Strong Q113 Growth A Sign Of Things To Come

BMI View: Having grown by a robust 5.2% y-o-y during the first quarter of 2013, the Kenyan economy is set to expand by 5.7% for the year as whole with private and public investment and consumption expected to perform strongly . We are expecting growth to accelerate to over 6.0% in 2014 provided that there are no external shocks such as a recurrence of drought.

The Kenyan economy defied concerns that it would see an election-related slowdown in the first quarter of 2013 (Q113) , growing by 5.2% in year-on-year terms , the fastest rate of expansion since Q411.

The strong performance was largely the result of robust growth for the agriculture sector, which makes up around one fifth of GDP and which expanded by 8.3% y-o-y in Q113 thanks to favourable weather conditions. The economy was not completely unaffected by the elections with the 'hotels and restaurants' component contracting by 15.8% as foreign tourists stayed away during the quarter.

Strong Growth In Q113
Kenya - Quarterly GDP Growth, % y-o-y

BMI View: Having grown by a robust 5.2% y-o-y during the first quarter of 2013, the Kenyan economy is set to expand by 5.7% for the year as whole with private and public investment and consumption expected to perform strongly . We are expecting growth to accelerate to over 6.0% in 2014 provided that there are no external shocks such as a recurrence of drought.

The Kenyan economy defied concerns that it would see an election-related slowdown in the first quarter of 2013 (Q113) , growing by 5.2% in year-on-year terms , the fastest rate of expansion since Q411.

Strong Growth In Q113
Kenya - Quarterly GDP Growth, % y-o-y

The strong performance was largely the result of robust growth for the agriculture sector, which makes up around one fifth of GDP and which expanded by 8.3% y-o-y in Q113 thanks to favourable weather conditions. The economy was not completely unaffected by the elections with the 'hotels and restaurants' component contracting by 15.8% as foreign tourists stayed away during the quarter.

Agriculture In The Driving Seat
Kenya - Sector Growth Rates In Q113, % y-o-y

We have argued for some time that economic activity would gather momentum as 2013 progressed thanks to a boost from positive post-election sentiment in the context of healthy macroeconomic environment. The Q113 figures provide a solid foundation for the remainder of the year and we reiterate our view that the economy will expand by a robust 5.7% y-o-y in 2013 and that growth will accelerate to above 6.0% y-o-y in 2014.

Kenyan Economy Revving Up
Kenya - Real GDP Growth, % y-o-y

The major risk to this robust growth outlook stems from the possibility that rains could fail and the impact that this would have on agricultural output, food prices, hydroelectricity production , and macroeconomic stability in general.

Expenditure Outlook

Private Consumption: Private consumption held up relatively strongly in Q113 as evidenced by a 6.2% y-o-y expansion for the 'wholesale and retail trade' component of GDP. Although inflation is on the rise after having bottomed at 3.2% y-o-y in December 2012, it came in at a relatively benign 4.9% in June and we are not expecting further rises to be too dramatic , boding well for the purchasing power of Kenyan consumers.

Low Inflation Will Help Consumers
Kenya - Headline Inflation, % y-o-y

That said, Kenyan consumers face the prospect of having to pay a 16% value added tax on a range of basic goods after Finance Minister Henry Rotich stated in his budget presentation on June 13 that the government would revisit the contr oversial VAT bill that was shelved in the run-up to the elections. The bill is currently in parliament and it is not clear whether or not it will pass given that some MPs are vehemently opposed to it. If it does end up going through, it will have a negative impact on private consumption growth.

Government Consumption: Minister Rotich's budget allocated KES955.5bn (US$ 11bn) to current expenditure, a figure which represents a 9.5% increase in nominal spending for the 2013/14 fiscal year. Like its predecessors, the government of President Uhuru Kenyatta has said that it is eager to increase capital expenditure. However, rather than trimming current expenditure to free up resources for government investment, the budget indicates that the Kenyatta administration is more inclined to raise taxes to meet its spending targets. This suggests that at this stage, government consumption is likely to remain robust during Kenyatta's first term.

Investment: The investment component of GDP is likely to receive the biggest fillip following the successful passing of the elections as both foreign and domestic participants will feel more comfortabl e committing long-term capital, especially in the context of a relatively stable macro environment. The government is planning on spending KES447.98bn (US$5.2bn) on capital projects during FY13/14. As for the private sector, although confidence will be high, financing will remain expensive. Although the Central Bank of Kenya cut the policy rate by 950 basis points to 8.50% between June 2012 and May 2013, the weighted average commercial bank lending rate had only declined by less than 300bps during the same period.

Net Exports: Net exports will remain a drag on the Kenyan economy for the foreseeable future. Although export revenues will be bolstered by a rebound in foreign visitor numbers following the completion of the election process and by robust growth outlooks in Kenya's East Africa trade partners, this will be accompanied by an increase in demand for imported consumer and capital goods in line with the robust outlook for private consumption and investment. T he introduction of a 1.5% Railway Development Levy stands to raise the cost of imports, but we do not believe that this will materially affect import demand as the large proportion of Kenyan imported goods are comprised of items for which there is not currently a domestically-produced substitute (e.g. oil).

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Sector: Country Risk
Geography: Kenya, Kenya
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