Kenya Grounding Africa's Economic Growth
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Kenya Grounding Africa’s Economic Growth October 2016 Kenya | Grounding Africa’s Economic Growth Brief overview Located in East Africa and sharing its borders with countries including Ethiopia, South Sudan, Tanzania and Uganda, Kenya has often been referred to as the commercial “gateway” to and regional hub of East Africa. This comes as a result of the strategic importance the coastal city of Mombasa plays, which is one of the busiest ports along the East African coastline. Apart from being the largest and most advanced economy in East Africa, Kenya is also set to be among the fastest-growing countries in Africa, expected to continue to grow in excess of 5% per annum over the next five years. Nairobi, the country’s capital city, is the business and financial centre of Kenya and the government is on a quest to establish it as a financial hub in the region, putting it on par with existing financial centres in the world. Various sector growth drivers and a non-reliance on commodity exports have underpinned the continued notable economic performance of the country. Yet, Kenya will increasingly depend on innovation, on creating the broader enabling environment for business to thrive through infrastructure construction and reforms, and on reducing corruption to generate value, create employment opportunities, and serve a rapidly urbanising and rising middle class. Given Kenya’s diversifying and robust growth prospects, strong private-sector participation, ongoing pro-business reforms, as well as a rising domestic and regional consumer market, Kenya offers a wealth of investment opportunities across various priority sectors including infrastructure development, horticulture, manufacturing, tourism, power generation, natural resource extraction, and information and communications technology (ICT). 02 Kenya | Grounding Africa’s Economic Growth Given Kenya’s diversifying and robust growth prospects, strong private-sector participation, ongoing pro-business reforms, as well as a rising domestic and regional consumer market, Kenya offers a wealth of investment opportunities across various priority sectors including infrastructure development, horticulture, manufacturing, tourism, power generation, natural resource extraction, and information and communications technology (ICT). 03 Kenya | Grounding Africa’s Economic Growth Political snapshot Kenya promulgated its new Constitution in and prime ministers from Africa, including August 2010. The Constitution decentralised several foreign heads of states. Nairobi has also the political system, limited the president’s played host to high-level meetings such as the powers and also created 47 local governments, 10th World Trade Organisation (WTO) Ministerial known as districts or counties, all of which are Conference, the United Nations Conference on competing to position themselves as Trade and Development (UNCTAD) as well as investment hubs in Kenya. the Tokyo International Conference on African Development (TICAD VI), showing the President Uhuru Kenyatta under the ruling international community’s confidence in the Jubilee Coalition Party is expected to run for a increase of security measures in the region. second and final term during the 2017 general elections. During his first two years in office, Kenya was ranked in position 139 out of 168 Kenyatta has run a robust development agenda countries according to the 2015 Global and has signed several major development Corruption Perception Index (CPI) released by agreements with international and regional Transparency International. In his State of the partners. He is also credited for extending Nation Address in November 2015, the projects of the past government under the President formally declared corruption a major auspices of Vision 2030 – the country’s threat to national security. Furthermore, in a development programme from 2008 to 2030 – bid to fight corruption, Kenya and the other and initiating large infrastructural projects members of the East African Community (EAC), including a standard gauge railway that forms signed the 2016 East Africa Code of Conduct part of the more than US$20bn Lamu Port- which aims at enhancing ethical business Southern Sudan-Ethiopia transport corridor practices in the region. The country also signed project, also known as LAPSSET, and the into law the 2016 Bribery Bill which set strict largest geothermal plant in the world. penalties for individuals or organisations involved in corruption. In addition, some high- President Kenyatta has also maintained an ranking government officials suspected of aggressive foreign policy and has earned corruption have been removed from public himself the title “the traveling president”. His office and charged in