For the economy, 2018 is a time to recover and reflect

If 2017 was a tumultuous year for business and the economy, many are expecting 2018 to be the year of not just recovery but also reflection.

All economic sectors that have been experiencing hiccups, mainly caused by election jitters, are hoping for a lifeline from New Year optimism and an end to politicking. The prolonged presidential election after the nullification of the first presidential election results caused more tension that piled pressure on productive sectors, nearly stalling the economy.

Sectors that are hoping for a lift in 2018 include manufacturing, which had slowed down in 2017. The stock market has been shaky, consumption dropped while retail suffered, leading to several supermarket closures.

Also hit was the real estate sector, where construction of new houses was largely put on hold while demand for finished housing units stagnated. This had a direct impact on mortgages. Meanwhile, economic slowdown wiped out thousands of jobs. Kenyans have had to tighten their belts for the better half of 2017.

TENSION

A new year brings hope to these sectors, although analysts say it will take some time before recovery effects filter down to the common people and employees. There is still some tension on the political scene with Nasa presidential candidate Raila Odinga, who boycotted the repeat presidential election, toying with the idea of being sworn in as the people’s president.

This is likely to scare away foreign investors and big time local businesspeople who wouldn’t want to bet their funds in an unpredictable political environment.

Ms Patricia Rodrigues, Analyst, Control Risks’ Nairobi office, says the 2017 election cycle was unprecedented in many ways, with a historic annulment of the August 8 poll by the Supreme Court and an opposition boycott of the subsequent October 26 re-run.

“For many months, Kenya’s businesses have been holding their breath, waiting for the outcome of the 2017 presidential elections,” she says in a post-election analysis.  “Just as businesses thought it was all over now that Uhuru Kenyatta was sworn in for a second term on November 28, opposition leader Raila Odinga stated that he intends to have himself sworn in on as the ‘people’s president’.”

BUSINESS UNUSUAL

Control Risks, a global risk analysis organisation, expects relative political stability to return to Kenya and economic growth to pick up from early 2018. Election fatigue among the public means that Nasa demonstrations are unlikely to be sustained beyond early 2018.

Opposition leaders and their supporters may also face growing public pressure to end protests amid concerns about their disruptive economic impact.

Ms Rodrigues says normal business operations are returning and foreign investors have resumed trading on Nairobi Securities Exchange (NSE), pushing the value of shares to a post-election high.

Kenya’s economic outlook seems promising, analysts say, now that the election cycle embers away. President Uhuru Kenyatta’s pro-business and pro-international investment approach is likely to continue in 2018, his first year in his second term, which bodes well for economic growth.

More populist policies such as the cap on bank’s interest rates are likely to be reviewed, while the country’s early oil production scheme will likely restart in coming months with increased vigour.

ECONOMIC RADAR

The economy is expected to grow by 5 per cent, according to the IMF, and the government is confident of seeing gains in agriculture following the end of a region-wide drought.  The tourism sector, which is usually hard hit by political uncertainty, saw a 10 per cent increase in tourist arrivals in the past year. In addition, despite the political uncertainty in the past year, Kenya ranked third in sub-Saharan Africa in the World Bank’s Ease of Doing Business 2017 index, climbing 12 places and finishing at 80th out of 190 countries globally.

“This is Kenya’s best performance on the index in over a decade and reflects that reforms to streamline government bureaucratic processes and reduce waiting times for investors are taking effect,” Ms Rodrigues says in Control Risks December 2017 analysis.

In banking, there has been a general squeeze in credit in the market. This has tightened the supply of money within the larger SME sector and households, which are the main drivers in this market, thanks to the new law that caps interest rates.

The impact is undeniably painful for everyone – in banks, for customers and even to the government.

Banks have recorded significant drops in profit attributable to this law, while most small businesses are struggling with financing.

The credit issue will be top of the agenda for President Kenyatta and he is likely to champion a repeal of the legislation, which he signed into law in 2016. That seems the quickest way out as the banking cartel continues to starve the low-end of the economy of funds. Opening up credit taps will stimulate faster growth and trickle down to many sectors.

DISAPPEARING JOBS

The next priority is to cultivate political stability and national unity to inspire investors. Both local and foreign investors still feel scared investing in Kenya for the long term and need the assurance that their investments are secure and staff safe. This will help a number of sectors including financial markets, export and import as well as tourism. Then there is the monster of growing unemployment.

The government should spend more on projects that require lots of labour to absorb the many young people roaming around without anything tangible to do, as it stimulates other sectors to expand and create jobs.

The government’s focus on infrastructure investment is, however, likely to come under pressure from the need to repay rising levels of government debt, which represents 56.4% of GDP. In addition, the administration is unlikely to root out endemic corruption given the vested business interests of some politicians.

Control Risks analysts say these factors will dampen economic development “unless serious reforms are undertaken to both decrease the government’s reliance on commercial debt and prevent the diversion of funds due to corruption.”

INVESTORS

The positive outlook means investors can dust themselves up and resume their plans. But they will have to keep a close eye on Nasa activities, especially its campaign for civil disobedience, brands boycott and the emergence of the people’s assemblies. This would undermine social cohesion and raise political tension.

“The government response to the formation of a parallel governance structure would likely involve heavy suppression by security forces,” says Ms Rodrigues, “posing integrity risks to investors given the security forces’ reputation for disproportionate use of force against civilians. A sustained period of unrest prompted by anti-government campaigns would also disrupt supply chains for companies operating in the region that are reliant on the Kenyan port of Mombasa, particularly companies operating in South Sudan and Uganda.”

A ballooning public debt should be of concern to investors given government plans to raise a second Eurobond in the coming months. According to the Central Bank of Kenya, public debt had risen by more than 25 per cent in the past year, to $43 billion. A significant amount of the government’s commercial debt will mature in 2019, making 2018 a crucial year for the country’s economic performance.