Bridging the knowledge gap between perception & reality of the economic potential of Kenya

JUNE 2015

House of Major Limited (HoM) is a strategy and communications firm based in Nairobi, Kenya with a core competence on doing business in Kenya.The scope of HoM’s capacity cuts across collabo-rative and integrated disciplines including media relations, regulatory advisory, organizational mod-elling & re-modelling, market research, reputation management, supply chain and market entry strat-egies.The firm is fluent in doing business in Kenya and through its growing links to the wider African con-tinent, HoM remains fully abreast with continental decisions and their implications to the Kenyan market.HoM has consulted and managed clients across industries and has direct links to critical institutions such as Kenya Private Sector Alliance (KEPSA), Kenya Chamber of Commerce, Investment Kenya and various key ministries and parastatals to ensure the valued integrity of our research and recommendations are appropriately advocated.

Regardless of which growth indicator and the source of the data, the consistent outcome high-lights the continued economic growth of Kenya and its growing influence on the continent. This document works to highlight the significant opportunities in Kenya for economic investment to both local and foreign investors. The 2015 Attractiveness Survey by Ernst & Young highlights a concerning gap which would be inexcusable in other market entry assessments. Out of 10 regions, the survey found that those investors already established in Africa, identified Africa as the most attractive investment destination in the world. Conversely, those respondents not estab-lished on the continent, ranked Africa as the second worst destination for investment. This polarising level of optimism is unfortunately not a surprising outcome but one that needs addressing for the continued development of the continent. This paper will aim to fill the gap specifically for Kenya to local, continental investors and beyond.

About House of Major Purpose of the Publication

Structure & Content

Kenya’s Growth Story

Skilled Workforce & the Technology Sector

Kenya Government’s Role

Foreign Direct Investment & the US Dollar

Nairobi Securities Exchange Performance

Final Word

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Kenya Is Open For Business

Kenya’s Growth Story

Immediately known for its long distance athletes and tourism, Kenya has over the past 2 decades grown into one of Africa’s leading economic hubs and strategic access for organisation’s looking to grow in the region.Kenya’s economic significance coincides with the turn of the century. According to the IMF April 2015 World Economic Data, Gross Domestic Product (GDP) from 2000 to 2014 has grown over 330% since with continued year on year forecasted growth above any of the East African Communi-ty member states and the traditional BRICS economies at 11% per annum. Though most of the consensus locally projects the trend at >7% per annum the undoubted factor is the significant growth of the Kenyan economy.

This expansion in wealth in Kenya has seen the recalculated Gross National Income (GNI) of $1,160 catapulting Kenya into the definition of a Middle-Income economy and Africa’s 8th largest economy. Kenya’s poverty levels are reducing from the latest World Bank report; currently estimated at between 34% and 42% from a high of 47% in 2005.

The pace at which Kenya is reducing poverty, especially in its highly concentrated rural areas, needs to increase by a further percentage point per annum if Kenya is to curtail poverty in the country by 2030, according to the study. It is however encouraging to investors that there is a signifi-cant growth of the middle income population in Kenya whose disposable income have also increased consistent with the GDP rate.Kenya’s population growth rate is one of the fastest in the world and forecasted to continue above comparative averages.

The consensus is the government of Kenya addressed the population challenges later than it should have (early 2000’s). It nonetheless has accelerated infrastructure invest-ments to curb the strain of the population explosion. In-spite of the infrastructural delays, Kenya’s GDP per Capita is forecasted to continue to grow and firmly establish Kenya as a Middle Income economy before 2020.

Increasing urbanisation rate in Kenya has supported the growth of the middle income groups though the govern-ment is still faced with the challenges of ensuring inclusive growth of the economy.Kenya has challenges to continue to reduce poverty levels at a faster rate and contain the concerns with urbanisation to further enhance the growth of the country and region.

Skilled Workforce & the Technology Sector

To exploit the economic growth investors’ opportunities exist in Fast Moving Consumer Goods (FMCG), real estate and the financial sector. Kenya has been held as the bench-mark globally over the use of mobile money transfer. Indica-tors state that Kenya’s mobile access & utilisation has grown considerably to 80 per 100 inhabitants but mobile money movements such as MPesa, has transformed the pace and accessibility of Kenya’s capital. This has given birth to its own mobile money transfer ecosystem creating employment for agents amongst others as over 26 million transactions are undertaken in a 3 month period according to the Commu-nications Authority of Kenya.

