NAIROBI: Kenya cut its economic growth forecast for 2012 yesterday saying high interest rates, soaring fuel costs and lower investment ahead of a general election would slow expansion in East Africa's biggest economy.
Kenya's 2012 Economic Survey gave a 3.5-4.5 percent range for growth, downgrading the growth forecast from a 5.2 percent projection in a budget policy statement released in April.
"The high interest rates, that's a major issue. And of course as we move towards elections, most of the investors shy away, so this is likely to effect, and of course oil prices," Planning Minister Wycliffe Oparanya said.
Oparanya said in addition to these factors, the economy would be hurt by erratic weather conditions, including both drought and too much rainfall, during the year.
Economic growth in 2011 fell to 4.4 percent from 5.8 percent in 2010, he said.
Last year, a volatile shilling slid 25 percent to a record low of 107 on Oct. 11, but has since recovered, after the central bank sharply raised its key lending rate to 18 percent in December from 7 percent in September.
"The ... growth forecast for 2012 indicates a willingness from the government's side to tolerate a lower economic growth rate as a price to bring inflation back into single digits, but words will have to be followed by action here," Mark Bohlund, senior economist for sub-Saharan Africa at IHS Global Insight.
"While monetary tightening should contribute to bringing down inflation, a higher degree of government spending going to infrastructure investment rather than the recurrent expenditure envelope would also be beneficial over the medium term."
The International Monetary Fund said in its latest forecasts for sub-Saharan Africa that Kenya's economy is expected to grow by 5.2 percent in 2012, and 5.7 percent in 2013.
Oparanya said high oil prices and interest rates, that could lead to defaults on loans, may persist this year, and coupled with slowing investments, would lead to lower the 2012 growth.
At a separate function, Finance Minister Robins on Githae said slowing food prices would counterbalance fuel price rises.
"Fuel prices have gone up again and we are hoping that when we get the inflation figures for this month that it will be overly compensated by a drop in food prices ... particularly cabbages and short-term cereals," he told reporters.
Inflation stood at 13 percent in April.
Kenya's economy largely relies on agriculture, which slowed to a 2.4 percent growth last year from 6.4 percent in 2010, on account of erratic weather and the high cost of fertilizer.
Tourism continued its recovery with earnings up 33 percent to 98 billion shillings ($1.17 billion) versus 2010.
The sector is however expected to slow down on the euro zone crisis, travel alerts from foreign governments, and the elections due in March next year.
Over the past three decades, Kenya has had its lowest growth periods in or just after election years, says the World Bank.
Oparanya said he expected increased spending by the government on elections and on a new administrative structure under a new constitution would also drain resources.
"The government has the appetite to take more because of the commitments of implementation of the new constitution and the elections," Oparanya said.
Meanwhile, Kenya plans to start negotiations on a sovereign bond after agreeing to borrow $600 million in a debut two-year syndicate loan from foreign creditors at an interest rate of 4.75 percent above Libor, the finance minister said yesterday.
The loan, which replaced a planned Eurobond and is meant to substitute nearly half of a 119 billion shillings local borrowing target for the 2011/12 (July-June) fiscal year, would go toward ongoing infrastructure projects, officials said.
Treasury said in April it had postponed the Eurobond to the 2013/14 fiscal year, and analyst said the success of the syndicate loan was a good pointer at the ability of the biggest economy in East Africa to access the global financial markets.
Kenya is rated B+ by Standard & Poor's and Fitch.
"Now we can start negotiating on the sovereign bond for the next fiscal year ... because the intention was to retire the expensive domestic debt," Finance Minister Robinson Githae said at the loan signing.
"The syndicate loan is competitively priced at an interest rate of 4.75 percent per annum over Libor, and is also competitively priced when compared with other similar African debt financing."
Kenya decided to borrow internationally late last year after yields on government securities soared to highs of 20 percent in December from as low as 2 percent in January.
This made it costly to borrow domestically, especially to fund the government's infrastructure development plans which are core to its economic growth aims.
Yields have since edged down in oversubscribed auctions this year as inflation dropped for five straight month to 13.1 percent in April.
"The market had evidently nosed out the imminence of the loan and this is evidenced in the sharp fall in government yields," said Aly Khan Satchu, an independent analyst.
The arrangement of the loan was done by a consortium of foreign banks including Citibank London, Standard Chartered Bank and South Africa's Standard Bank, who also fully underwrote the loan facility.
"We are particularly proud to have effectively delivered this financing solution for the sovereign during what has been a challenging period in the markets," David McCaig, Global Head of Debt Products at Standard Bank, said.
Kenya cuts 2012 growth forecast on high lending rates
