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MARKET
APRIL 2015
KENYA IN 2015:
INVESTOR DARLING WITH SERIOUS POLITICAL PROBLEMS
Kenya in particular and East
Africa as a whole are the real
winners emerging from global
market volatility, and 2015 will
be a prosperous year for the
region, says Anna Rosenberg,
Head of Frontier Strategy
Group's Sub-Saharan Africa
research practice
T
his (2015) will not be an easy year
ple, with $402bn for the UAE) lifted Nigeria
for many countries around the
onto the international stage. Now, Nigeria
world. Business leaders are facing
was in the headlines, and executives were
tough decisions. The large markets that ac-
ready to commit to a larger presence there.
count for the majority of their sales experi-
First, they would expand their footprint in
ence considerable volatility: Europe may fall
Nigeria, then West Africa. The rest of Africa
back into recession, China’s rapid expansion
would follow.
is slowing, Russia’s economy could contract
by 5%, the Middle East faces an Islamist
SHIFTING PRIORITIES
threat, and Brazil is in a state of economic
But then Ebola hit the region. The disease
crisis.
severely affected only three small West Afri-
Luckily, there are the markets of Sub-Saha-
can countries, and the epidemic’s economic
ran Africa, the second fastest-growing region
ramifications for the rest of West Africa were
in the world after developing Asia. There
initially very small. Sierra Leone, Liberia,
are one billion African consumers, who are
and Guinea accounted for only 2.0% of West
growing wealthier and demanding more and
Africa’s combined nominal GDP of $700bn in
better products. African governments are
2014. Other than mining companies, few big
also on a spending spree, rapidly expanding
foreign businesses were present in those
their road, rail, and port infrastructures.
countries.
In early 2014, many Western multinationals
Media coverage of the epidemic, however,
across sectors were drafting plans to estab-
resuscitated a narrative of Africa as a dark
lish operations in West, East, and Southern
continent mired in political violence, poverty,
Africa to take advantage of the region’s
and contagious disease. Headlines read
opportunities. Nigeria—the giant of Africa—
“West Africa” with no differentiation among
often received top priority in MNCs’ expan-
countries, geographical distances were
sion plans. The rebasing of the country’s GDP,
ignored, and international flights to countries
which increased the size of its economy by
with no reported Ebola cases were cancelled.
89% to $580bn in 2014 (compared, for exam-
Tourist numbers fell in countries as far away
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MARKET
APRIL 2015
from the crisis as South Africa.
Western companies, concerned about
East African Community. For businesses, this means that East Africa
this media coverage, tried to exercise
is a relatively integrated region, allowing companies to reach other
extreme caution. As a result, travel
markets easily from Kenya, thereby creating economies of scale that
plans were put on hold, which slowed
offer access to a combined population of about 237 million*. In West
investment; and expansion plans for
Africa, by contrast, a single regional strategy is extremely difficult to
West Africa were postponed until the
implement because of substantial differences among markets, mean-
Ebola scare subsided.
ing that each market must be tackled in isolation.
Then, back in July 2014, oil and
ANNA ROSENBERG
its inclusion in one of the most effective African regional bodies, the
Kenya’s neighbors are in themselves also very attractive to foreign
commodity prices began to tumble,
businesses. Just recently, Uganda and Tanzania also rebased their
adding insult to injury to West Africa’s
GDPs, increasing the size of their economies by 13% and 32%, re-
commodity exporters: currencies
spectively. While Uganda, frequently called ‘Kenya’s younger sibling,”
depreciated, inflation accelerated, and
holds large oil and gas resources, and benefits from a wealthy middle
economic growth slowed in the region’s
class, most of the growth for fast-moving consumer goods companies
main markets, with political challenges making matters worse. Execu-
comes from populous Tanzania, the region’s “sleeping giant,” which is
tives felt vindicated in their decisions to slow expansion plans for the
just now beginning to become a real free market economy.
Frontier Strategy Group
region.
Businesses come to Kenya not just to sell into that country, but into
Fast forward to February 2015: At an FSG business breakfast in
South Africa that brought together 20 of our clients, leading executives of multinational companies confirmed that
their West Africa strategies are on hold until Nigeria’s election outcome is settled, and its implications for business are clear. Executives reiterated
that their primary focus was now on the Eastern
part of the continent, and particularly Kenya. Indeed, our Frontier Market Sentiment Index, released
the region as a whole. Kenya’s political influence in East Africa, its
relatively sophisticated infrastructure and its strong talent pool are
“What makes Kenya attractive is its strategic
geographic position and its inclusion in one of
the most effective African regional bodies, the
East African Community
- Anna Rosenberg
in conjunction with the Wall Street Journal, confirms
that executive sentiment is now directed toward East Africa. Between
attracting many businesses to establish hubs in Nairobi. In fact, some
Q2 and Q3 2014, Kenya rose from 5th to 2nd place to become the
companies, such as General Electric, have located their Africa head-
world’s second most-watched frontier market, after Nigeria.
quarters in the Kenyan capital.
