Waiyaki Way, in downtown Nairobi, makes for an interesting drive. Billboards advertising healthy breakfasts, car dealerships, toothpastes, and cheap consumer financing rise tall, with newspaper stands at their feet advertising corruption scandals, bottlenecks, and bank defaults. The contrast between opportunity and challenge personifies the nuances of the Kenyan economy – one that is both enticing and risky for multinationals.
Predicted at 5.8% YOY, Kenya’s 2016 GDP growth is higher than major markets across the continent, such as Nigeria’s (2.4% YOY) and South Africa’s (0.7% YOY). Both countries are experiencing the harmful effects of low commodity prices. As a net oil importer, however, Kenya is entering a new era of macroeconomic stability as low fuel prices help narrow the current account deficit, reduce prices at the pump, and place a ceiling on inflation. The oil price decline also supports the shilling, which remains on an eight-month high against the US dollar, and contributes to foreign exchange availability (unlike Nigeria and Angola).
Macroeconomic stability lends itself to a positive domestic growth story, as the country experiences the double-edged sword of devolution and urbanization. Since county governments were implemented in 2013, following a new constitution in 2010, purchasing power in rural areas has improved and pockets of opportunity outside of Nairobi have risen, such as in Nakuru, Eldoret and Kisumu. People are increasingly moving into new cities and away from subsistence agriculture, which leads to rising incomes and greater purchasing power at the pyramid.
However, despite strengthening macroeconomic fundamentals and robust growth numbers, business sentiment remains shaky. As I met with businesspeople across industries, I was greeted with a common chorus against tax increases, corruption, and bank scandals.
Starved for revenue to pay for its major infrastructure projects ahead of the 2017 elections, such as the Nairobi-Mombasa single gauge railway, the government increased excise duty in December 2015. The new tax regime led multinationals to increase prices to maintain profitability in a price-sensitive market. Consumer demand slowed and company losses soared, resulting in a difficult Q1 for local and multinational companies across industries.
Compounding weak consumer demand are ongoing scandals around three failing banks: Chase Bank, Imperial Bank and Dubai Bank. The three are in financial custody with the central bank because of insolvency as depositors withdrew their money over loan misreporting, profit overstatement and corruption allegations. Consolidation in the banking sector is expected, and companies are bracing for delayed payments by businesses and consumers alike.
The climate of uncertainty is also reflected in diverging opinions around election risk, as the country gears up for the 2017 elections. While some business leaders opine that urbanization leads Kenyans to define themselves along economic, rather than tribal, lines, everyday people are less optimistic about the election lead-up. Now that President Uhuru Kenyatta and Deputy President William Ruto are no longer indicted by the International Criminal Court, there is a sense that perpetrators of post-election violence in 2007 won’t be held accountable for their crimes, which could lead old grievances to surface next year. Uncertainty around the elections is prevalent, but with a weak opposition and greater transparency through technology, optimism at a peaceful unfolding prevails among the majority of people I spoke to.
That optimism is prevalent across sectors, as business leaders and consumers are still riding the tide of economic growth despite challenges. I spoke to many multinationals that are establishing local production facilities, legal entities, and putting a direct salesforce into the market because of strong growth in their industry and a long-term belief in Kenya’s potential. Country managers are leveraging Kenya’s sophisticated mobile payments ecosystem to reach new customers, reduce distribution costs, and generate consumer insights in real time. Sophisticated multinationals are setting their sights on second-tier cities, cracking Kenya’s vast informal sector, and adapting to its expanding formal retail segment.
Innovation and a commitment to the market are the hallmarks of the most successful multinationals in Kenya, irrespective of risk and uncertainty. With competition at an all-time high, these attitudes will differentiate the winners from the losers in one of Sub-Saharan Africa’s most dynamic markets.