity request and internationally-determined commodity prices, which have an impact on both sides of the trade balance as Kenya exports soft commodities but is an importer of crude oil). In 2000-08, annual average current account deficits were -2.1% of GDP but by 2011 shortfalls had become double-digit. In the next few years, it is likely that nations in the East African Community (EAC) will grow in importance for Kenya as regional integration deepens. Mombassa remains the major regional port and Uganda and Tanzania by presently account for a combined 21% of Kenyan exports. This year, the current account deficit is estimate at -8.6% of GDP (next -8.8% in 2013) and a slight development in 2015 is still likely to result in a deficit of around -7.9%. Part of the large external deficits is accounted for by development-related capital imports with next benefits, but they still require careful management. External deficit levels (debt/GDP 30% and debt/export earnings 116% in 2013) as well require careful management, although foreign exchange reserves cover additional than four months of imports.

Lingering perceptions of corruption

Well-established international agencies indicate that perceptions of corruption can act as a deterrent to business activity. In addition, infrastructural bottlenecks impede full business and increase potential. The latter are being addressed half through project assistance from multilateral bodies but as well through inward investments from nations inclunding China. In addition to the boost from infrastructure spending, economic increase will be driven increasingly by exploitation of oil and coal resources.

General Information

GDP USD37.229bn (World ranking 87, World Bank 2012)
People 43.18 million (World ranking 31, World Bank 2012)
Form of national Republic
Chief of government Uhuru Kenyatta
Next elections 2018, presidential and legislative

Country Rating C2

Strengths

Large domestic market (people 43 million) and member of a regional trading bloc, East African Community, which is expanding and offering good business opportunities
Vibrant horticultural and tourism sectors, although the latter is volatile, subject to domestic political stability and regional security concerns
Regional energy sector has significant potential (inclunding offshore gas fields), with direct (exploitable reserves within Kenya’s territory) and indirect (inputs through Kenyan ports and exports from them) benefits
Strategic importance: regional economic hub

Weaknesses

Recent poor record in terms of political party and individual rivalries and ethnic, tribal and religious divides, which spilled over into violence in 2008. Despite a relatively successful election process in March 2013, these fault lines remain in place
Regional uncertainties (inclunding Somalia, piracy and terrorist activity)
Classified as a low gain economy by the World Bank, with associated need to maintain aid and other external assistance flows
Chequered relationship with the IFIs and wider donor community, half reflecting perceptions of corruption
Twin deficits in fiscal and current accounts