The Kenyan presidential race was a game of building the broadest and most cohesive coalition of ethnic voting blocks, where kinship trumped detailed policy programs on the voters’ list of priorities. As such, Kenyatta’s victory brings little changes to the business environment with regard to the government’s inclination to raise taxes on foreign companies or corruption worries. Nonetheless, barring any complications in cooperation with the ICC, the new regime should remain open to foreign investment.

More Certainty Required

The relegation of policy issues to the background of the election campaign will leave foreign companies anxious for more clarity over the government’s plans for Kenya’s nascent oil and gas sector, with its estimated $2.6 trillion worth of potential oil reserves. Fears over election violence and instability put oil exploration projects on hold, and neither of the top candidates put forward any details on tax structures or the pipeline network supporting future oil deals. Kenyatta put out vague promises that oil would “benefit all Kenyans,” proposing two separate funds for local communities and renewable energy projects, each allocated with 5 percent of energy revenues.

Kenyatta will have to come up with a more substantial program to complete the pipeline linking Kenyan and Ugandan oil industries.

The new president will spend the first months in power building a stable administration. But as the government looks for investors into the $300 million cross-border pipeline project linking Kenyan and Ugandan oil industries, Kenyatta will have to come up with a more substantial program. Kenyatta himself is a scion of one of the richest families in the region, and enjoys close links to Kenya’s business community.

Political Stabilization Key to Growth

Record election spending is expected to boost economic activity around election time, while driving the inflationary pressure, on the upside since the end of 2012. Political stabilization and full confidence of foreign investors will be key to keeping the economy on the positive growth trajectory. This in turn should facilitate a gradual fiscal tightening starting with the 2013/14 budget, after the 6.5 percent of GDP deficit targeted in the current fiscal year, the level widely considered as unsustainable in the mid-term.

Growth accelerated to 4.7 percent on the year in the third quarter of 2012 (the latest quarterly data released by the authorities), following the slowest rate since end-2009 in the previous quarter (3.3 percent). Figures show a robust performance in agriculture, fishing and manufacturing sectors, but construction contracted for the third straight quarter, showing significant spare capacity in the investment-heavy sectors of the economy.

Assuming the normalization in domestic politics and Kenya’s relations with key trade partners, the economy should land in the 5.5 – 6 percent range in 2013, up from the estimated 5.1 percent in 2012. The authorities plan to issue a $1 billion debut sovereign bond in September is expected to raise funds to kick-start new infrastructure projects.

Election Spending Boosts Inflation, Imports

Kenyatta and Odinga alone are estimated to have spent a combined $340 million on their election campaigns, five times the amount recorded in 2007. At the same time, importers began stocking up on dollars in the run-up to the election, anxious over possible unrest and disruption to trade. Cross-border trade with Uganda also suffered. This raised the pressure on the shilling which in January hit a 7-month low against the dollar.

The pressure on prices has slowed down, but not reversed, the trend of falling inflation. Under the tight monetary policy of the central bank, the inflation fell from the peak rate of 19.7 percent in November 2011 to single digits last year. But the year-on-year inflation accelerated to 3.67 percent this January, the first rise in 13 months, and further to 4.45 percent in February when prices of food and non-alcoholic beverages increased by 1.29 percent. The annual inflation in 2013 will still remain within the official target of 5 percent plus minus 2 percent, but pushing toward the upper side of the bracket. In these circumstances, the central bank is unlikely to loosen its benchmark interest rate, currently set at 9.5 percent.

The current account deficit as share of GDP is likely to have moved north of the 9 percent mark last year, under the combined effect of weaker demand from China and the UK, and larger imports of fuel and election-related goods. Resumption of normal trade will set the deficit on a gradual downward trend in 2013.


Christopher McKee
About The Author Christopher McKee [Full Bio]
Christopher McKee is CEO and owner of the PRS Group, a leading global provider of political and country risk forecasts and analysis, with offices in Syracuse, New York, and Mt Pleasant, South Carolina.

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