1 October 2010

Kenya: Economy Gains Momentum

Kenya's economy grew at the rate of 5.4 per cent in the second quarter of the year powered by improved productivity in the key agriculture, construction and financial services sectors.

That annualised gross domestic product outcome was nearly one percentage point higher than the official full-year target of 4.5 per cent and an acceleration from the 0.9 per cent growth realised during a similar period last year.

The pick-up in the pace of growth reflected stronger consumer spending and a larger inventory build-up in the manufacturing sector that greatly benefited from a 16.8 per cent increase in the volume of trade.

The growth was mainly driven by robust performance in agriculture, construction, manufacturing and financial services sectors, according to the Kenya National Bureau of Statistics, whose data also pointed at strong growth in consumer confidence and spending.

"This continued expansion in the economy reflects a gradual recovery from the past external and internal shocks," said the bureau as it put the average annualised half year growth rate at 5.2 per cent compared to last year's 3.2 per cent- putting the country on course to achieving the 4.5 to 5 per cent target for 2010.

Growth was strongest in the agriculture sector at 5.8 per cent, buoyed by favourable weather that lifted productivity and global recovery that raised demand even as low commodity prices helped keep inflation in check on the home front.

Tax on products, an indication of increased consumption, also grew robustly at 19 per cent, pointing to a rise in household uptake of goods and services that only comes with improved confidence in the direction of the economy.

A survey conducted by TNS Research, a consumer market research firm and whose results were released early this week, indicates that retailer confidence index rose to 150.7 in September from 113.7 in June, in tandem with that of consumers, pointing to the possible continued rise in demand for goods and services in the remaining part of the year.

The survey, conducted among 500 retailers showed 86 per cent of businessmen believe that the next six months will be better compared to 63 per cent in June.

"Over the past three months, there is an increase of 18 per cent in optimism levels about future economic circumstances," said Melissa Baker, the chief executive officer at TNS.

The impressive second quarter performance was realised in an environment of relatively low interest rates, lower inflation and increased production of cheaper hydro-electricity that kept the cost of borrowing in check and eased the pressure on household budgets leaving them with enough headroom to spend more.

The outcome is expected to offer some relief to the Central Bank of Kenya, which has been pushing for low interest rates aiming to support growth that fell to below three per cent in the past two years.

In the past six months, most banks lowered their base lending rates, speeding up credit expansion in an economy and offering momentum to consumer demand.

Kenya's economy has also benefitted from a huge jump in the uptake of loans in the construction sector where the CBK says net lending grew from Sh43.3 billion to Sh81.7 billion in the year to June faster than household lending that rose from Sh84.3 billion to Sh118 billion.

The manufacturing sector also expanded by 6.8 per cent in second quarter, supported by strong growth in the non-food segment including cement, galvanized sheet, and laundry soap.

Improved weather conditions significantly changed the fortunes of the key agricultural sector that employs more than 60 per cent of Kenya's workforce and lowering the cost of food that is estimated to take up 60 per cent of poor household incomes.

Agriculture accounts for more than 24 per cent of Kenya's GDP and a strong performance in the sector not only puts money in the pockets of the majority of ordinary folks, but also eases inflation, leaving enough money in the pockets of consumers to take in more from other sectors of the economy.

Its performance however remains tightly linked to the increasingly erratic rainfall pattern making it the most critical determinant of the country's economic fortunes.

Already, the weatherman has warned that a looming drought could set in as early as next month, and development that could easily reverse the current momentum.

The CBK has, however, shrugged off the La Nina effect on economic growth and maintained the growth target at 4.5 per cent, saying the impact will only be known early next year.

"Perceptions of growth are positive while inflation and exchange rates remain stable," said CBK"s Monetary Policy Committee on Tuesday. "All indicators support the argument that the growth momentum in the first and second quarter was sustained and has not been held back by either domestic or foreign events."

During the first and second quarter of 2010, agricultural production increased by 70 per cent and 38 percent respectively, resulting in half year increase of 53 per cent.

This represents the highest output since 2007.

Better agricultural output points to stability in the national budget on reduced commitment towards food imports.

This is outlook is egging policy makers and economists to say that the country's soft economy is on the brink of take off and that the government growth target of 4.5 per cent will be attained.

"If the weatherman is right, the beginning of next year may be difficult, but you don't expect growth to be knocked down this year," said Terry Ryan a consultant economist at the CBK.

The impressive second half growth results have benefited from a new constitutional order, reduced crime and a general improvement in the investment climate that has lifted business leaders confidence in the economy in the past six months.

Improved agricultural output, a rebound in global commodity prices, strong second quarter corporate earnings and the changing investor fortunes at the Nairobi Stock Exchange (NSE) all supported growth in the second quarter and point to a possible reversal of the steep decline of the past two years, analysts said.

The financial sector expanded by 16 per cent in the second quarter compared to the same period in 2009, contributing 11.7 percent to the GDP growth.

Analysts said this high level of optimism offers the clearest signal yet of the positive developments ahead because consumer spending has traditionally driven economic growth.

The domestic economy is also expected to get a boost from ongoing global recovery that should change the fortunes of key sectors such as tourism and the global agricultural commodities market where Kenya sells tea, coffee and cut flowers.

In the tourism sector, hotels and restaurant activity maintained a positive growth recording a growth of one per cent growth partly attributed to the cancellation of travels due to the volcanic eruption experienced in Iceland during the month of April.

Total bed occupancy, one of the key indicators, increased from 1.33 million to 1.44 million during the period.

International trade indicators showed marked improvement in the first half of 2010 with volume of merchandise trade increasing by 16.8 per cent.

Overall balance of payments recorded a surplus of Sh3.5 billion in the first half of 2010 compared to a deficit of Sh26.8 billion in corresponding period of 2009.

Business leaders said the growth in the first half and optimism in the remaining quarter has helped remove cost cutting, freeze in capital spending and restructuring from their radar screens in favour of innovation and expansion into regional markets.

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