Is this market the best way to tap into African potential?

Kenya is once again politically stable and is fast becoming the most mature emerging market in Africa.

Jambo!*

When you go through customs control on entering Kenya you are supposed to surrender all your plastic bags. Last year, plastic bags were banned in Kenya outright. This impressed me for two reasons. Firstly, it shows Kenya’s strong commitment to conservation, which, as I subsequently found out, is abundantly evident in the stewardship of Kenya’s game reserves and national parks. Second, it shows a very high level of social discipline. (Can you imagine the hoo-ha if all plastic bags were outlawed in Britain?) And the ban is strictly observed: I have seen Swahili traders measure out sugar and flower into paper cones – the traditional receptacle, now restored.


I write this article partly to counteract the relentlessly negative press coverage that Kenya received from the Western media last year – particularly during the first Presidential election which was certainly marred by violence. I can report that the country – which I have traversed over Christmas and the first week of the New Year – is now calm and is humming to the rhythm of progress. Kenya, after South Africa, can claim to be one of the most advanced nations in Africa and the sense of optimism is palpable. This ought to be better known.

A growing middle class

After independence from Britain in December 1963, there was a slow trickle of mzungu (the white tribe) out of Kenya as pressure was put on their extensive farmsteads. Many went to South Africa – where they have not necessarily flourished. Conversely, after the end of apartheid in South Africa, many white South Africans chose to migrate to Kenya. Now, white people born in Kenya who often hold British, New Zealand or Australian passports are choosing to come back to Kenya and to re-naturalise. I have been staying with one such family so I know this to be true.

That is a very significant vote of confidence in Kenya’s future but it is only a tiny part of the Kenyan story. Whites make up only one percent of the population – much less than people of Indian heritage – the descendants of the railway workers during the British Empire – are overwhelmingly business owners. But the real story is that Kenya now has a large, thriving and often wealthy black middle class.

Most of the tourists who patronise the luxury hotels of Kenya’s Indian Ocean coast are black citizens from Nairobi and Mombasa who casually pay American-level rates for top-class African hospitality. And why not? Nairobi is a thriving city of four million people. Downtown, there is a commercial construction boom; in the suburbs, high-end residential villas are fetching record prices by the day.

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It is good news that the downturn in the numbers of Western tourists – the result of fears about terrorism, some real, some exaggerated – appears to have been more than compensated by the upsurge in domestic tourism.

But the really encouraging thing is that the inter-racial tensions that still characterise life in South Africa seem to be almost entirely absent here. There are no laws which require minimal black representation in the workplace – though of course black Africans predominate. And yes, there are inter-tribal rivalries between Kenya’s forty or so ethnic tribal groups – which was the root cause of the violence last year. (President Uhuru Kenyatta comes from the Kukuyu (the largest tribe) while his opponent, Mr Raila Odinga, is from the Luo tribe.) But, on the surface at least, and according to people who know the country infinitely better than I, there is a high degree of social harmony. If social happiness is measured by smiling faces then Kenya is a happy country.

The Kenyan economy

Kenya still has very much the structure of a developing economy with about 75 percent of the workforce engaged in agriculture – but manufacturing is advancing.

The Kenyan economy grew by 4.4 percent year-on-year in Q3 2017, slowing from a 5.6 percent expansion in the same quarter of 2016. This was the weakest growth since the last quarter of 2013. Growth in financial services slowed to 2.4 percent compared to 7.1 percent in Q3 2016), due to government measures to constrain the over-rapid growth of domestic credit. Agriculture grew at 3.1 percent (compared to 3.8 percent in Q3 2016), mainly due to dry weather that affected food crops[ii]. As a largely agricultural nation, the weather can impact the economy in a real way. Many farmers are still recovering from the extreme drought of 2008-09.

Annual GDP growth in Kenya averaged 5.44 percent from 2004 until 2017, reaching an all-time high of 12.4 percent in Q4 2010 and a record low of 0.20 percent in Q4 2008.

If the population is around 50 million now it was just under forty million ten years ago – so it is growing by about one million a year. That is not exceptional for much of Africa but this population growth is putting a huge strain on the environment. In the deep countryside one can see how the human footprint is being stamped on areas once considered wilderness on the outskirts of the national parks. Many of Kenya’s tribal peoples are pastoralists who herd goat, sheep and cattle in large numbers. Increasingly, their flocks spill over into the game reserves frequented by Western tourists who are naturally a source of important hard currency income. The competition between the human and animal world has never been greater.

