Kenya–country focus: building confidence

Ongoing and planned construction of mega infrastructure projects in Kenya are seen as its greatest chance of attaining its near-term annual economic growth target of 10% and continuing its leadership as the region’s largest and most diversified economy. But its fragile political process is the biggest risk facing the country, with the level of uncertainty expected to peak in late 2016 ahead of the 2017 elections. The construction of the Standard Gauge Railway from the port city of Mombasa to the capital Nairobi, a distance of 500km, has already started. The new railway line, the biggest project by value undertaken by the government since independence in 1963, will drastically cut the cost of transporting goods as locomotives will travel at a speed of 120kph, compared to the current average of 40kph.hideTransport costs have been a major factor in Kenya’s poor competitiveness, with effects being felt by land-locked countries in the region such as Uganda, Rwanda, Burundi, South Sudan and eastern Democratic Republic of Congo, which all depend of the port of Mombasa for their imports and exports. Once the rail line is completed in 2018, it will raise the gross domestic product (GDP) by 1.5% according to government statistics. “There is a deliberate effort to put Kenya on a long-term development path, which has given confidence to local and foreign investors and this is providing a lot of business opportunities,” says Professor Peter Kagwanja, the CEO of Africa Policy Institute, a pan-African thinktank based in Nairobi. Other mega projects being implemented or planned in Kenya include the ongoing expansion of the Port of Mombasa, construction of the new Lamu Port, which needs related infrastructure like roads, airports, a refinery and a railway line extending to South Sudan and Uganda at a cost of $26bn, and the construction of a new airport in Nairobi. Human resource Another major opportunity for Kenya is the nurturing of human resource, indicated by the expanding access to higher education. From about seven universities 15 years ago, there are currently 53 universities providing access to higher education, especially for the youth. But the challenge has been that most of these universities are offering non-technical courses, causing educationists to question the long-term impact in a country that is aiming to attain industrialisation status by 2030. “While access to higher education has expanded exponentially in the past 15 years, the challenge is that technical courses are being taught less, in comparison to humanities. This is a major risk to industrialisation efforts because if you look at countries like Brazil, which Kenya is emulating, it gave a lot of weight to teaching sciences and engineering courses,” says Dr Alex Mwamburi, who has taught mechanical engineering in various universities across east Africa. Calestous Juma, Professor of the Practice of International Development at Harvard University, says countries like Kenya need an urgent expansion of engineering education and entrepreneurship and to establish a new generation of engineering schools that are directly linked to the productive sectors. “Egypt, Kenya and Ghana have already created telecoms universities linked to line ministries and the private sector. The advantage for Kenya and Africa in general is that they just need to adopt the existing technologies that have been tested and proven and which are now cheaper. Brazil and China did it,” he said. Electricity progress One of the visible gains the economy has made is a drop in the cost of electricity following the injection of 280MW of geothermal-generated power in December 2014. The cost of electricity in Kenya is, however, still more than double the cost in competing economies like South Africa and Egypt. In the past three months, the cost of electricity in Kenya dropped by a massive 52% and is expected to drop further in the near term as the government implements an ambitious strategy to generate 5,000MW of new electricity by 2018 from geothermal, wind power, natural gas and coal. The tender for the 970MW coal power project has been awarded while Lake Turkana Wind Power has completed the fundraising for the 300MW wind power project, construction of which is expected to start soon. “The government is delivering well on energy plans and this has sent good signals to the investment community. Local companies are also planning how to increase production because of additional power that has come on board,” says Betty Maina, CEO of the Kenya Association of Manufacturers. Growing middle-class The rising number of middle-class citizens remains the key driver of the Kenyan growth story. A recent report by the Africa Development Bank indicates that 49% of Kenya’s 40 million population are categorised as middle-class—essentially those spending between $2 and $20 a day. This class is driving consumerism, attracting global brands to pitch camp in their country. The latest global brand to express an interest to enter Kenya is the New York Stock Exchange-listed foods manufacturer, Kellogg’s, which has announced plans to set up a manufacturing unit in the country. The growing consumerism story is being narrated through new investments in retail outlets, like the recent announcement by Kenya-based regional supermarket chain Uchumi that it plans to establish 12 more brands in the region in 2015 to meet the growing consumer demand. Another indicator of growing incomes is the month’s announcement of new car sales in Kenya jumping 20.3% in 2014, compared to 2013, according to data from the Kenya Motor Industry Association. Even more indicative is the fact that dealers in luxury cars such as Porsche, Mercedes, BMW and Range Rover recorded the highest jump in sales at 58.4%. Shipments of personal computers to east Africa increased by 76% last year, while in Kenya mobile handset sales have increased 200% since 2009. The rise of the middle-class is expected to continue in Kenya, particularly if the improving business environment is maintained, power costs continue the downward trend and production of oil and gas comes online as planned in 2018, which will put an end to the huge spending on importing petroleum products, which currently consume half of the imports budget. Regional trade There