After smooth transition, Kenya expects $330m in investments

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Former President Kibaki hands over the Constitution of Kenya to President Uhuru Kenyatta after he was sworn into office as the country's 4th president in Nairobi on April 9, 2013.   Nation Media Group

By Joint Report The EastAfrican

In Summary

• Analysts say political risk has dropped to the lowest levels in two years, and are optimistic inflation will slow further and the currency remain stable.
• Activity at the Nairobi Securities Exchange, which is usually a good indicator of the health of the economy, is picking up, responding to the positive sentiments.

Kenya is hoping to attract at least $330 million in foreign direct investments in the next three months, in the wake of a smooth political transition that has raised business leaders’ confidence in the economy to new highs.

As a result of political uncertainty ahead of the March 4 General Election, Kenya missed its foreign direct investment (FDI) targets for the half year ending March 2013, data from the Kenya Investment Authority (KenInvest) shows.

“Our target for the first quarter of 2013 was Ksh28 billion ($330 million) but that has not been reached because most potential investors adopted a wait-and-see attitude as a result of elections. The inflows were quite small,” said Kenneth Mutuku, the general manager at KenInvest. “But now our target for the second quarter is the same.”

The heightened political risk had forced Kenyan businesses into holding cash while others suspended expansion plans. Company data showed firms that had reported their 2012 full year results by the end of last month held a combined Ksh130 billion plus ($1.52 billion) compared with Ksh110 billion ($1.29 billion) in 2011.

This was a war-chest to help them weather any election-related shocks as they sought a balance between expansion, appeasing shareholders and paying off debt.

But now most business leaders say the swearing in of President Uhuru Kenyatta on April 9 is likely to open the floodgates of investment, with no major potential risks seen in the medium term.

While none of the listed companies tapped the capital markets for funds in the first quarter of this year, companies are now expected to kick off a fundraising spree. Retail chain Uchumi Supermarkets plans to hold a rights issue and power generator KenGen will soon launch a bond.

Keroche Breweries, which had held back on planned expansions, has reactivated its plant expansion plan. The firm hopes to scale up production 10 times, to a million hectolitres.

“We are moving fast with the expansion project to make sure we recover the time we lost,” said chief executive Tabitha Karanja.

Listed companies whose profitability dropped last year as a result of a hard operating environment, including KenolKobil, Total Kenya, National Bank, Kenya Airways and Mumias Sugar, are banking on the renewed confidence to reverse their fortunes.

Analysts say political risk has dropped to the lowest levels in two years, and are optimistic inflation will slow further and the currency remain stable.

Analysts at global financial service firm Citi Group said, going by history, the peaceful election outcome should give the private sector sufficient confidence to pick up activity.

ALSO READ: Kenya attracts most new foreign projects, but political risk rises

Analysts at ICEA Lion Asset Management said a more accommodative monetary policy, low inflation and the expectation of adequate rainfall should also contribute to a better business climate.

Last month, the cost of living index dropped for the first time this year — to 4.11 per cent in compared to 4.45 per cent in February — easing fears that prices of goods and credit would rise.

Rising inflation had made low-end consumers cut back on spending, resulting in reduced sales that forced companies to scale back their spending to protect profits.

Deputy President William Ruto said on Tuesday the economy should grow by double digits in the next five years.

A recent survey by the Central Bank of Kenya’s Monetary Policy Committee indicated that business leaders expected inflation to rise by one to two percentage points in the post-election period as economic activity picked up.

“We are likely to see a sharp rise in FDI and big firms are likely to come calling to set up base in Nairobi,” said Hudson Aluvanze, the chairman of the Export Promotion Council. “The risks to growth are much lower than ever with a new government whose actions are tightly checked by the Constitution.”

Global corporate giants like Toyota, Huawei and Samsung are expected to have training centres in Kenya by the end of this year. But, even with the optimism, business leaders said the government still had a big task ahead in improving the operational environment.

“We will see an acceleration of financial and economic activity. A lot of the funds that were sitting out there will begin to come into the country,” said Patrick Obath, the chairman of the Kenya Private Sector Alliance.

The latest World Bank’s Ease of Doing Business report, released last month, ranked Kenya at position 121 out of 185 economies, down from position 109 in its previous report. It cited delays in resolving contract disputes and protracted cross-border trade procedures.

“This issue must be addressed. We should also not increase salaries such that we become uncompetitive. We have to bake the cake. It’s not our turn to eat. The issue of energy development and minerals management must be handled very carefully so that Kenya does not become like some oil-rich countries that cannot meet their energy needs,” said Vimal Shah, the managing director at Bidco Group.

Activity at the Nairobi Securities Exchange, which is usually a good indicator of the health of the economy, is picking up, responding to the positive sentiments.

After Kenya’s Supreme Court dismissed two petitions challenging the election of President Kenyatta on March 30, the NSE 20-Share Index crossed the 5,000 mark for the first time in more than four years.

READ: Share prices rise sharply after Supreme Court decision

“The confidence is back,” said Jonathan Ciano, the chief executive officer of Uchumi Supermarkets.

But business leaders in the financial sector say the government should weigh its borrowing options carefully as it seeks to implement promises contained in the Jubilee manifesto, which would push up public expenditure.

“The government should look to international markets and multilateral funders like the World Bank and the International Monetary Fund. This will ensure that the local private sector is not crowded out of the domestic credit market by the government,” said Nelson Kuria, chief executive officer at CIC Insurance.

The president is this week expected to name Cabinet secretaries, and business leaders expect these individuals to focus on resolving issues that affect the business climate.

Reported by David Mugwe, Steve Mbogo, Peterson Thiongo and Scola Kamau