The Nairobi Securities Exchange (NSE)

The Kenya stock market, the Nairobi Securities Exchange[iii], has about 69 listed entities of which Air Kenya (NSE:KQ), Standard Chartered Bank Kenya (NSE:SCBK) and Safaricom (NSE:SCOM) will probably be most familiar to Western investors.

Western investors might also be surprised at the relative sophistication of the Kenyan financial system. The Business Daily reported on 27 December that cash-rich publicly traded companies have shifted nearly $100 million in cash from bank deposits to money market accounts and government securities since interest rates were capped in September 2016. Bank deposit rates are capped at around eight percent while cash-rich Kenyans can earn up to 13 percent from medium-term government securities. The maximum rate at which banks can lend is currently 14 percent.

Safaricom

Safaricom Limited is the leading mobile network operator in Kenya. It was formed in 1997 as a fully owned subsidiary of Telkom Kenya. In May 2000, Vodafone Group Plc (LON:VOD) of the UK acquired a 40 percent stake and management responsibility for the company. Safaricom is the owner and operator of M-Pesa (pesa is Swahili for money) – the most common form of payment in the country. Ordinary Kenyans who do not have bank accounts deposit cash at a local Safaricom office. They can then use this to make payments at a huge range of outlets from their mobile phones. It seems that even Maasai warriors herding goats in remote locations have mobile phones.

The Chinese connection

When the Kenyans decided to build a completely new railway line connecting the new container port at Mombasa on the Indian Ocean to the capital, Nairobi, some 500 kilometres away, they gave the contract to a Chinese consortium – even though their bid was, so it is said, much more expensive than the alternatives. Nairobi was founded as recently as 1899 as the key stop on the Mombasa-Uganda Railway, built by the British. That narrow gauge line was still in service until recently but was unequal to the task of transporting large volumes of modern containers up-country.

The spanking new line – a single track – runs literally above the old British railway on a raised causeway and is of a much broader gauge. It required hundreds of new bridges. The new terminus in Nairobi is itself a massive freight hub. Chinese construction workers are currently working on the new extension of the line from Nairobi to Lake Victoria which runs across the Rift Valley.


I am told that the infatuation of Kenya’s current ruling elite with China has caused some tensions amongst indigenous communities. It is said that the Chinese construction workers are convicts who have been paroled on condition that they come to Africa to work on Chinese-led infrastructure projects. Some have actually gone native and can be seen selling maize by the side of the Nairobi-Mombasa highway – much to the chagrin of the locals.

Kenya’s policy of looking east has brought unintended consequences. Chinese banks have been generously advancing loans to Kenyan businesses without normally stringent lending criteria. This is causing concern in some quarters.

According to Prof Brahma Chellaney of New Delhi-based Centre for Policy Research, “China uses sovereign debt to bend other states to its will… and because China chooses its projects according to long-term strategic value, they may yield short-term returns that are insufficient for countries to repay their debt.”[iv] You can dismiss that as an Indian view of China’s thrust into Africa, but I am only observing what is being stated in Kenya’s vibrant English-language media.

Kenya’s debt stands at 56.4 percent of GDP. Most of that is owed to Chinese institutions. The fiscal prudence of former President Mwai Kibaki’s administration seems to have been abandoned. Mr Kibaki, President of Kenya from December 2002 to April 2013, when he was replaced by the current incumbent, Uhuru Kenyatta (the son of Kenya’s first President) was, despite his humble origins, a highly competent economist. He served both in academia and as Minister of Finance before assuming the top role. Under his stewardship Kenya’s economy came out of the doldrums. The previously quasi-socialist tenets of economic policy since independence were relaxed and more pro-business policies were adopted. (This is now a very familiar story in emerging markets – just look at how India’s economic policy has evolved since 1947).

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If President Kibaki is now remembered as a technocrat, he is also noted as the only one of Kenya’s four Presidents to date who did not put his face on banknotes.

I have been so taken by this beautiful country and its natural and animal wonders that I have decided to stay a week or so longer. That gives me more time to learn about Kenya’s Vision 2030. Why rush back to the cold and damp?

* Hello! In Swahili. Correctly, the Swahili language, which is Kenya’s official language along with English, is Kiswahili. There are of course, 50 or so tribal languages which are currently spoken many of which have numerous dialects.

[ii] See: https://tradingeconomics.com/kenya/gdp-growth-annual

[iii] See: https://www.african-markets.com/en/stock-markets/nse/listed-companies

[iv] See: https://www.standardmedia.co.ke/article/2001264801/pride-and-prejudice-will-be-downfall-of-kenya