The Report: Kenya 2014

Economy

Kenya has a liberalised economy with a GDP of $55.2bn, which grew at 5.7% in 2013. Much of the 2013 growth was attributable to relatively low and stable inflation, and the establishment of county governments as public expenditure rose in line with the devolved system of government, according to an economic survey from 2014. Agriculture, wholesale and retail trade, transport and communication, and manufacturing led growth. As an emerging market, Kenya benefits from a number of competitive advantages, not only within East Africa but also within the wider continental context. Kenya’s blueprint for development and future planning, called Vision 2030, serves as an overarching guide to the country’s goal of seeing annual GDP growth of 10% every year from 2012 to 2030.

This chapter contains interviews with Henry Rotich, Cabinet Secretary, National Treasury; James Mwangi, Chairman, Kenya Vision 2030 Delivery Board; Vimal Shah, Chairman, Kenya Private Sector Alliance (KEPSA); Moses Ikiara, Managing Director, Kenya Investment Authority; and Atul Shah, Managing Director, Nakumatt Holdings.

Capital Markets

Headlined by two equities boards and liquid options for bonds both in primary and secondary trading, Kenya’s capital markets stand out for their maturity in comparison to most African markets, although other asset classes are in the early stages of development. The Capital Markets Master Plan (2014-23) outlines a growth programme for the short to medium term, while separately the Nairobi Securities Exchange (NSE) has demutualised and is implementing a strategy that includes self-listing, in keeping with a worldwide trend as bourses seek to evolve to suit changing global market conditions. The year 2014 could prove a pivotal one for the NSE and for Kenya’s capital markets overall. A period of discussion and planning is now poised to end, with the master plan commencing its phased implementation and the NSE completing its plan for demutualisation and listing.

This chapter contains interviews with Peter Mwangi, CEO, Nairobi Securities Exchange (NSE); Paul Muthaura, CEO, Capital Markets Authority (CMA); and a viewpoint from James Mworia, CEO, Centum Investment Company.

Banking

The banking sector in Kenya is notably diversified, thanks in large part to the country’s efforts to boost financial inclusion. Kenya’s predominant mobile money platform, M-Pesa, is perhaps the best known example, but other elements of the Kenyan system, such as savings and credit associations, microfinance and agency banking, also underscore the diversity and innovation within the sector. The sector appears to have moved past a period of instability. Widespread defaults are no longer common, and capital raising has left lenders with bigger balance sheets and increasingly robust fundamentals as measured by common prudential ratios. The financial sector overall is now the third largest in sub-Saharan Africa, behind those of South Africa and Nigeria. With more banks establishing themselves in multiple countries, Kenya looks to be on the right side of a growing trend. This chapter contains interviews with Njuguna Ndung’u, Governor, Central Bank of Kenya; Razia Khan, Regional Head of Research for Africa, Standard Chartered; and Habil Olaka, CEO, Kenya Bankers Association.

Insurance

Holding enormous untapped potential, Kenya’s insurance industry has expanded rapidly over the past 10 years, with both the life and non-life segments showing consistent double-digit growth. As of early 2013 there were 47 operating insurance companies in Kenya, including 24 non-life businesses, 11 life insurers and 12 composite firms. Although the sector is still dominated by the short-term motor segment, rapid uptake in life, medical and new micro-insurance products has seen lower-earning Kenyans gain coverage. The industry, however, faces formidable challenges – premium undercutting has put intense pressure on major players, while fraud and low penetration have hurt margins and prevented nationwide expansion of comprehensive coverage. Nevertheless, the market holds considerable promise in the medium and long term. The expansion of coverage to lower-income groups via micro-insurance products also promises new opportunities to expand the market.

This chapter contains an interview with Tom Gichuhi, CEO, Association of Kenyan Insurers (AKI).

Energy

Along with Tanzania and Uganda, Kenya is emerging as a new destination for oil and gas explorers after several hydrocarbons deposits in commercially viable quantities were found in the East Africa region. The extent of Kenya’s oil and gas reserves is still being determined and estimates vary widely, but some government projections suggest that its reserves could exceed Uganda’s expected reserves by as much as three-fold and rank the country as one of Africa’s most resource-rich nations. The country is also developing its mining sector, which currently contributes less than 1% to GDP but has significant potential to grow. Kenya is working to review and improve its regulatory environment for natural resources. An appealing regulatory environment will help to convince the industry that Kenya is serious about promoting investment in extracting its natural resources. In addition, a commitment to infrastructure development by the authorities should also help to attract the necessary funding and expertise to the country.

This chapter contains interviews with Davis Chirchir, Cabinet Secretary, Ministry of Energy and Petroleum; and Martin Mbogo, Country Manager, Tullow Oil.

