Kenya in 2015: Investor darling with serious political problems


2015 will not be an easy year for many countries around the world. Business leaders are facing tough decisions. The large markets that account for the majority of their sales experience considerable volatility: Europe may fall back into recession, China’s rapid expansion is slowing, Russia’s economy could contract by 5 percent, the Middle East faces an Islamist threat, and Brazil is in a state of economic crisis.

Luckily, there are the markets of Sub-Saharan Africa, the second fastest-growing region in the world after developing Asia. There are 1 billion African consumers, who are growing wealthier and demanding more and better products. African governments are also on a spending spree, rapidly expanding their road, rail, and port infrastructures.

In early 2014, many Western multinationals across sectors were drafting plans to establish operations in West, East, and Southern Africa to take advantage of the region’s opportunities. Nigeria—the giant of Africa—often received top priority in multinational corporations’ expansion plans. The rebasing of the country’s GDP, which increased the size of its economy by 89 percent to US$ 580 billion in 2014 (compared, for example, with US$ 402 billion for the UAE) lifted Nigeria onto the international stage. Now Nigeria was in the headlines, and executives were ready to commit to a larger presence there.  First, they would expand their footprint in Nigeria, then West Africa. The rest of Africa would follow.

Shifting priorities

But then Ebola hit the region. The disease severely affected only three small West African countries, and the epidemic’s economic ramifications for the rest of West Africa were initially very small. Sierra Leone, Liberia, and Guinea accounted for only 2.0 percent of West Africa’s combined nominal GDP of US$ 700 billion in 2014. Other than mining companies, few big foreign businesses were present in those countries.

Media coverage of the epidemic, however, resuscitated a narrative of Africa as a dark continent mired in political violence, poverty, and contagious disease. Headlines read “West Africa” with no differentiation among countries, geographical distances were ignored, and international flights to countries with no reported Ebola cases were cancelled. Tourist numbers fell in countries as far away from the crisis as South Africa.

Western companies, concerned about this media coverage, tried to exercise extreme caution. As a result, travel plans were put on hold, which slowed investment; and expansion plans for West Africa were postponed until the Ebola scare subsided.

Then, back in July 2014, oil and commodity prices began to tumble, adding insult to injury to West Africa’s commodity exporters: currencies depreciated, inflation accelerated, and economic growth slowed in the region’s main markets, with political challenges making matters worse. Executives felt vindicated in their decisions to slow expansion plans for the region.

Fast forward to February 2015: At an FSG business breakfast in South Africa that brought together 20 of our clients, leading executives of multinational companies confirmed that their West Africa strategies are on hold until Nigeria’s election outcome is settled, and its implications for business are clear. Executives reiterated that their primary focus was now on the Eastern part of the continent, and particularly Kenya. Indeed, our Frontier Market Sentiment Index, released in conjunction with the Wall Street Journal, confirms that executive sentiment is now directed toward East Africa. Between Q2 and Q3 2014, Kenya rose from fifth to second place to become the world’s second most-watched frontier market, after Nigeria.

Kenya’s year

In a nutshell, Kenya in particular and East Africa as a whole are the real winners emerging from global market volatility, and 2015 will be a prosperous year for the region. Since October, we have been revising our GDP growth forecasts for Kenya upward. The IMF finally followed suit this March, revising 2015 GDP projections upward, from 4.7 percent to 6.0 percent year-on-year. We expect GDP growth in Kenya to reach 6.4 percent year-on-year. This is an important figure, because Kenya is now also growing from a larger base. Following in Nigeria’s footsteps, the country also 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. Compared to Nigeria, of course, this is still tiny.

But Kenya cannot be seen in isolation. In Part 2 of this blog series, I will discuss how the regional and macro environment will come into play in Kenya in 2015.

This is part 1 of a series on Kenya in 2015. Check back on Friday for part two, where I examine the macro and regional outlook surrounding Kenya in the coming year.

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

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