Kenya’s population with access to internet stands at 64.3 per 100 inhabitants though a significant population, estimat-ed at 70% of internet users, utilise their mobile phones to access the internet. The growth and importance of the mobile phones and accessibility to high speed internet in just over 15 years, has seen Kenya’s technology sector surface to be dubbed “Savannah Valley” with key technology MNCs, including Google and Cisco Systems, basing their regional headquarters in Kenya.

Kenya’s technology savvy population serves as a key innova-tive resource that can tap into the growing population of the region with solutions catered to the masses.

Kenya’s population demographic is one of the most oppor-tune for investors. The young population and the reducing dependent population means Kenya will continue to have one of the most active population ratios over the next 30 years. 60% of the population is under the age of 24 with a near equal split of gender.

The country still has challenges to rural education accessi-bility, with culture & poverty playing critical inhibiting factors.

The country still has challenges to rural education accessi-bility, with culture & poverty playing critical inhibiting factors. However, at the turn of the century, education was made free to all in primary levels which has enticed a growing primary education rate that improves the overall skill levels. The World Economic Forum report on Kenya ranks the country’s quality of education system a respectable 30th out of 144 nations studied. Moreover, Kenya consistently ranks in the top 3 in Africa over the volume of students who pursue higher education in Australia, UK and the USA.

Additionally, increasing government investment in health-care and economic growth, should appeal to the investment community over Kenya’s productivity potential. Further key opportunities for investors are in the outsourced service industry. Kenya’s educated young workforce, English fluency, geographic time neutral zone (+8 hours from Summer EST & -5 hours from Singapore, Beijing) and regional leading fibre optic penetration serving the EAC, Kenya is ripe to be an outsourcing hub.

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Kenya Government’s Role

Kenya’s political maturity was visible in the peaceful 2013 General Elections where there were the country’s firsts in live political debates, legally contested and decided presidential decisions and since then, a transition to a 47 county as part of the country’s ambitious decentralisation of governance. A key expansion for investors in the government setup is the Ministry of Industrialisation & Enterprise Development whose one of 6 mandates is the Development of Micro, Small and Medium Enterprises and Buy Kenya policy. With the growth of Kenya and forecasted opportu-nities, investment in Kenya has never been more enticing. The maturing political landscape, regional influence, infrastructural development and burgeoning educated population, invest-ments in the agricultural, manufacturing, services and technological industry is ripe for both exports & imports.

The increasing accountabilities of the Ministries are in place though Kenya still ranks a mediocre 16, on the World Bank Group’s Ease of Doing Business report from the 47 Sub Saharan African countries in the report. However, the government has taken proactive steps in tandem with the World Bank and the Private Sector to significantly improve the ease of doing business in Kenya. Led by the Ministry of Industrialisation & Enterprise Development, the Government of Kenya has in July 2015 announced the significant changes already made to improve the rank-ing with a target of a Top 50 Global Ranking by 2020. Key changes in place are through intensi-fied technology adoption and faster processing & execution in Kenya Power, the Kenya Trade Network, Ministry of Lands and Nairobi City County with more scheduled. Kenya’s ranking in the next Ease of Doing Business ranking will undoubtedly see a significant leap.

The government is further conscious of the need for data and information. There have been significant steps taken and visible progress in the information accessibility and credibility off the Kenyan ministries websites. The data and analysis held therein are current with a key aim to drive knowledge regards to the potential of the Kenyan market.

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Foreign Direct Investment & the US Dollar

According to Ernst & Young, since 2007, Foreign Direct Invest-ment (FDI) projects in East Africa have grown at a Compounded Annual Growth Rate (CAGR) of 19.9%, the strongest in Africa. FDI in Kenya is trending with the global pace though increasing interest in the region over the raw materials potential, especially in Oil & Gas, will continue to drive investments in Kenya to exploit both the competitive skilled workforce and further enhance inevitable local content requirements.In 2014, FDI to Kenya doubled from 2013 according to the African Development Bank (AfdB), as investment continues to defy security concerns from Somalia.