court. However, the fight efforts have borne positive results leading to against corruption in Kenya is far from over. trade agreements with several countries, as well as increased foreign direct investment Adverse weather and changing climatic (FDI) flows (FDI inflows almost tripled between conditions, regional insecurity threats (most 2013 and 2015) and a rise in diaspora notably from Al-Shabaab) and volatile global remittances. financial markets remain the biggest threats to Kenya’s political economy going forward. In 2015 and 2016 the President has hosted high-level delegations of over 35 presidents 04 Kenya | Grounding Africa’s Economic Growth 05 Kenya | Grounding Africa’s Economic Growth Kenya’s growth outlook bucks the African trend The majority of emerging and frontier markets, both globally and across the African continent, have struggled with various headwinds, particularly the aftermath of the global financial crisis and a lower commodity price environment over the last few years. According to the International Monetary Fund’s October 2016 World Economic Outlook the average real growth rate of gross domestic product (GDP) for sub-Saharan Africa (SSA) is expected to moderate to 1.4% in 2016 and recover to 2.9% in 2017. For the first time in 15 years and since the onset of the commodity price boom, SSA’s annual regional growth rate is expected to dip below world growth (3.1%). Kenya is bucking this trend. After a statistical rebasing exercise in 2014, the World Bank reclassified Kenya’s economy as a lower middle-income country making it the largest economy in East Africa and Africa’s ninth-biggest. Having averaged above 5% GDP growth over the past decade, the country is expected to expand at a pace of 6.1% in 2016 and 2017 – continuing to outperform its major African peers (including South Africa, Nigeria and Angola) in the coming years. This makes Kenya the fifth-fastest growing and the most sizable economy in the top 10 SSA growth economies. Average real GDP growth of SSA’s 10 fastest-growing economies (%), 2016f-2017f 8% 7% 6.1% 6% 5% 4% 3% 2% 1% Average Average GDP growth (%) 0% Côte d'Ivoire Tanzania Ethiopia Senegal Kenya Rwanda Burkina Ghana Central Uganda Faso African Republic Source: IMF, 2016 The Kenya National Bureau of Statistics (KNBS) reported that the country’s GDP grew by 5.6% in 2015 compared to 5.3% in 2014. This consistently exceeds the average growth rate for SSA countries since 2009, as per figures published by the World Bank and compares favourably to its East African peers. The KNBS predicts Kenya’s economy will grow by 5.8% in 2016 while the IMF is more upbeat at 6%. Real GDP growth rate of Kenya and its regional peers (%), 2013-2016f 8% 7% 6% 5% 4% 3% 2% GDP growth GDP growth (%) 1% 0% 2013 2014 2015 2016f Kenya Tanzania Uganda Rwanda Source: World Bank, 2016 Kenya’s growth trajectory has been underpinned by various sectors, ranging from agriculture and construction, to manufacturing and financial services. Going forward, Kenya’s growth and by 06 Kenya | Grounding Africa’s Economic Growth extension that of East Africa will be supported by continued economic diversification and integration, allowing the region to outpace other sub-regions of SSA whose growth stories will be undermined by persistent low commodity prices (as well as the overreliance on sometimes single commodity exports) at least in the short to medium term. With Kenya having been classified as a lower-middle income country, consumer spending is considered a key economic driver. BMI Research predicts that private spending will almost double in local currency terms, from Kes4.7tr (US$47bn) in 2015 to Kes8.7tr (US$87bn) in 2020 due to rising incomes, favourable demographics (Kenya’s population is expected to more than double from 45 million in 2015 to 95 million in 2050, giving rise to an expanding working age population) and growing financial inclusion. Kenya’s middle class (44.9% of population) is expected to continue expanding by an average annual growth rate of 5%, giving rise to a thriving shopping-mall lifestyle, a booming housing market, growing automobile industry, expansion of retail banking and mobile money, as well as growing domestic tourism activity, amongst other things. Kenya's population by age group (millions), 1980, 2015, 2030 & 2050 120 100 80-84 80 75-79 70-74 60 65-69 40 60-64 Population Population (millions) 15-59 20 0-14 - 1980 2015 2030 2050 Source: United Nations Department of Economic and Social Affairs, Population Division, 2015 Fiscal framework The government’s fiscal performance has been relatively stable in recent years with public spending – which has been increasing largely owing to major infrastructure projects – supporting economic growth. Despite concerns raised over the country’s debt levels at just over 50% of public debt to