KENYA’S YEAR
DOMESTIC REASONS
In a nutshell, Kenya in particular and East Africa as a whole are the
It is not only external factors that make Kenya an attractive invest-
real winners emerging from global market volatility, and 2015 will be a
ment destination. Private consumption in the country has grown by
prosperous year for the region. Since October, we have been revising
an average of 11.7% annually during the last decade, and it will con-
our GDP growth forecasts for Kenya upward. The IMF finally followed
tinue to expand in 2015 as the financial services sector expands and
suit this March, revising 2015 GDP projections upward, from 4.7% to
borrowing costs drop. The country also has a strong domestic private
6.0% YOY. We expect GDP growth in Kenya to reach 6.4% YOY. This is
sector, with Kenyan firms expanding to neighboring markets.
an important figure, because Kenya is now also growing from a larger
Kenya’s government is keen to fuel economic activity and is busy
base. Following in Nigeria’s footsteps, the country also rebased its
putting much-needed infrastructure in place. Road, railway, and port
GDP last year, increasing the size of its economy by 25.3% on paper,
expansion projects are underway, linking Kenya’s rural areas. Kenya
with nominal GDP expected to rise to $67bn. Compared to Nigeria, of
is also in the process of shifting power from the central government
course, this is still tiny. But Kenya cannot be seen in isolation.
in Nairobi to the country’s 47 counties. The idea is that local governors will directly compete to promote growth and development in
REGIONAL INFLUENCE
their states, which should fuel wiser public spending and the com-
What makes Kenya attractive is its strategic geographic position and
pletion of critical projects. In the long term, this approach will lead
*Our definition of East Africa includes Kenya, Uganda, Tanzania, Burundi, Rwanda, South Sudan, and the eastern part of the Congo DRC, because our research indicates
that those countries can easily be managed out of Kenya. Accordingly, this figure includes the above-mentioned countries. While only the eastern part of the DRC is
included in our definition of East Africa, economic indicators used here reflect data for the entire country. Please note that the East African Community includes only
Kenya, Uganda, Rwanda, Burundi, and Tanzania.
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MARKET
APRIL 2015
to better-connected, better-educated, and healthier
consumers, and a more sophisticated business infrastructure outside of Nairobi.
COMPETITION WILL ONLY HEAT UP
“As quickly as Kenya has risen this year, it
could also quickly fall from favor should local
and global dynamics change
- Anna Rosenberg
Businesses from around the world, not only from Western countries, but also from China, India, and Turkey,
the makeup of the economy and fueling economic diversification
are busy expanding their footprint in Kenya. Competition is already
if the government manages to avoid the “Dutch disease” that has
fierce, especially for companies selling to other businesses and into
plagued so many oil-exporting countries, and instead ensures that
numerous government projects.
more wealth is passed down to the people.
The consumer market, however, is the most hotly contested. Nairobi’s supermarket shelves are crowded with more products than can
CHALLENGES
be found in a supermarket in London, all vying for a share of Kenya’s
However, Kenya also faces some serious political and security
growing consumer spending. However, this large and varied product
challenges that could derail the country from its positive trajectory.
offering is not sustainable, and a price war between brands is likely.
Kenya’s rapid growth has not resulted in an adequate reduction in
This will make groceries and other small consumer items cheaper for
poverty levels. The rich are growing richer, while the poor are becom-
Kenyans, allowing them to spend more on bigger-ticket items.
ing increasingly frustrated.
More competition is also good for the country’s business environ-
Rapid urbanization has caused housing prices in Nairobi to soar
ment, as companies will eventually have to offer the best service at
to New York City-like levels, leaving the city’s residents increasingly
the most competitive price.
dissatisfied with their deteriorating quality of life. Industrialization
hasn’t picked up fast enough, which means that there is no sector
OIL AND GAS WILL BE A GAME CHANGER
that allows the many unskilled workers to find formal employment.
Although Kenya has discovered oil and gas deposits, it is lucky
Coupled with rising terrorism, this is creating serious security chal-
enough not to be an oil exporter yet, given low oil prices. In fact,
lenges.
low oil prices, which have led to low fuel prices for consumers at the
Radical Islamist group Al-Shabaab has been stepping up terrorist
pump, have benefited Kenya. The drop in fuel prices has freed up con-
activity in the country, especially along the coast. The fierce response
sumer spending power and extra government revenues, and is partly
of Kenya’s government forces to security challenges exacerbates
responsible for Kenya’s high growth rates.
the problem of rising terrorism, as certain groups are increasingly
Despite current global market dynamics, the country is already
benefiting from investment into exploration activity. Once natural
marginalized, typically in the mainly Muslim coastal areas. Every
time a terror attack occurs in the country, tourist numbers tumble,
causing the shutdown of hotels and restaurants, and creating more
unemployment. This provides fertile recruitment ground for radical
terrorists.
Kenya is also susceptible to tribal tensions, and the country’s political leadership frequently exploits these tensions for political gain,
contributing to volatility that could intensify rapidly.
While Kenya has many opportunities, and will be one of Africa’s
most attractive markets in 2015, investors must not underestimate
these risks. Although Kenya’s challenges should not deter investors
altogether, they must still be taken into consideration when investing
in the market.
As quickly as Kenya has risen this year, it could also quickly fall from
favor should local and global dynamics change. In 2007 – 2008, Kenya,
assumed at the time to be one of the region’s more stable democracies, was hit by post-election violence in which several hundred
Drilling for oil in Kenya
people died. Investors, surprised by the country’s rapidly deteriorating security and business environment, exited the market. The un-
resources come online in the coming years, the government will earn
derlying tensions and political dynamics that led to the violence have
greater revenues, allowing it to spend more on development projects.
to date not been addressed. Should Kenya once again experience
Depending on the amount of natural resources found, oil and gas are
likely to considerably strengthen Kenya’s financial muscle, changing
internal disruptions, the country’s stability will depend mainly on the
response of its political leadership.
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