InVhestia hosts a cocktail event for clients every year. This event celebrates the year that was while providing a platform for our clients and partners to hear from experts on what to expect from the year to come. Last year’s the cocktail was held at Park Inn by Radisson on the 5th of December. Additional to hearing from experts, the evening serves as an opportunity for our clients and partners to; learn more about InVhestia’s various offerings which include- financial modelling consulting and training, project and corporate finance advisory, and capital raising; witness the awarding of our financial modelling competition finalists; and to network with each other.
The theme for the night was “A Touch of African’ and the effort on the part of the invited guests cannot go unmentioned. There was a flair of colorful ankara prints and beautiful African accessories all around the room.
The highlight of the night was the keynote address by renown Economist Dr. David Ndii, on “The State of the Kenyan Economy & How it Affects Businesses.” In this blog we would like to highlight some of the key messages from his key note address.
- The country has recorded an economic growth over the past couple of years of between 5% and 6%. The feeling on the ground is different as citizens claim not to be feeling this growth, well-articulated by the Kenyan phrase “kwa ground vitu ni different” (On the ground things are different). Additional to this a number of companies have issued profit warning not to mention laying off staff. Dr Ndii attributes this disconnect between the economic development and the reality on the ground, to two main factors i.e. bad economics and bad politics.
- Elections have a negative impact on GDP growth, whenever Kenya has had an election there has been a notable reduction in GPD and in the overall over a 30-year period the impact is a 40% reduction on GDP performance. When comparing the GDP growth rates and Average Annual Income per capita of East African countries, there is a visible trend of economic decline during election periods. This is as a result of the expectation of unrest that comes with election which forces investors to apply a ‘wait-and-see’ strategy which in turn contributes to decline in the economic growth.
- For bad economics in the country, we look at the contributors of economic growth, which are human capital, physical capital, factor productivity and employment as shown in the figure below. Dr Ndii explains that human and physical capital contribute to factor productivity. When money is borrowed for the economy to fund infrastructure projects (physical capital), and in turn these projects are not productive, this results in reduced productivity leading to reduced tax collections which means that the economy may not be in a position to pay back the loans which may result to economic distress. Kenya is currently going through this, loans borrowed for mega infrastructure projects e.g the the SGR, Dams etc have not resulted to productivity increase and the impact can be partly seen in the Kenya Revenue Authority missing its tax collection targets.
- The above borrowing has not only been in the external markets but in local markets too. This has resulted in the Government crowding out the private investors from the local debt market. This means that the private sector is not able to attract as much credit from the local debt market, which reduces its growth and contribution to the economy leading to a reduction in the tax contributions as explained above. The resulting deficit needs more borrowing to be filled and leads to a vicious cycle where the Government needs to borrow more to fill the deficit which increases the debt service leading to less allocation to development in the budget, reducing growth and contribution of the private sector, and the cycle continues. Left uncorrected this may lead to financial distress in the economy.
The implications of this state of affairs on the economy are as follows;
- Increased taxation with aim of offsetting the large debt service requirements
- Reduction in the spending power of the consumers due to increase in cost of living
- “Wait-and-see” approach by private investors, especially for short term investments that reduces the economic growth due to private investing
- An Economy that is in a fragile state can get to distress at any time. Distress would have any of the various dire implications including a weaker Kenya Shilling, aggressive taxation, reduced expenditure by the Government on essential services to name a few.
According to the Economist, to reduce adverse effects of the current economic state of the country, some mitigations can be employed. He suggests that for the recovery to take place, the Government should reduce their debt appetite; especially for local debt. The Governments should release credit to the private sectors, as they are the major economic drivers, it should also create investor confidence by cutting their expenditure and finding cheaper foreign loans. This is much easier said than done and would need political will to tighten the belt not only for the Government but for Kenyan’s too.
As local businesses in the country, there are measures that can be taken into account, in preparations for the economic wave. These include;
- Making long term investments as opposed to short term ones. This will reduce the risk of loss that make come with any short-term changes in the economy
- Companies can think regionally and not restrict operations to inside the country alone. This will be a way to diversify operations as well as tap into new markets
- Rationalize costs. As is the situation for any time of difficulty companies have to learn to reduce costs
- Create a buffer. Always make sure that you have a cushion for a rainy day
In closing, Dr Ndii reiterated the power of the private sector has to make change in the country. He suggests that the private sector should converge and tap into their power to be able to influence policy in the country.
For more details on this discussion visit our official YouTube page and watch the video on Dr Ndii’s address here.
This blog was written by Jihan Haji, a financial analyst at InVhestia