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Kenya Business Forecast Report Q2 2014

  • January 2014
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

The International Criminal Court investigation targeting President
Uhuru Kenyatta created fears of a political crisis between the court
and African states that accuse it of bias, but we believe this is unlikely.
The case has been suspended for technical reasons, and a
lack of evidence may lead to its cancellation. Even if restarted, we
believe that a compromise will avoid a stand-off between the court
and the African Union.
Kenya’s economy will accelerate in 2014, growing by 6.1% in real
terms. This will be Kenya’s fastest rate of GDP expansion since
2007, and BMI believes that growth will stabilise near 6.0% between
2014 and 2018. Rapid economic growth in the other East African
Community states will spur demand for Kenyan goods and services.
Inflation will remain restrained over 2014 due to lower energy prices
and a firming shilling. Slightly faster price growth is likely later in the
year, however, due to rising food prices.
A reduction in Kenya’s trade deficit and strong service sector growth
will cause the country’s wide current account deficit to narrow from
8.7% of GDP in 2014 to 6.0% in 2018. Capital and financial inflows
will keep the deficit covered, though we note that a dependence on
short-term investment inflows leaves the economy vulnerable to
external shocks.
Accelerating economic growth will increase government revenue,
but we expect rising public spending to keep pressure on Kenya’s
fiscal balance. The country’s budget deficit will narrow in 2013/2014
compared to 2012/2013, but will remain approximately 7.0% of GDP
for the duration of our forecast.

Major Forecast Changes

Climactic factors pose a serious risk to Kenya’s agricultural production;
poor rains would harm economic growth, spur high inflation,
and also necessitate large-scale food imports, putting pressure on
the already stretched balance of payments position.
While not our key forecast, a political crisis caused by Uhuru Kenyatta’s
refusal to appear at his trial could seriously strain Kenya’s
relationship with Western powers.

Table Of Contents

Kenya Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Foreign Politics 8
Kenyatta Prosecution Unlikely To Go Ahead 8
A lack of valid evidence has led the International Criminal Court to postpone its prosecution of Kenyan President Uhuru Kenyatta, and
we doubt that the controversial trial will be restarted in 2014 Prosecutors allege that their witnesses are being deterred from testifying
by a campaign of intimidation, a charge that the president's supporters deny The trial's collapse would prevent a political clash between
the ICC and African states that accuse it of bias
table: Political Overview 8
Long-Term Political Outlook 9
Ethnic Polarisation Remains Key Challenge 9
Despite the terrorist attack on the Westgate shopping centre, the politicisation of sharp ethnic divisions remains the key threat to
Kenya's long-term political stability Although the 2013 elections were peaceful, voting patterns show that the electorate continues to
cast ballots according to ethnicity Meanwhile, President Uhuru Kenyatta, elected in 2013, is facing charges at the International Criminal
Court This will complicate the country's relations with the West Terrorism linked to Kenya's military involvement in Somalia is likely to
remain a risk, but it does not pose a systemic threat to political stability
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Growth Moving Up A Gear 14
Below-expectations GDP expansion in H213 has not led us to adjust our growth forecasts for 2014, and we still see Kenya's economy
expanding by 6 1% The country's economic acceleration will gain momentum over the year, and we believe growth will stabilise around
6 0% over the duration of our 2014-2018 forecast period
table: GDP BY EXPENDITURE 14
Monetary Policy 16
Inflation Contained In Q114, Could Rise In Q214 16
Price growth in Kenya has been slowing since October 2013, and we believe that year-on-year inflation in East Africa's largest economy
will remain constrained in Q114 A strong shilling and lower energy prices will prevent a major uptick in inflation, but higher food and
transportation costs could cause price growth to accelerate later in the year
tab le: MONETARY POLICY 17
Balance of Payments 18
Current Account Deficit Narrowing 18
A reduction in Kenya's trade deficit and strong service sector growth will cause the country' s wide current account deficit to narrow from
8 7% of GDP in 2014 to 6 0% in 2018 Capital and financial inflows will keep the deficit covered, though we note that a dependence on
short-term investment inflows leaves the economy vulnerable to external shocks
table: CURRENT ACCOUNT 19
Economic Analysis 21
Budget Balance To Remain In The Red 21
Accelerating economic growth will increase government revenue, but we expect rising public spending to keep pressure on Kenya's
fiscal balance The country's budget deficit will narrow in 2013/2014 compared to 2012/2013, but will remain approximately 7 0% of
GDP for the duration of our forecast The creation of 47 county-level governments poses a significant risk to budget discipline
table: FISCAL POLICY 21
Business Monitor International Ltd www businessmonitor com 3
Contents
Chapter 3: 10-Year Forecast 25
The Kenyan Economy to 2023 25
Solid Foundations Spur Broad-Based Economic Growth 25
We expect that Kenya's economy will more than double in US dollar terms between 2014 and 2022, with annual real GDP growth
averaging 6 1% The economy is highly diversified, and serves as the commercial core of the fast-growing East African Community
Rapid economic growth in Uganda will keep the demand for Kenyan service exports high, even as it slowly reduces the country's share
of regional GDP
tab le: Long -Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 30
TABLE: BMI LEGAL FRAMEWORK RATING 31
Tab le: LABOUR FORCE QUALITY 32
Infrastructure 33
TABLE: AFRICA - ANNUAL FDI INFLOWS 33
Market Orientation 34
TABLE: TOP EXPORT DESTINATIONS 34
Operational Risk 36
Chapter 5: BMI Global Assumptions 37
Global Outlook 37
Momentum To Continue In H114 37
Tab le: Globa l Assumptions 37
Tab le: Developed States , Rea l GDP Growt H, % 38
Tab le: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 38
Tab le: Emerging Markets , Rea l GDP Growth , % 39

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