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1. Kenya: Country outlook................................................................................................................................ 1

Bibliography...................................................................................................................................................... 4

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Kenya: Country outlook

Publication info: EIU ViewsWire . (Aug 7, 2013). ProQuest document link Abstract (Abstract): INTERNATIONAL RELATIONS: Foreign policy will be driven by economic interests, especially the maintenance of close relations with key donors and the advancement of regional integration within the regional economic body, the East African Community (EAC). Kenya will retain close ties (including military co-operation) with the US and important developing countries such as China, India and South Africa. However, the pending ICC cases will complicate relations with key Western partners. Full text: Kenya: Country outlook Kenya: Country outlook FROM THE ECONOMIST INTELLIGENCE UNIT POLITICAL STABILITY: The prospects for political stability have improved following the largely peaceful general election on March 4th--Kenya's first under the 2010 constitution. Uhuru Kenyatta emerged as the victor, by a 50.1% to 43.3% margin over Raila Odinga, on a high 86% turnout, and was sworn in to serve a five-year term as Kenya's fourth president on April 9th. Had Mr Kenyatta failed to cross the 50% threshold, there would have been a second-round run-off, but the Supreme Court ruled, after a challenge by Mr Odinga, that the result was legitimate. This avoided the need for a run-off, which would have perpetuated the uncertainty and increased the risk of violence. Mr Odinga's acceptance of the Supreme Court ruling and the institutional strengthening provided for by the new constitution reinforce The Economist Intelligence Unit's forecast of an improvement in political stability during the outlook period. ELECTION WATCH: Kenya's next elections will not take place until 2017-18. The new constitution calls for subsequent ballots to take place during the month of August, although it is unclear at this stage if this would be in 2017 or 2018. Alternatively, the constitution may be amended to provide for an alternative election month, such as March 2018, five years after the recent ballot. Mr Kenyatta will, in theory, be allowed to run again for a second and final five-year term, barring a development such as a conviction for either Mr Kenyatta or his vicepresident, William Ruto, at the International Criminal Court (ICC), where they face charges of facilitating violence after the 2007 election. INTERNATIONAL RELATIONS: Foreign policy will be driven by economic interests, especially the maintenance of close relations with key donors and the advancement of regional integration within the regional economic body, the East African Community (EAC). Kenya will retain close ties (including military co-operation) with the US and important developing countries such as China, India and South Africa. However, the pending ICC cases will complicate relations with key Western partners. The civil war in neighbouring Somalia will remain the primary source of security- and terrorism-related risk. Kenya's armed incursion into southern Somalia in October 2011, in pursuit of Islamist rebels fighting under the banner of al-Shabab, has been broadly successful. In alliance with African Union peacekeepers, Kenya seized Kismayu port, al-Shabab's main stronghold, in late 2012. However, al-Shabab will increasingly revert to guerrilla tactics, and the launch of further terrorist attacks on Kenyan soil remains a key risk, exacerbated by the large number of Somalis resident in Kenya. The incursion has bolstered Kenya's standing and enhanced the prospects for regional integration, but concerns that Kenyan forces are taking a partisan approach could negate the goodwill. Moreover, al-Shabab has not been eliminated and setbacks remain a possibility. POLICY TRENDS: The main policy challenge in the medium term will be to alleviate structural constraints, such as weak infrastructure, which are impeding growth prospects. An ongoing fiscal stimulus and structural reforms such as deregulation and privatisation will promote economic activity, as will the relaxation of monetary policy, 24 August 2013 Page 1 of 4 ProQuest

