, NAIROBI, Kenya, Jul 15 – Investment Group Old Mutual maintains that Kenya’s economy will grow by three percent in 2009 despite persistent high inflation rates, rising political temperatures and a struggling energy and water sector.
The investment bank attributed its growth projections to increased government spending, manufacturing, a surge in construction and also wholesale and retail trade.
Senior Investment Manager George Apaka said on Wednesday that this was despite the on-going debate on how to deal with the perpetrators of the post election violence.
A Cabinet meeting held on Tuesday which was expected to give the country direction on the matter failed to come up with a solution.
Mr Apaka said Old Mutual took the ‘Hague issue’ into consideration while coming up with the three percent forecast.
“The view we have taken with the current wrangling within the coalition and more recently issues to do with The Hague is that we don’t think that there will be a radical shift in terms of economic policies of the government until 2012,” he said.
Mr Apaka explained that Central Bank of Kenya and the Ministry of Finance appeared determined to block a rise in interest rates.
“Some of the actions the government has been doing, like participating in the reverse ripple strategy has injected a lot of liquidity in the system. If you look at the inter-bank trading we are now playing anything between Sh10 and Sh11 billion on a daily basis and the interbank rates have just fallen to about 2.5 from a high of five,” he observed.
He further noted that despite the fact that the government has a Sh296 billion budget deficit it was fully funded and runs no risk of having any short term negative effects on the economy.
Mr Apaka however observed that the bigger long-term risk would be if the government was unable to raise the Sh145 billion it hopes to borrow from donors.
“On the other hand the Sh109 billion the government is hoping to raise from the local economy should not affect interest rates because it will not hopefully borrow the whole amount at the same time,” the Investment Manager said.
He noted that if anything the funds may actually stimulate the economy especially if spent within the economy.
However, Mr Apaka expressed concern at the level of outstanding external debt.
“Our view is that this level of borrowing is quite high at about 44 percent of the GDP which means that we are highly geared compared to some of our peers. We don’t think it’s sustainable but you must appreciate that this year’s budget increase to about Sh865 billion was largely to jump start economic growth,” he added.
Globally the Old Mutual is indicating that there are signs the pace of decline in economies is slowing though the recovery will be sluggish through 2010.
It is expected that the first quarter of positive growth in the US and European economies is likely to occur in quarter four of 2009 and quarter one 2010 respectively.