Economy faces bad weather and terrorism shocks

Bad weather and sustained terrorist attacks have cast a dark cloud over Kenya’s quest to expand its economy by 6.2 per cent this year, analysts said.

Kenya’s farming belt that covers Central and North Rift, and the Western region has received lower than normal rainfall in the past couple of months that usually marks the onset of long rains and the main planting season, putting a damper on growth prospects.

On Tuesday, the Department of Agriculture warned that the production of maize could fall by up to 5.8 million bags if the prevailing weather conditions persist.

Director of crops Johnston Irungu said that should the unfavourable weather conditions persist to the end of the week, most maize fields will be adversely affected diminishing the output.

“Unless rainfall pattern improves before the end of the week, we are estimating that between 15-20 per cent of the projected national output of 29 million bags will be affected,” said Mr Irungu.

READ: Failed rains to cut maize output 20pc

Agriculture is Kenya’s single largest productive sector whose performance has traditionally determined the overall health of the economy.

Its reliance on rain has, however, remained a big window of exposure that the government has tried to fix with the shift to irrigation.

Insufficient rains are also a threat to the supply of the cheaper hydro-electric power that forces the country to rely on expensive thermal power.

Kenya is also struggling with a major security threat in key sectors such as retail outlets and public transport that have come under sustained attacks from the Somalia-based Al-Shabaab terrorist group.

The terrorists captured global attention last September with a deadly attack on a Nairobi mall that left more than 60 people dead and have since continued intermittent attacks on churches and public transport vehicles killing more than 20 people since January.   

Besides the rising number of casualties, the attacks are seen to have a negative impact on key sectors of the economy such as tourism, which lost 2.1 per cent of its earnings last year as tourist arrivals diminished in the wake of security threats.

READ: Long rains failure exposes agriculture sector to losses

President Uhuru Kenyatta’s government has made public its intention to increase the pace of growth to 6.2 per cent this year – its first full calendar year in office.

But analysts see the twin risks as continuing to pose a major challenge to the Jubilee government’s ambitions in the coming months.

“If the risks are sustained at the current levels or intensify in frequency we will have entered a new normal and this six per cent-plus forecast will be a hard attain,” said Aly-Khan Satchu, who runs an investment advisory and data vending firm Rich Management.

Kenya is also facing the prospect of increased capital flight as the European and American economies recover from the crisis that has dogged them since the onset of the global financial meltdown in 2008.

Mr Satchu said tourism was so beholden to “news flow” that its earnings would probably remain under downward pressure this year, putting a damper on economy-wide growth.

“Europe and the US are on the mend but tourism is beholden to news flow and it is difficult for tourism to raise its head in the current environment, said Mr Satchu.

American business information firm Teneo Intelligence – with representation in Kenya – told its clients a briefing Monday that the simultaneous attacks in Kenya’s capital Nairobi and port city of Mombasa pointed towards a new level of sophistication and boldness by terrorists that if not stopped could have serious ramifications on economic activity.

“By attacking bus stations and transport hubs the assailants understand that they can slowly cripple Kenya’s economy, which continues to be undermined by the challenging security outlook,” said the brief.

The intelligence firm said that while replace those in charge of the security apparatus was an option it remains a difficult to implement option on the ground and would probably not improve the security situation.

“Domestic pressure on the Kenyatta administration to make changes on the security apparatus have started to mount but a potential cabinet reshuffle will not be simple to carry out nor would it immediately improve the security conditions,” it said.

One of Kenya’s largest lenders, the World Bank, in its latest report made a less optimistic forecast of the GDP growth placing it at 5.1 per cent this year or a full percentage point lower than the government’s 6.2 per cent target.

The bank reckons that though the economy remains fairly stable, it continues to face significant challenges in tourism and export sectors as well as unreliable weather.

“Exports remain stagnant mainly as a result of subdued demand from Kenya’s trading partners and increased vulnerabilities of emerging markets. Furthermore, the external position may continue to weaken due to high petroleum prices and renewed security threats in the region, which have a negative impact on tourism.” 

Taneo said the security situation in Kenya has recently deteriorated to the point of delaying the planned issue of a sovereign bond and significantly upsetting the tourism sector.

“Domestic political pressure is likely to increase on President Kenyatta in the aftermath of the deadly attacks,” the intelligence firm said adding that it might also result in yet another delay of the long-awaited Eurobond issuance.

The Kenyatta government has positioned the bond as key instrument in its effort to ease pressure on domestic interest rates but it has been held in abeyance for months by a combination of factors, including the public finance law and a tightening of global markets.