Kenya’s economic risk outlook for 2012
By / March 11, 2012 | 10:56 am
Although the Kenyan economy will be adversely affected by the subdued outlook for European demand, we believe that brighter prospects in regional trade partners combined with improving domestic economic conditions should see the economy rebound in 2012. We expect the Kenyan current account to narrow in 2012, to US $3.2bn (8.1% of GDP), after ballooning to US $3.4bn (10.3% of GDP) in 2011. The major driver of the narrowing trend will be lower global oil prices and reduced import demand on account of a weak currency. The most pertinent risks to the balance of payments come from the weather and the possibility that capital and financial inflows are disrupted by elections scheduled for August 2012.
The decision by the Central Bank of Kenya’s monetary policy committee to hike the central bank rate by 400 basis points to 11.00% represents a much-needed shift into aggressive tightening. Although not a panacea, we believe that the change in stance will help to support the weak currency and thereby temper the effects of imported inflation. While we expect headline inflation to trend lower over coming months due to improving food production, we believe that further monetary tightening is on the cards.
Following the release of quarterly GDP figures, we have downgraded our 2011 real GDP growth forecast to 4.1% (from 4.4% previously) and our 2012 forecast to 5.0% (from 5.3%). We have also increased our forecast for the current account deficit to US $3.2bn (8.1% of GDP) from a previous expectation of US $2.8bn (7.2%).
The major risk to the economy emanates from the weather as poor rains would not only disrupt output in the important agriculture industry but would also keep inflation high and the currency weak, having a negative impact on non-agricultural segments of the economy.
Political risk should also not be underestimated. Elections scheduled to be held in 2012 have been delayed and there are concerns that there could be a repeat of the violence seen following the last poll in late 2007. Any boiling over of tensions would not only harm domestic confidence but would also likely deter foreign investment which would raise the prospect of a balance of payments crisis.
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