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Kenya: Political Risks a Threat to the Economy
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Business Daily (Nairobi)
3 July 2008
Posted to the web 3 July 2008
James Makau
Events in the political arena still pose the greatest risk to the Kenyan economy, a deterioration of which could hurt business even as the country shows signs of recovery.
Analysts at AIG Investments warned that while recovery of the tourism, agriculture and manufacturing sectors were aiding the economy, the ghosts of sour political events still loom large.
"Provided that the government focuses on these key areas, we project that the economy could grow by 4.3 per cent this year. However any adverse political developments could erode the gains we have made so far," said Mr Peter Wachira of AIG Investments.
The Nairobi Stock Exchange (NSE) was the signal for renewed confidence as investor sentiment was expressed in the Safaricom IPO, which raised activity at the local equity markets.
Turnover for the second quarter of the year stood at Sh33.9 billion compared to Sh16.3 billion in the second quarter of 2007.
Tracking the performance of the market, the AIG 27 index registered a growth of 9.7 per cent while the benchmark NSE 20 share index was up 7.1 per cent.
A strong showing from the banking sector in the first quarter of 2008 moved to allay fears that the skirmishes at the start of the year had hit the sector's earnings potential although.
"The banking sector recorded a 33 per cent growth in after tax profits while other listed companies also showed sustained earnings growth," said Nicholas Malaki, investment manger at AIG Investments.
Mr Malaki, however, pointed that earnings in the year were likely to come under threat as the expected slow down in the economy takes its toll on company's revenues.
But even with politics having taken a back seat, economic factors such as the rising cost of living show little signs of easing. Increased electricity tariffs are adding to the burden of spiking food and fuel prices.
Analysts at AIG Investments projected that inflation would average 25 per cent for the rest of 2008 even as the government grapples with burgeoning expenditures.
Over the last 12 months, food prices have risen by 40.1 per cent while energy prices are up by 20.1 per cent.
The CBK's underlying inflation, which excludes food, fuel and transport items, stands at 7.25 per cent, more than two percentage points above the five per cent target. But the bank insists that money supply levels are within targets.
Mr Wachira said that while the economy was showing signs of resurgence, the government's ability to contain inflation while spurring growth would prove a huge challenge for the rest of the year.
Maintenance of price stability and funding of government operations may lead CBK to raise interest rates, the downside of which is the increasing cost of borrowing for business. However, analysts at AIG say that this is unlikely to happen. 'They (CBK) are unlikely to be aggressive in tightening rates due to the need of supporting economic growth," said Mr Wachira.
One factor that may put pressure on interest rates however, will be government borrowing to meet the expenses of an expanded cabinet. "The bigger challenge will be to raise additional funding without putting undue pressure on interest rates," saidMr Wachira.
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With expenditure exceeding revenues by 48 per cent, the failure to finance a budget deficit of Sh128 billion through the local infrastructure and sovereign bonds will put upward pressure on interest rates.
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