Doha: Kenya is now the third largest economy in Sub-Saharan Africa (SSA) after Nigeria and South Africa with nominal GDP of $66bn expected in 2015, says QNB in its weekly report. The economy is dependent on agriculture, which accounts for 30 percent of GDP and 40 percent of exports. (Kenya is the world’s leading exporter of black tea).
Real GDP growth is currently relatively high, expected to be 5.5 percent in 2015 driven by investment in infrastructure and high population growth. Kenya’s long-term fundamentals are underpinned by positive demographics. The 44m population is growing quickly (2.7 percent a year) and urbanising, leading to rising wealth, an expanding middle class, strong growth in the supply of labour and rapidly growing demand for consumer services.
Kenya is also expected to start producing and exporting oil from 2021, which would provide a further impetus to growth. However, in the short term Kenya’s weak fiscal and external positions leave it exposed to the risk of capital flight, the QNB report said.
From 1990 to 2003, Kenya’s real GDP growth was weak, averaging 2.2 percent as a result of protectionist policies, economic mismanagement, patchy reforms and corruption. However, after Kenya’s first truly free and fair elections in 2002, the economy turned around as a number of reforms were implemented, including deregulation, anti-corruption laws and an overhaul of the public finances, leading to an improved business environment. As a result, private and public investment rose sharply, including from foreign investors (foreign direct investment rose from $21m in 2005 to $514m in 2013), and GDP growth picked up to an estimated average of5.1 percent in 2004-14. In 2014, Kenya issued a $2bn sovereign bond (SSA’s largest ever debt issue), which was four times oversubscribed.
To further encourage investment and develop the economy, a number of major projects are being implemented. However, Kenya is exposed to risks of capital flight. The current account deficit is expected to be 7.7 percent of GDP in 2015 and international reserves are low (around four months of import cover). The fiscal deficit is expected to be 7.6 percent of GDP in 2015 and public debt is high and rising (50 percent of GDP in 2015 compared with 48.6 percent in 2014).
In summary, Kenya has a lot of positives: strong investment; high population growth; and a backstop of $1bn to $2bn of additional oil revenue expected to come online in 2021. As a result, many forecasters expect growth of over 6 percent over the long term. However, in the meantime, there is a real risk of a balance of payments crisis that could seriously upset growth in the short term.The Peninsula