In 2009, China surpassed the US as Africa’s key trading partner and in 2014, Kenya tied for second attracting 9.4% of the Chinese investment into the continent after South Africa. Kenya continues to diversify its FDI sources with Middle East interests compound-ing the traditional European and intra-Africa investment while initiatives as part of Kenya’s Vision 2030, continue to encourage & attract investors.The pace at which Kenya is reducing poverty, especially in its highly concentrated rural areas, needs to increase by a further percent-age point per annum if Kenya is to curtail poverty in the country by 2030, according to the study.

It is however encouraging to investors that there is a significant growth of the middle income population in Kenya whose dispos-able income have also increased consistent with the GDP rate.Kenya’s population growth rate is one of the fastest in the world and forecasted to continue above comparative averages.

Kenya still has challenges with corruption and the ongoing securi-ty apprehensions which it is collaborating in tandem with western intelligence to suppress. These are likely the main viewpoints in front of investors not present on the continent, while those work-ing in Africa understand that in established markets, such as Ghana, Nigeria, South Africa, Morocco, Tanzania, Rwanda and Kenya, those are the exceptions than the norm and should not derail the significant opportunity to create value from the next market frontier. In 2015, FDI to Africa is expected to grow by 12% ($55 billion). The development of the Tripartite Free Trade Zone that would link 26 African countries carrying a combined $1.2 Trillion GDP announced June 2015, will only further improve the ease of doing business on the continent, accessibility to more than 600 million inhabitants and stimulate intra-Africa trade. Diaspora are also increasing the level of remittances back to Kenya. The Central Bank of Kenya identified that remittances from the diaspora was at a record high $1.4 billion in 2014 and though

there is a proportion focused on family up keeping, investment by the diaspora into Kenya has grown significantly and encouraged further by government–friendly policies. Kenyan Embassies are also playing a significant role in engaging with Kenyans abroad.

The strengthening US Dollar against most of the major currencies has generally received mixed views across the globe. This should be seen as a key catalyst for investment in Kenya factoring the increasingly skilled labour. The US Dollar has appreciated against the Kenya Shilling, not due to a weakening Kenyan economy but rather a consequence of improving US trade balance driven mainly by the growing US energy supply. As such, this should entice investment and be seen as an opportunity to both invest in the market and also as an export hub to the continent. The Diaspora community should also take this as opportunity to heighten investment back to Kenya while the cost of exploring Kenya’s famed Tourism industry should be lower.

Nairobi Securities Exchange Performance

The Nairobi Securities Exchange (NSE) is one of Africa’s most active & best performing exchanges. Commenced in 1954 as a Stock Exchange, it changed its name to the Secu-rities Exchange in July 2011 emphasising on its financial maturity and delving into a full service securities exchange supporting trading, clearing, settlement of equities, debt, derivatives and other associated instruments. In 2014, the NSE joined Johannesburg Stock Exchange in being the only exchanges in Africa that are self-listed.In 2014, East African markets were the top performing in Sub Saharan African markets while only Kenya, Uganda, Tanzania and Malawi had positive dollar-term returns in sub-Saharan Africa. This challenge was mainly driven by the stronger US Dollar against most currencies. Relative to other security exchanges in Sub Saharan Africa, the NSE’s performance over a medium-long term continues to outperform its peers and can be benchmarked globally.

From 31st December 2009 to 29th May 2015, the listed companies have had an average return of 135% to its inves-tors with an average shares traded of 675,332 per listing over the duration. 53% of the firms had positive returns to their investors relative to the 32% that had a negative percentage gain over the same period. The continued strong performance, maturity and independence of the NSE is a key attraction for investors.

Final Word

Kenya’s economic potential is significant and the necessary infrastructures required for growth are in development or already in place. Security is a factor which the government is firmly tackling and the state’s strategy on the topic needs continuous monitoring.

The political climate is increasingly pro–business and the economy is visibly vibrant. Chal-lenges with poverty levels are apparent but the growing educated middle class is generat-ing optimism and stimulating the economy. The country’s growth trends are positive im-material of which indicator is utilised; the public & private sectors’ are active in seeking the opportunities borne from Kenya’s Vision 2030 and positioning themselves to profitably re-alise the country’s immense potential.

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