Utilities

As with a number of African markets, expanding the capacity of Kenya’s utilities sector is a key part of the government’s blueprint for development. On the power side, the government aims to add 5000 MW of generation capacity to the existing 1672 MW by 2017. Down the road, the government intends to further expand capacity to meet the 17,000 MW of demand anticipated by 2030. Renewables such as geothermal energy and wind are also key to this plan. The water and sanitation sectors are lagging, but upcoming regulation promises to clarify roles and facilitate private sector investment. The goal that is laid out in the Vision 2030 master plan is to extend universal access to safe water by 2030. Nairobi alone requires $1.9bn in infrastructure upgrades to meet this goal. All sectors within the utilities umbrella promise to grow and have strong support from the national government.

This chapter contains interviews with Jay Ireland, President and CEO, General Electric Africa; and Ben Chumo, Managing Director and CEO, Kenya Power.

Transport

Expansion of infrastructure and transportation networks is a key pillar of the government’s Vision 2030 economic development plan. Kenya represents a critical lifeline for landlocked neighbouring countries. While increased competition, ongoing delays among roads and ports projects, and a host of non-tariff barriers pose serious challenges to future expansion, the government’s dedication to improving transportation indicators has already witnessed steady growth in the rail, port, road and maritime segments. The sector is now poised to undergo enormous change in the next several years, with government expenditure on transportation construction and upgrades showing steady expansion. At the same time the country’s Public-Private Partnership (PPP) Act, enacted in 2013, has opened the door for private investors to help develop high-profile projects including LAPSSET, the standard-gauge railway project and Lamu Port. Coupled with regulatory reforms aimed at reducing non-tariff barriers, these developments should see transportation in Kenya improve dramatically in the medium to long term.

This chapter contains interviews with Michael Kamau, Cabinet Secretary, Ministry of Transport and Infrastructure; Titus Naikuni, Group Managing Director and CEO, Kenya Airways.

Construction & Real Estate

Following several years of sustained growth, the outlook for Kenya’s construction sector remains positive as the industry benefits from the elevated levels of public spending outlined in the Vision 2030 development strategy. Although a slowdown in capital inflows into infrastructure and real estate projects between 2009 and 2011 impacted real growth rates, the sector as a whole has delivered average annual growth rates of 15.26% between 2008 and 2012. With a host of infrastructure projects planned, as well as increased housing demand, contractors are set to profit from a continuation of the robust upward trajectory of recent years. Backed by regulatory reform under the newly formed National Construction Authority (NCA), the industry should also see improved enforcement of standards and training.

This chapter contains an interview with Mohamed Hassanali, CEO and Director, HassConsult Real Estate.

Telecoms & IT

The telecommunications sector in Kenya is one of the more dynamic in Africa, having garnered recognition in particular for its success in rolling out mobile money platforms and value-added services, and benefitting in a broader sense from the government’s effort to increase the role of telecoms and ICT in the country’s overall development. Wireless connectivity has acted as a leapfrog technology, enabling Kenyans to skip fixed-line connections and transition directly to mobile phones. An aggressive approach to building infrastructure has yielded significant benefits for Kenya, bolstered by growth in mobile money platforms, which has helped encourage start-ups and expand digital value-added services. The country’s Connected Kenya 2017 master plan for ICT and broadband development clarifies its step-by-step vision for growth and its needs for foreign investment along the way. The government’s determination to extend broadband access to all Kenyans is likely to reinforce the burgeoning innovation culture that has taken root and provides for a promising medium-term outlook.

This chapter contains interviews with Fred Matiang’i, Cabinet Secretary, Ministry of Information, Communications and Technology; and Bob Collymore, CEO, Safaricom.

Industry & Retail

Industry in Kenya encompasses manufacturing, construction, and mining and quarrying. Combined, these sectors accounted for 14% of GDP between 2009 and 2012. Policy is being guided by the Vision 2030 national development roadmap (V2030), the National Industrialisation Policy Framework 2012-30 (NIPF) and the Second Medium-Term Development Plan 2013-17 (MTDP2), in tandem with the East African Community Industrialisation Policy and Strategy 2012-32. Objectives outlined in V2030 and the NIPF will require improved productivity, market development, infrastructure strengthening and diversification into high value-added sectors. In retail, home-grown businesses form a significant proportion of Kenya’s modern retail sector. Competition is tight and the informal market continues to play a big role, but the sector is dynamic. Penetration of formal retail establishments remains low, estimated at 15-20% of the sector, and the market is highly fractured, particularly outside of the main urban centres, but devolution should encourage the expansion of modern retail space.

