Kenyan economy will not stagnate

January 14, 2009
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, NAIROBI, Kenya, Jan 14 – Financial analysts have predicted that the Kenyan economy might not slip into a recession as it has been widely feared.

AIG Investments Vice President and Senior Investment Manager Peter Wachira told reporters on Wednesday that instead, the economy would experience a slow growth with the 2009 projection placed at between three and 3.5 percent.

“Kenya and Africa in general do not have a strong linkage to the global markets so our economy might not suffer as much (due to the meltdown). Our expectation is that although we are likely to see a slower growth, it’s unlikely that we are going to enter into a recession,” he observed.

Many people had feared that the economy would contract owing to the negative effect that the post election violence had on key sectors such as tourism, agriculture and manufacturing; reduced remittances and capital inflows, and the hurried exit of foreign investors from the stock market.

Mr Wachira said that this year’s outlook would largely depend on the success of the agriculture sector and political stability, but provided that the global financial crisis was not prolonged.

“Our assumption is that we are going to have a conducive political environment for the economy to grow. As we saw last year, politics is a big determinant of the business environment and investor confidence,” he added.

The manager expressed optimism that economic performance for 2009 would be better than last year’s.

In 2008 – having experienced both internal and external shocks – the economy declined by one percent in the first quarter, but recovered in the second quarter when the GDP rose by three percent. However, growth slowed down to 2.1 percent in the third quarter as the agriculture and manufacturing sectors shrank by 4.7 percent and 0.7 percent respectively.

The analyst said that they had downgraded the forecast for 2009 as they expected the economy to grow at 2.2 percent. This is well below the government’s target of 4.5 percent.

The firm’s Investment Manager Nicholas Malaki however said that inflationary pressures would ease in the second quarter of this year to below 10 percent, while the outlook for interest rates would remain uncertain.

“We expect that the current food crisis will ease and coupled with decreasing international oil prices which have dropped to an average of $45 per barrel, should help lower inflation,” he pointed out.

The ongoing intervention measures by the government to mitigate the effects of the drought and pressures for salary increments from many civil servants like teachers and health workers are likely to push up current expenditure.

The experts observed that the expanded spending, challenges in meeting revenue collection targets and the limitation to external funding owing to the weak economic projection for international markets – that have delayed issuance of a $500million sovereign bond – would lead to increased domestic borrowing.

“Then we could see a spike in interest rates,” Mr Malaki warned, but was quick to point out that the opening up of the Treasury Bill market to retail investors was likely to provide an avenue of funding to the government.

At the same time, the two fund managers forecast that stock market recovery this year would largely depend on the overall economic performance, robust corporate earnings, growth and positive investor sentiments.

On the local currency front, they predicted that the Kenyan shilling would remain weak as the recovery of the global economy remains uncertain.

Despite the gloomy picture painted about the Kenyan economy, the Ugandan and Tanzanian ones are expected to do well; with the International Monetary Fund projecting a 7.5 percent and 7.3 percent growth respectively for the two neighbours.

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