Country Report Kenya October 2012

Update Country Report Kenya 08 Oct 2012

Sub-Saharan growth impressive despite downgrade

The World Bank has downgraded its 2012 growth forecast for Sub-Saharan Africa (SSA), although it still expects SSA to be the second fastest-growing region in the world. We are slightly more optimistic, although the region's vulnerability to global economic conditions and the slowdown in high-growth markets, particularly China, are clear downside risks.

Sub-Saharan economies are likely to grow by an average of 4.8% in 2012, according to the World Bank's biannual Africa's Pulse report, released in early October. This is broadly unchanged from 4.9% in 2011, but is slightly down on the 5.2% expansion the Bank was projecting earlier in the year. The reasons for the downgrade are clear enough: although relatively poorly integrated with the global economy, the region has been affected by the market volatility arising from the ongoing crisis in the euro area, as well as the slowdown that is occurring in some major developing economies, including China (an important market for Africa's metal and mineral exporters). Underscoring this is the fact that in South Africa-the most globally integrated economy in the region-export growth on a seasonally adjusted annualised basis was down by some 32% in the April-June period. (In addition, if the current wave of labour unrest in the mining sector proves prolonged-and spreads to other sectors-it will exert a further drag on growth.) Indeed, South Africa is already acting as a drag on regional growth-if it is excluded, SSA growth is likely to hit 6% this year.

Nonetheless, SSA will remain one of the fastest-growing regions in the world this year-behind Asia, but well ahead of Europe, the US and OECD economies as a whole, as well as Latin America-and this expansion is reasonably broad-based. One-third of the continent is expected to register growth of 6% or more, with other countries experiencing much higher rates owing to new mineral exports, a return to peace, or robust growth in the non-minerals sector. For example, Sierra Leone is projected to grow by no less than 25%-five times the 2011 level-largely owing to the impact of mining of the Tonkolili deposits, which contain an estimated 10.5bn tonnes of iron ore.

Domestic demand holds up

The Bank is also optimistic about 2013 prospects, largely because of resilient domestic demand and the continued strength of commodity prices. As a result, it expects Sub-Saharan growth to accelerate to 5.2%-and 6.2% if South Africa is excluded. This is broadly in line with the Economist Intelligence Unit's forecasts: we expect Sub-Saharan growth to average 5.3% annually in 2012-13, although we too have revised down our forecasts, to 5.1% for 2012 (from 5.2% previously) and 5.4% (from 5.6%) for 2013. Despite these modest downward revisions, we expect economic activity to continue to be supported by the ongoing pursuit of crucial economic reforms in an increasing number of African countries, combined with rising fiscal spending and-crucially-the region's strengthening ties with fast-growing economies in Asia. Around one-half of SSA trade is now conducted with emerging markets, compared with negligible amounts in the 1990s, and the IMF has suggested that around two-thirds of the region's growth in 2005-10 was accounted for by an expansion in exports to emerging markets, especially in Asia.

Clearly, this changing trade pattern offers distinct advantages to exporters in SSA at a time of sluggish-or non-existent-growth in the developed world, (even though emerging-market growth has also started to come off the boil). Commodity price trends will also help: although non-oil commodity prices will weaken, they will remain well above historical levels. Equally, although the price of oil (Brent) is forecast to moderate to US$103/barrel in 2013 (from US$110/b in 2012), this will still leave oil prices nearly two-thirds higher than in 2009. As a result the region's oil producers-including Angola, Ghana, Equatorial Guinea and Nigeria-are likely to remain the fastest-growing Sub-Saharan economies.

However, there are a number of downside risks to this relatively optimistic forecast. Clearly, global economic growth remains fragile: the Economist Intelligence Unit estimates that the global economy will have grown by 2.2% at market exchange rates in 2012, down from 2.6% in 2011. At purchasing power parity exchange rates, which give more weight to emerging markets, we now estimate that growth this year will have slipped to 3.1% (from 3.2% previously), well below the 3.7% recorded for 2011. However, a sharp deterioration in high-income economies-notably in Europe, a key African trading partner-could have serious implications. Indeed, the World Bank has suggested that Sub-Saharan GDP growth could be restricted to just 1.7% in 2013 should a marked escalation of financial market tensions shut off some larger euro area economies from refinancing their debt. Equally, a serious slowdown in China could hit the region's resource exporters: China's GDP growth slowed to a three-year low in second-quarter 2012, and we have reduced our 2012 growth estimate. That said, we continue to project growth of 7.8% in China this year, and we expect growth to rebound to 8.6% in 2013. Our overall assessment, therefore, is that this will be a challenging but not disastrous year for prospects in Sub-Saharan Africa. Furthermore, the medium-term outlook for SSA remains positive, although there is little sign that real GDP growth will reach the 8-10% a year required if poverty levels are to be addressed across the board.

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