Download Kenya – A Macro Overview

Kenya – A Macro Overview
Aly-Khan Satchu
www.rich.co.ke
Kenya A High Beta Economy – GDP
Overview
• It is clear that in order to stand still (because of the
demographic surge) we need to be growing at a rate
of above 3.5%.
• The picture the GDP paints is of a high beta economy.
• GDP has shown above trend growth in the immediate
post-Independence phase and again during the
coffee boom years of 1976,1977 and then the steady
rise which peaked at 7.1% in
the fourth quarter of 2007.
GDP Overview
New Income Streams
• Remittances – Peaked at $1.3 Billion
• Privatization Receipts
• Better Revenue Capture and Collection by Kenya
Revenue Authority
Collection By Kenya Revenue Authority
Is It A V Or An L?
Historical income streams
• Agriculture remains a mainstay of the economy.
• It is a fact that our yields are in line with the SubSaharan averages which, in turn, are materially below
worldwide averages.
• Malawi (with 3 consecutive surplus harvests in excess of
1.2 million tones) has proven that it is not rocket science
that is required but small holder access to subsidized or
credit extension fertilizer at the start of the planting
season.
• Softs = Far more effective trickle down than hard
commodities in SSA.
• It a fact Kenya has experienced super-sized food
inflation and this has been a double whammy. Consumer
spending power has been crunched.
Tourism
• Tourism crested a wave coincident with GDP which
peaked in
the fourth quarter of 2007 and has substantially slowed
down.
• The multiplier effect is difficult to model but is obviously
material.
Tourism Earnings
The Budget Narrative
Development V Recurrent
• There is debate over the exact skew between
development and recurrent expenditure in the Kenyan
Economy.
• What is clear is that the recurrent expenditure side has
put
a massive squeeze on development expenditure.
• Given this internal dynamic Kenya exhibits high beta
GDP correlation.
• In effect these short spikes (1964-1967, 2002-2007)
whilst welcome have not been of long enough duration to
ignite and embed above trend growth for a significant
time.
Near Term Landscape
• It is now self-evident that the Frontier Markets Theory
(lack of correlation to developed markets) has been
disproved.
• Two key pillars where this has been disproved are
floriculture and tourism and that the impact on our
economy is actually an outsize one given our small size.
• One would be hard pressed to find any income stream
that has managed to hold its own (apparently avocadoes
and tea have).
• The near term landscape is putting unprecedented
pressure on the Budget.
Finmin Goes For Deficit Financing
• For example: The Government of Kenya is
seeking to borrow KES 109 billion from the
domestic market . The lemon is being squeezed
and it is unclear how much more squeezing it
can take.
• This is reminiscent of the Dutch boy, his 10
Fingers and the Dyke.
• In order to reignite growth we need to square the
circle. That circle being a KES 109 Billion plus
overdraft plus finding $ 2-2.5 Billion of new
money to inject into this economy.
Recurrent Budget Supersized
Is The Millstone Around Kenya Inc.
• Speakergate and the Internet signify new levels of citizen
empowerment and oversight.
• This will translate into political leverage.
• A few smart technocrats could slice 20%-30% off the
recurrent budget.
• We exist in a political landscape and the Finmin was not
prepared to Kimunya himself.
• The development Budget has been permanently
undersized.
Foreign Investors And FDI Flows
The Equity Market
• Safaricom IPO took out the structural short in equities.
• Rencap cut and run.
• Market was long and wrong.
• Allsopp’s New Star piled more supply on top.
• NSE witnessed A VERY FAT TAIL.
Kenya Shilling Versus US Dollar – 5 Year
Kenya Bets Big On ICT
• The under sea cables represent an outsize bet by Kenya
on ICT.
• It is currently possible to model the positive GDP
outcome but
I expect it to be in the region of 3% annually from 2010.
• This might well be a catalyst for returning to trend growth
and entirely fortuitous.
• World Bank report finds a strong link between GDP
growth and broadband access.
• Every 10% increase in high speed internet connections
creates an equivalent increase in GDP growth of 1.3%.
Political Analysis
• Massive and quite recent urbanization.
• A demographic skew where 60% of the population is
under
18 signal a very fragile dispensation.
• We need to create jobs, slogans are not enough.
Breakthrough Thinking
• In order to accelerate convergence we need to regain
above trend growth in the order of 7-10%.
• A sustained infrastructure/development spend of $2
billion equivalent per year for the next 5 years is
required.
• How do we do this?
– Today from East to West the talk is of
infrastructure and its multiplier effect.
– We fell far behind Singapore from the time of
our Independence but just as the cables have
landed in the year 2009 we now have an
opportunity to leverage the catch-up.
Where Do We Source This New Money ?
• We need to do Infrastructure Bond Issues totaling $10
billion over the next 5 years.
• We need to create a layer of smart IT which can
measure in real time traffic flows and deliver this data to
our bondholders.
• We need to segregate toll receipts and this was done in
the
90s by the Italian government ( which used to fall every
month) - Autostrada Bonds.
Conclusion
• Impossible is Nothing.
• Talk is Cheap.
• We need to execute and execute now.