Markets

Kenyan economy to grow amid headwinds

tourists

Tourists at a Mombasa hotel. Tourist arrivals have shown significant recovery this year. PHOTO | FILE

The looming General Election and the appreciation of the dollar are the most important variables that could undermine economic growth, Barclays analysts have said.

Economists at the bank project the economy will maintain growth on the back of strengthened agricultural output and increased investment in infrastructure.

Barclays Africa Group Ltd (BAGL) chief economist Jeff Gable said that Kenya’s relative insulation from falling commodity prices — as a buyer rather than a supplier of many of the global fuels and minerals — will see its economy grow faster than the sub-Saharan Africa average despite the August 2017 polls. It will also run markedly ahead of the world’s average GDP expansion.

However, the government and country’s balance of payments deficit continue to be a “cause for concern” with interest payments on government debt this year consuming some 20 per cent of tax revenues.

“Strong economic growth and better oversight bode well,” said Mr Gable. “We expect a continued depreciation of the shilling into 2017, with the biggest risks related to elections and dollar strength.” He cautioned that the “politics of rage” being experienced in advanced economies, as witnessed in the outcome of the Brexit and the US election, are set to put further pressure on Africa’s economic growth.

Rising finance costs and lower capital flows have also been underlined as factors set to dampen the region’s growth alongside reduced tourism spending and lower remittances.

READ: Kenya's economy to grow by 5.7 per cent in 2016

However, for Kenya the capital formation, strong agricultural output and surging infrastructure spend will likely maintain progress despite these external setbacks, he said.

“With tourism arrivals having shown significant recovery during 2016 from the lows of 2015, the Brexit vote may now dampen that recovery in the short-to mid-term,” he said.

“But the far higher levels of infrastructure and oil investment and strengthening agricultural output, mean GDP growth is likely to remain strong over the long term.”

Beyond the political risk, there is a real possibility of more market risks.

“With more than a quarter of the bonds in major indices currently offering negative yields, global funds have moved into risk assets, notably gold and emerging markets. But as the scope for monetary policy nears its limits, any reversal could be sharp,” he said.

This could see investment funds quickly withdrawing from many African markets, putting further pressure on the Kenyan shilling.