although the global slowdown will act as a constraint. Moreover, policymaking will remain vulnerable to exogenous shocks, including drought and volatile commodity prices, and to political in-fighting. Kenya's IMFbacked programme, supported by a US$760m extended credit facility, remains on track and will focus on fiscal reform, investment in infrastructure and the implementation of the new constitution. Although continued IMF backing will encourage support from other donors, corruption and weak governance will deter investment and continue to strain relations with external backers. The government aims to accelerate the pace of structural reform in 2013-17, including deregulation and trade liberalisation (especially within the EAC). Plans for the disposal of full or partial stakes in up to 25 state enterprises, either by selling shares to strategic partners or via flotations on the Nairobi Securities Exchange, will gain fresh momentum under the new government. ECONOMIC GROWTH: Given robust growth in the first quarter, the peaceful election and transition process and favourable rainfall in the main long-rains season (March-May), our forecasts for real GDP growth for this year and 2014 have been revised upwards, to 5.3% (from 4.8%) and 5.6% (from 5.1%) respectively. Growth in 2013 will also benefit from a series of interest-rate cuts made since July 2012, which will boost credit allocation to households and firms, and from lower inflation, which will facilitate consumer spending. In addition, the clear election result and the lack of violence will bolster the confidence of investors, both local and foreign. However, weak global conditions--especially in Europe, a key trade, investment and tourism partner--will act as a constraint. Drought remains a perennial downside risk, although the main rainy season in the second quarter of 2013 was satisfactory. Growth will remain positive in 2014-17, helped by a rapid take-up of banking services (including telebanking), a continued boom in telecommunications, the expansion of the middle class, increased regional trade, investment in infrastructure and structural reforms. However, faster growth will exacerbate domestic structural deficiencies, especially in transport and power, despite new investment. Moreover, key reforms could fall victim to political in-fighting, while corruption, high taxes, overregulation and weak governance will continue to inhibit private investment. There is also little prospect of Kenya eliminating infrastructural constraints or dependence on rain-fed agriculture during the forecast period, and drought will remain a perennial downside risk. Nonetheless, the rate of expansion will remain relatively brisk, barring global and local shocks. INFLATION: Year-on-year inflation edged up to 6.0% in July, an 11-month high, owing to costlier fuel, healthcare and housing rentals. This underlines our view that inflation will accelerate during the second half of the year, spurred by higher taxes imposed in the 2013/14 budget (including a 1.5% import levy), the depreciation of the shilling and stronger demand. However, favourable rainfall in the main March-May season will help to keep food prices, the largest component of the consumer prices index, in check. We currently forecast that annual inflation will retreat to 5.6% in 2013 (from 9.4% in 2012), helped by lower commodity prices. Thereafter we expect average annual inflation to be confined within a range of 4.8-6% in 2014-17, despite temporary breaches. Rising aggregate demand and electricity tariffs will underpin higher prices, although prudent monetary policy, more stable global commodity prices and efficiency gains arising from investment in infrastructure and regulatory reform will help to relieve inflationary pressure. The weather (and, therefore, farm and hydroelectricity production) will remain a key variable. EXCHANGE RATES: Ongoing IMF support and healthy foreign-exchange reserves will support the Kenya shilling at around the KSh87:US$1 mark in the third quarter. The shilling strengthened after the March election to average KSh84.14:US$1 in May, its strongest rate for nine months. However, the currency subsequently drifted to KSh86.86:US$1 in July because of strong import demand and reduced export receipts for tea (because of lower world prices and disruption in the key Egyptian market). The shilling will remain vulnerable to balance-of-payments pressures and global monetary uncertainty, which is putting downward pressure on emerging-market currencies. However, barring major shocks, such as a fresh euro zone debt crisis, the shilling's slide is likely to be gradual. We currently forecast that the shilling will average KSh86.51:US$1 in 2013, before declining gradually to KSh105.5:US$1 in 2017. Depreciation will be underpinned by current-account deficits and relatively high (albeit falling) inflation, and will be more rapid if political or economic confidence slips. 24 August 2013 Page 2 of 4 ProQuest

EXTERNAL SECTOR: The current-account deficit will shrink gradually over the forecast period, from an estimated 10.6% of GDP in 2012 to 9.7% of GDP in 2013 and 4.3% of GDP in 2017. Helped by closer regional integration and stronger Asian demand, earnings from key exports, including tea and horticulture (and, later in the forecast period, minerals), will grow steadily, despite a slight slippage in world tea prices in the early part of the forecast period. However, import demand for oil and both capital and consumer goods will be similarly robust, and the merchandise trade deficit will remain broadly stable in absolute terms in 2013-15. The decline in the current-account deficit will be underpinned by growth in invisible earnings, especially from tourism, remittances and servicing regional trade (although receipts from all three sources will be vulnerable to negative global developments). Official donor grants will offer additional support. Income debits, although small, will rise during the forecast period owing to payments to foreign investors and debt-service outlays. The current-account deficit, despite declining during the forecast period, will leave Kenya dependent on external inflows--either debt or investment--to fill the gap. Subject: Economic conditions; Economic indicators; Forecasts Location: Kenya, Africa Identifier / keyword: Economy, Outlook, Kenya, Africa Publication title: EIU ViewsWire Publication year: 2013 Publication date: Aug 7, 2013 Year: 2013 Publisher: The Economist Intelligence Unit Place of publication: New York Country of publication: United States Publication subject: Business And Economics, Political Science--International Relations Source type: Reports Language of publication: English Document type: News ProQuest document ID: 1418266656 Document URL: http://search.proquest.com/docview/1418266656?accountid=46052 Copyright: (c) 2013 The Economist Intelligence Unit Ltd. All rights reserved. Reproduced with permission of the copyright owner. No further reproduction is permitted. Last updated: 2013-08-07 Database: ABI/INFORM Global

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Bibliography
Citation style: Harvard - British Standard Kenya: Country outlook. 2013. New York: The Economist Intelligence Unit.

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