Is Kenya cruising on the dangerous road to deep recession?

Real estate boom: While there are no statistics about prices in the last 15 years, property rates in Nairobi area and along the holiday resorts have risen fast without similar growth in the economy, causing fears they may crumble. Photo/FILE 

By David Furnivall

In Summary

• On closer scrutiny it appears the middle class and leadership are living in a make-believe land of ever increasing wealth. The warning signs are all over with the incessant push for higher wages, hinging on the political power to do so, perhaps without regard for key fundamentals.
• Because of the cavalier attitude towards debt, the Budget deficit, the balance of trade, and property, could all work together to drive the Kenya economy into deep recession.

On the surface the Kenya economy is on the verge of high sustained growth reminiscent of the Asian Tiger economies between the 1960s and the late 1990s. The economy is expected to grow by more than five per cent this year and faster in the coming years.

Foreign investors are keen on Africa, Kenya, especially the then Central Province, is booming, and the mineral and oil discoveries carry enormous estimates, which have been picked up by the media.

Newspapers have carried reports of the niobium discovery in Kwale worth $590 billion and more. News about oil deposits, said to thrice the size of UK’s remaining reserves, all point to a rosy future.

READ: Mineral wealth sparks rush of foreign investors to Kenya

The upper and middle classes have a strong appetite for property and real estate, where prices tend towards the ceiling, possibly getting further momentum when the oil fortunes become a reality.

However, on closer scrutiny, it appears the middle class and leadership are living in a make-believe land of ever increasing wealth. The warning signs are all over with the incessant push for higher wages, hinging on the political power to do so, perhaps without regard for key fundamentals.

Fingers are crossed that the budding ‘Tiger economy’ or somebody will pay for the excess spending. Yet this excess spending has only recently driven the West into the ‘Great Recession’.

Because of the cavalier attitude towards debt, the Budget deficit, the balance of trade, and property, could all work together to drive the Kenya economy into deep recession. This is especially the case if expected adverse conditions in the international markets, including interest rates move sharply in the wrong direction.

Debt

The government finances its spending partly through taxes and, where there is a shortfall, through debt, Kenya’s total debt just under Sh2 trillion, which was equal to 52.1 per cent (having increased from 49.3 per cent in June 2012) of GDP in May 2013.

READ: Kenya’s public debt surges to Sh1.9 trillion

But this level of debt is not a big issue to a country of Kenya’s risk rating. Frequently a portion of this debt matures and this money must then be immediately re-borrowed. For example, Sh10 billion maturing in January 2014 is repaid and the same amount borrowed again.

In January, investors will compare the return with comparable investment options, and will ask if they are going to get back what is promised to them.

In the present circumstances of low international interest rates and hype about Africa being the next investor’s ‘frontier’, getting people to relend the Sh10 billion in January 2014 in exchange for low interest rates is not a problem. Kenya, given its level of debt can easily pay the interest.

However, what happens if the percentage debt to GDP increases, say from 52.1 per cent to 100 per cent? Investors become wary and will want to be paid more interest to compensate for the higher risk of possibly not getting all the money back.