The Kenyan Flag
A Maasai warrior’s shield covering crossed spears at the center; black symbolizes the majority population, red the bloodshed in the struggle for freedom, green stands for natural wealth, and white for peace; the shield and crossed spears symbolize the defense of freedom
Kenya: At a glance
Structure of the economy
Kenya is the third largest economy in Sub-Saharan Africa behind Nigeria and South Africa; it was one of the fastest growing economies in the region prior to the pandemic, with average annual GDP close to 5% between 2004 and 2020. Over the last decade, Kenya has made significant progress in its reform agenda, which has contributed to sustained economic growth and social development. The economy is among the most sophisticated in Africa, where its financial sector is vibrant and developed, boasting the highest financial inclusion in the region. As such, the largest contribution to economic growth comes from the services sector (42% of GDP); alongside financial services, Kenya has well-developed retail, telecommunications and tourism sectors. That said, the economy still remains heavily dependent on agriculture which contributes 35% of GDP and employs approximately 60% of the labour force.
While the economy has suffered in the wake of the pandemic, registering its first recession in 12 years, the recovery is expected to be swift; the IMF forecasts GDP to reach 7.6% in 2021 and 5.7% in 2022. While the prospects for the rebound are favourable, with economic activity supported by the reopening of the domestic economy, the constructive backdrop for agricultural activity and the rebound in international demand, the growth outlook is likely to remain uneven across sectors and could face downside risks from vaccination shortfalls.
The Central Bank of Kenya (CBK) has been active in its efforts to cushion the blow from the pandemic, implementing a series of measures to support the economy, such as cutting rates, injecting liquidity, lowering banking sector reserve ratios, increasing the tenor of REPO arrangements and encouraging the postponement of consumer loan repayments. While the impact of the pandemic was extensive, it was largely contained by the proactive approach from the CBK. Over recent months, the CBK has left its policy setting unchanged at 7%, prioritiszing the need for ongoing stimulus to insulate the recovery. Despite signs of inflation on the ground, CPI reached 6.3% in June. Much like its contemporaries at the Fed, the CBK believes that the price pressures are likely to remain within their target band of 5% +/- 2.5%.
The initial emergency response to the pandemic in Kenya, like many other emerging market economies, has resulted in a deterioration of the fiscal position. Looking forward, concerns are building that further fiscal slippage is inevitable, and market commentators have speculated that Kenya’s budget deficit will be wider than the 7.5% of GDP outlined in the budget for FY21. As a result, public debt as a percentage of GDP could reach 70%. At the same time, debt servicing costs are a concern, as, even before the crisis, in 2019, 60% of Kenya’s export revenue was spent on debt service (principal and interest), a rapid surge from 6.3% in 2012. Kenya continues to enjoy support from the IMF; in April 2021, a $2.4bn program was agreed, under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF). The most recent disbursement, which will take place over 38-months, was released in June following a review. Likewise, the World Bank has offered support; $750m was released in June to reinforce “Kenya’s resilient, inclusive and green economic recovery”.
Kenya is due to hold its general election on 9th August 2022, with all elected positions up for grabs, including members of the government, the senate and the presidency. Prolonged periods of civil unrest often go hand in hand with election cycles in Kenya. As such, the general election is a key risk event for next year. While it is early to ascertain the future political landscape, the formation of the One Kenya Alliance (OKA) is notable, reintroducing the possibility of two political rivals - Raila and Ruto - forging an alliance as they did in 2007.
Bottom line: Bronze medal
We are cautiously optimistic when it comes to Kenya. From a bottom up standpoint, the recovery story is notable; there has been a swift rebound from the pandemic, which is reflected in the robust IMF growth forecasts over the next two years. The rebound continues to be insulated by the pragmatic approach by the CBK, which is maintaining its stimulative policy setting while looking through transitory inflation. While legitimate concerns remain over the near-term fiscal position, Kenya is now largely backstopped by the IMF and World Bank policy support which is now in place.
From a structural perspective, as noted in our Roadmap for Q3 and Beyond, we believe that the current backdrop is complicated for emerging markets. That said, in our view, there are selective opportunities for alpha. Why? As noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage selective carry positions. We believe that with the recovery well under way, Kenya fits the bill.
1. United Nations;
3. The World Bank.
Olympics data: Olympiandatabase.com
All other data is ESLJ, 2021.
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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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