Kenya in 2015: Investor darling with serious political problems (2)

PART 2: 2015 will be a prosperous year for Kenya; the country rebased its GDP last year, increasing the size of its economy by 25.3 percent on paper, with nominal GDP expected to rise to US$ 67 billion. (For more on this, see Part 1 of my blog series.) We expect GDP growth in Kenya to reach 6.4 percent year-on-year, but, of course, the country cannot be seen in isolation.

Regional influence

What makes Kenya attractive is its strategic geographic position and its inclusion in one of the most effective African regional bodies, the East African Community. For businesses, this means that East Africa is a relatively integrated region, allowing companies to reach other markets easily from Kenya, thereby creating economies of scale that offer access to a combined population of about 237 million.[1] In West Africa, by contrast, a single regional strategy is extremely difficult to implement because of substantial differences among markets, meaning that each market must be tackled in isolation.

Kenya’s neighbors are in themselves also very attractive to foreign businesses. Just recently, Uganda and Tanzania also rebased their GDPs, increasing the size of their economies by 13% and 32%, respectively. While Uganda, frequently called ‘Kenya’s younger sibling,” holds large oil and gas resources, and benefits from a wealthy middle class, most of the growth for fast-moving consumer goods companies comes from populous Tanzania, the region’s “sleeping giant,” which is just now beginning to become a real free market economy.

Businesses come to Kenya not just to sell into that country, but into the region as a whole. Kenya’s political influence in East Africa, its relatively sophisticated infrastructure and its strong talent pool are attracting many businesses to establish hubs in Nairobi. In fact, some companies, such as General Electric, have located their Africa headquarters in the Kenyan capital.

Domestic reasons

It is not only external factors that make Kenya an attractive investment destination. Private consumption in the country has grown by an average of 11.7% annually during the last decade, and it will continue to expand in 2015 as the financial services sector expands and borrowing costs drop. The country also has a strong domestic private sector, with Kenyan firms expanding to neighboring markets.

Kenya’s government is keen to fuel economic activity and is busy putting much-needed infrastructure in place. Road, railway, and port expansion projects are underway, linking Kenya’s rural areas. Kenya is also in the process of shifting power from the central government in Nairobi to the country’s 47 counties. The idea is that local governors will directly compete to promote growth and development in their states, which should fuel wiser public spending and the completion of critical projects. In the long term, this approach will lead to better-connected, better-educated, and healthier consumers, and a more sophisticated business infrastructure outside of Nairobi.

Competition will only heat up

Businesses from around the world, not only from Western countries, but also from China, India, and Turkey, are busy expanding their footprint in Kenya. Competition is already fierce, especially for companies selling to other businesses and into numerous government projects.

The consumer market, however, is the most hotly contested. Nairobi’s supermarket shelves are crowded with more products than can be found in a supermarket in London, all vying for a share of Kenya’s growing consumer spending. However, this large and varied product offering is not sustainable, and a price war between brands is likely. This will make groceries and other small consumer items cheaper for Kenyans, allowing them to spend more on bigger-ticket items.

More competition is also good for the country’s business environment, as companies will eventually have to offer the best service at the most competitive price.

Oil and gas will be a game changer

Although Kenya has discovered oil and gas deposits, it is lucky enough not to be an oil exporter yet, given low oil prices. In fact, low oil prices, which have led to low fuel prices for consumers at the pump, have benefited Kenya. The drop in fuel prices has freed up consumer spending power and extra government revenues, and is partly responsible for Kenya’s high growth rates.

Despite current global market dynamics, the country is already benefiting from investment into exploration activity. Once natural resources come online in the coming years, the government will earn greater revenues, allowing it to spend more on development projects.

Depending on the amount of natural resources found, oil and gas are likely to considerably strengthen Kenya’s financial muscle, changing the makeup of the economy and fueling economic diversification if the government manages to avoid the “Dutch disease” that has plagued so many oil-exporting countries, and instead ensures that more wealth is passed down to the people.

[1] Our definition of East Africa includes Kenya, Uganda, Tanzania, Burundi, Rwanda, South Sudan, and the eastern part of the Congo DRC, because our research indicates that those countries can easily be managed out of Kenya. Accordingly, this figure includes the above-mentioned countries. While only the eastern part of the DRC is included in our definition of East Africa, economic indicators used here reflect data for the entire country. Please note that the East African Community includes only Kenya, Uganda, Rwanda, Burundi, and Tanzania.

This is part 2 of a series on Kenya in 2015. Check back on Tuesday for part three, where I discuss the challenges facing Kenya in the coming year. In case you missed it, read Part 1 here.

For more insights on Sub-Saharan Africa, follow me on Twitter@anna_rosenberg.

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