are also benefits to come from increased trade within the East African Community (EAC), as Ms Maina explains: “Increased intra-EAC trade, harmonisation of standards in the EAC, mutual recognition of each partner’s standardisation mark, easier travel arrangements within the EAC, reduced roadblocks and the implementation of one-stop border posts, are all a plus to businesses in the region.” She adds: “About 25.8% of Kenyan exports are to the EAC region and the EAC market is very important for Kenya.” Other gains from the EAC Common Market include the ongoing removal of non-tariff barriers, provision of a level playing field due to implementation of a common external tariff against imports from third countries, increased market opportunities in the EAC, competitiveness due to economies of scale, and production efficiency and preferential tariffs for goods produced in east Africa so long as they meet EAC rules of origin. EAC has a population of 140 million and the trio of Kenya, Uganda and Tanzania have made significant oil and gas resource discoveries in recent years, which are expected to significantly boost their economies once production starts. Political outlook The withdrawal of crimes against humanity charges against President Uhuru Kenyatta at the International Criminal Court is being credited for increased confidence in the country’s political and economic future, although charges against his deputy William Ruto, who controls half of the ruling coalition, remain. The successful conclusion of trade talks under the Economic Partnership Agreements with the European Union (EU) has also given confidence, especially to flower and horticulture farmers whose main export is to the EU. The failure of talks would have meant their produce entering the EU market paying duty of up to 11.7%, compared to previous duty-free access, making flowers and vegetables from competing countries like Ethiopia and Tanzania cheaper in Europe. Kenya’s fragile political process remains its greatest threat, according to Professor Kagwanja. “Politics are still fragile. Next year, we expect the level of uncertainties to grow ahead of the 2017 vote,” he said. Kenya has had a dubious record of political and ethnic violence after every election cycle since the introduction of multi-party politics in 1992, except during the latest elections in 2013. The violence is largely driven by the highly ethnic politics, with senior politicians essentially being chiefs of their ethnic communities. Ascendancy to power is associated with economic benefit for the ruling tribes, hence the competition. But security, in particular the rising threat of terrorism activities perpetuated by Somali terrorist group al-Shabaab, poses a major threat. In December for instance, 64 people were shot dead while travelling on a bus from Mandera, a town near the shared border with Somali. Local organised tribal militants in the upper Rift Valley and Coast region also killed hundreds of civilians and tens of police officers last year. “Terror-linked incidences have been muted in January on the back of strategic changes in the top echelons of Kenya’s security apparatus at the end of 2014,” says Konstantin Makarov, the Managing Director of Stratlink Global, a consulting company based in Nairobi. “Relative quiet might serve to prop up investor confidence in the country’s efforts to arrest the malaise of insecurity that plagued 2014. Reports of the surrender of a senior al-Shabaab figure, Hassan Dhubi, to the Somali government on 15 January 2015 will also serve to buoy perception of a fractured al-Shabaab militia. “But investors will, however, also be on the lookout for possible retaliatory attacks as al-Shabaab seeks to rekindle hope among its followers,” he adds. Mr Makarov also says, however, that the passing of the controversial anti-terrorism law that allows detainment of suspected terrorists without trial for 90 to 360 days, has polarised the political atmosphere and raised tensions between the government and the Muslim community, which feels it may be the target of the law. Economic factors Mr Makarov has mixed news on the economic outlook: “On the economic front, the business climate is experiencing a mix of tailwinds and headwinds from plummeting global oil prices. On the one hand, consumers and business operators are reaping from the highest drop in petroleum product prices. This is expected to augur well for the cost of doing business in the months ahead. “On the flipside, the plummeting price of oil is dampening oil exploration efforts in the region. The plan by British oil and gas company Afren to slash its exploration budget speaks volumes of potential stress on the investment climate. Tullow Oil—which discovered the largest volume of oil in Kenya—has also undertaken austerity measures in neighbouring countries such as Ethiopia in view of oil prices.” Kenya has also introduced capital gains tax (CGT) of 5% that investors say could affect investment in property, equities, oil and mining. The reintroduction of the CGT regime is believed to be in response to robust growth in the stock market, real estate sector and extractive industries in Kenya. In 2013, the Nairobi Securities Exchange was ranked as the second best-performing stock exchange in Africa; in Nairobi, property values have increased and are attracting international investors; and mineral and oil and gas deposits have been discovered during the past five years. Already, stockbrokers and investment bankers have sued the Kenya Revenue Authority (KRA) over the reintroduction of the tax. The Kenya Association of Stock Brokers and Investment Banks says the new sections of the law are a threat to its members and violate guaranteed right to property. Another risk facing investors is allegations by the Kenya Association of Manufacturers that corrupt KRA officials are valuing goods even higher than the transaction prices. “Prices uplifts were on the increase last month leading to suspicions of rent-seeking. If KRA was relying on the internet to peg its prices, then it is doing us a disservice because those are not the prices for sale to the east African region. Usually, internet prices already include taxes,” says Ms Maina, KRA’s CEO.

Kenya–country focus: building confidence

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