What a period of political contest. For quite some time, and for the ordinary folks, it felt like wading through a flooded jungle with half-a-knee-deep paddles to go through.
Perhaps Kenya’s politics could have been one of the inspirations behind Buckhard Dallwitz’s ‘it’s a jungle out there’ composition.
With the conclusion of the hotly contested presidential elections, political risks, over the coming months are somehow expected to gradually dissipate from asset-pricing models.
However, even if we blind the political risks window, the economy may not be fully out of the woods yet—which then implies that asset prices, especially stocks, may not fully retrace the pre-election strength.
Remember that even before being dipped into the political freezer, Kenya’s economy was already a walking mass of frozen flesh, having previously passed through a number of freeze points.
In the second quarter of the year, economic growth slowed to five per cent compared to 6.3 per cent in a similar quarter of 2016.
On an annualised basis, only trading, technology and real estate sectors posted growth accelerations.
Otherwise major sectors such as construction, transport, agriculture and manufacturing reported growth slowdowns. By activity, these four sectors contributed slightly over half of the country’s gross domestic product (GDP) last year.
The three months of active politicking could have sucked out any little steam that might have been left of 2017 prospects and we should expect an acceleration in economic slowdown, unless a miracle happens.
Resultantly, we are likely to see continued private sector lay-offs, albeit in small scale, and less hiring as companies adjust to growth slowdown—which, in turn, will likely soften payroll tax collections.
Further, the twin deficits are still alive and kicking. As a matter of fact, the economy was already bracing for current account deficit widening.
Indeed, going by data from the Kenya National Bureau of Statistics, current account deficit widened to 6.2 per cent of GDP in the first six months of the year, from 5.5 per cent in 2016.
It probably could rack up some more basis points in the second half of the year on account of two factors: first, subject to official confirmations, there is a high chance the three months of politicking could have softened exports.
Secondly, global oil prices have been toying with $60 per barrel especially after the escalation of secession stand-off between Kurdistan and Iraq (the former being an oil rich region within the latter).
In 2016, Brent Crude prices averaged $43.5 a barrel. In October 2017, Brent prices averaged $57 a barrel. The $13.5 rise in prices will be reflected in the import bill, albeit not by a similar quantum.
However, I need to issue a mega caveat to the effect that when it comes to global oil price drivers, there are often several moving parts that it becomes difficult to wrap your hands around the wheel.
In addition to current account deficit, the economy continues to grapple with a fairly elevated fiscal deficit (which in itself has been triggered by the Treasury’s failure to roll out fiscal consolidation measures).
In fiscal year 2016/17, deficit, as percentage of GDP closed at 9.2 per cent. While the Treasury secretary in the fiscal year 2017/18 budget statement had projected the figure to drop to six per cent of GDP, his estimates may have been a statement of optimism.
But it is the aggressive pursuit of deficit financing that continues to entrench fiscal dominance which, in turn, has triggered a de-alignment of fiscal and monetary policies.
This absence of line of sight between the two macro-policies, in addition to the Banking (Amendment) Act, 2016, has significantly lowered the opportunity costs of public sector lending, hence crowding out the private sector.
Resultantly, private sector credit growth has stagnated over the past 12 months. Effectively, dissipation in political risks will only give prominence to other structural deficiencies in the economy—and the economy will not be out of the woods yet.