This chapter contains interviews with Adan Mohamed, Cabinet Secretary, Ministry of Industrialisation and Enterprise Development; Manu Chandaria, Chairman, Comcraft Group; Betty Maina, CEO, Kenya Association of Manufacturers (KAM); Charles Ireland, Group Managing Director & CEO, East African Breweries.

Agriculture

As the country’s largest employer and contributor to foreign exchange, agriculture is a critical pillar of Kenya’s society and economy, and the sector has grown steadily in recent years, despite facing a host of challenges. Although staple crops and subsistence farming are critical to maintaining food security, Kenya is also the world’s largest exporter of black tea, and the country’s horticulture and floriculture segments have seen rapid expansion in international markets. Sector objectives in the president’s 2013-17 manifesto include introducing affordable state loans to subsidise fertiliser and equipment, establishing a viable national irrigation scheme to cover 1m acres of land, and doubling and diversifying food reserves from 22% to 40% of annual consumption. The sector has shown promising growth, with far-reaching government development strategies expected to see production and output improve in the coming years.

This chapter contains interviews with Moses Changwony, Managing Director, Sasini Tea & Coffee; and Jane Ngige, CEO, Kenya Flower Council.

Tourism

Kenya has long been a popular tourist destination and the sector continues to be a critical industry for the country, although it has taken a number of serious knocks recently amid insecurity and travel advisories issued by several Western nations. Tourism directly accounted for 4.8% of GDP in 2013, or $2.09bn, with a total contribution to GDP of 12.1%, or $5.28bn. These contributions are forecast to rise by 2.9% and 3.1%, respectively, in 2014. The sector directly supported 226,500 jobs – 4.1% of total employment – in 2013. Tourism’s total contribution to employment was 10.6%, creating 589,500 jobs. While it is unlikely that international tourists from traditional markets will return to 2011 levels until confidence in security increases, the sector’s marketing efforts should replace some traffic. Kenyans reliant on tourism are likely to suffer in the short term, but a transition to business travel and domestic tourism may mitigate these external shocks.

This chapter contains interviews with Phyllis Kandie, Cabinet Secretary, Ministry of East African Affairs, Commerce and Tourism (MoEAACT); and Martin Dunford, Chairman, Tamarind Group.

Health & Education

Following decades of stagnation in basic health care indicators, Kenya’s health sector is slowly picking up. Health care spending however remains low, while key indicators such as maternal mortality have stayed high for a decade. Nonetheless, recent reforms have painted a brighter picture for health care in Kenya. President Uhuru Kenyatta’s goal to deliver universal health care has seen the National Hospital Insurance Fund (NHIF) significantly expand its activities and coverage in the last year, raising hopes of coverage expansion for low-income people. Meanwhile, over the past decade, intensive attention and investment have been directed at Kenya’s education sector as the government works toward industrialisation under the Vision 2030 national development plan. The introduction of universal primary education and the abolition of secondary school fees have created a more inclusive system, improving a number of basic indicators. A sharper focus on technical, industrial, vocational education and training (TIVET) activities will bolster employment outcomes, and new emphasis on ICT uptake will broaden access and enhance skills development.

This chapter contains interviews with James Macharia, Cabinet Secretary, Ministry of Health; Mabel Imbuga, Vice-Chancellor, Jomo Kenyatta University of Agriculture and Technology.

Counties

A historic transition is under way in Kenya that could have profound implications for its economy: as part of the implementation of its 2010 constitution, the national government is devolving about a third of its powers and responsibilities to 47 newly created counties. The ultimate objective of the process is to usher in a more decentralised approach to public service delivery, which, while challenging and involving substantial short-term costs, is designed to address regional inequalities and improve localised development. The largest areas to be transferred include health care, local transportation infrastructure, and the control of rivers and lake basins, as well as some planning, investment and licensing policies. Although devolution may be a challenge to successfully and smoothly implement for Kenya, the project promises significant benefits over the long term, and a number of counties have taken aggressive approaches to maximising the advantages devolution confers.

This chapter contains an interview with Anne Waiguru, Cabinet Secretary, Ministry of Devolution and Planning.

Tax

In conjunction with EY, OBG explores the taxation system, examining Kenya’s investor-friendly environment. OBG talks to Gitahi Gachahi, CEO, EY Eastern Africa, on the benefits of a regional Customs union.

Legal Framework

OBG introduces the reader to the different aspects of the legal system in Kenya, in partnership with Anjarwalla & Khanna. OBG talks to Karim Anjarwalla, Managing Partner, Anjarwalla & Khanna.

The Guide

This section includes information on hotels, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.

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