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What’s giving Kenyan CEOs sleepless nights



Business leaders have expressed concerns over the political uncertainty around the upcoming August 9 General Election in Kenya, several surveys show.

Kenya’s economy has a history of slowing down during election years when firms put investment decisions on hold, pending a return to normalcy.

Economic growth slowed to 4.81 percent in 2017 as a result of the bitterly contested presidential poll from 5.88 percent a year earlier. The deadly 2007 presidential poll sank the economy to a growth of 0.23 percent from 6.8 percent the year before.

A recent Central Bank of Kenya (CBK) survey found the chief executives see the upcoming election as well as the stability of the Kenyan shilling as some of the biggest impediments to growth and expansion of firms in the remainder of this year.

The apex bank polled chief executives across sectors last month in the lead up to the monetary policy committee meeting, where they reported that they are also concerned about heavy taxation.

“The impending elections are expected to slow down demand/orders and production volumes for majority of respondents,” said CBK in the survey.

The global rating agency, Fitch, in April this year lowered its outlook on Kenya’s sovereign debt to ‘negative’ from ‘stable’, citing a projected slowdown in Kenya’s GDP growth due to the August 9 election jitters and continued fiscal pressures.

The agency said then a bruising presidential poll poses the biggest threat to Kenya’s economic recovery since the Covid-19 shocks last year.

“The negative outlook reflects uncertainty about planned fiscal consolidation and risks to economic growth around the August 2022 general election,” said Fitch in a statement.

“Furthermore, the surge in global commodity prices puts upward pressure on inflation and the current account deficit.”

Fitch affirmed Kenya’s rating at B+ which signifies higher relative risk, with a more-than-average chance of default.

The rating firm sees economic activity expanding six percent this year with the service sectors continuing their post-pandemic rebound and agriculture recovering from negative growth in 2021 owing to adverse weather conditions.

“We forecast growth to slow to six percent, as the August 2022 general election poses downside risks to growth in the second quarter and third quarter of 2022,” said the agency.

“Our base case sees a moderate level of disruption in line with the 2017 election but well below the violence experienced in 2007 and 2012.”

In 2013, the economy decelerated to 3.80 percent from 4.57 percent, according to GDP figures which were revised following the rebasing of the economy.

The aftermath of the deadly December 2007 presidential sank growth to 0.23 percent in 2008 from 6.85 percent, while in 2002 it slowed to 0.5 percent from 3.78 percent the year before.

A similar trend was witnessed in 1997 when growth dropped to 0.48 from 4.15 percent, and in 1992 when it contracted to negative 0.8 percent from 1.44 percent on the onset of multiparty elections.

The weakening shilling that has been on the backfoot since mid-May when it stood at Sh106.40 on the combination of weak inflows and strong dollar demand across sectors, is also another factor giving CEOs sleepless nights.

“Respondents are also concerned about the business environment/cost of doing business and the economic environment. On the latter, firms are particularly concerned about the stability of the Kenyan Shilling and inflation," says the survey.

The shilling for the first time crossed the Sh116 mark against the dollar last May, setting the stage for costly imports such as cars, electronics, farm inputs and second-hand clothes as well as that of electricity amid a reported shortage of the US currency.

The shilling hit a new record low against the dollar, after it weakened to 117.32 on Friday, signalling a continued rally in prices of imported commodities such as fuel and cooking oil.

CBK Governor Patrick Njoroge recently dismissed concerns by the Kenya Association of Manufacturers (KAM) that persistent dollar shortages were triggering the emergence of a parallel exchange rate where lenders buy and sell well above the printed official rate.

Dr Njoroge maintained the foreign exchange market transacts about $2 billion of the US currency every month, which he indicated was enough to meet demand from importers and companies for payments like dividends.

Kenya imports a wide range of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery, whose costs are rising as the shilling weakens against the dollar.

Many sectors of the economy are also grappling with escalating costs of raw materials and soft demand as rising prices of final products hit consumers’ spending power.

Exporters gain

However, the weak shilling has come as a boon for exporters.

Exporters such as tea and coffee producers are the winners in the shilling’s depreciation, which has the effect of making their products more competitive in the international markets besides boosting their revenue in local currency terms.

Kenyans receiving money from relatives abroad are also counting the forex gains on the hard currency, which they exchange for shillings before spending locally.

“We are seeing a weaker shilling and that means for us who are principally exporters we are benefiting from the proceeds that we get mainly in forex when we convert that into Kenya shillings for our own use,” Sasini chief executive Martin Ochieng’ said recently.

The weakening of the shilling has seen manufacturers and importers transfer the additional shipment costs to consumers, increasing inflationary pressure in an economy where households are grappling with expensive basic items like fuel, soap, cooking oil and food.

The CBK raised its policy lending rate in May by a quarter percentage point to stem rising inflation and stabilise the shilling.

The tightening of liquidity is, however, expected to have a negative effect on access to credit for individuals and companies.

A slowdown in lending could deny the economy new investments and threaten the projected domestic output target of more than six percent this year.

Deputy President William Ruto and ODM party leader Raila Odinga are the leading hopefuls to succeed President Uhuru Kenyatta, who will leave office at the end of the constitutional two terms started in 2013.

Mr Kenyatta who had previously embarked on an aggressive campaign for the veteran opposition leader Odinga against his deputy, who has been campaigning for close to five years to succeed his boss, has since retreated from the campaign blitz.

There has not been major election-related violence in the current campaigns, prompting analysts and monitors to expect a relatively calmer political competition.

However, the ghosts of the 2007/8 violence continue to haunt traders amid assurances of peaceful polls by security agencies.

Kenya’s inflation hit a 27-month high in May on costly essential items such as cooking oil, food, fuel and soap, squeezing household budgets and demand for goods and services.

The cost of living measure rose to 7.1 percent in May from 6.5 percent the prior month, the Kenya National Bureau of Statistics reported.

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