Moody s B1 / S&P B+ / Fitch B+ 1 Economy: Agriculture 36%, Industry 17%, Services 47%

Transcription

1 Kenya Summary Moody s B1 / S&P B+ / Fitch B+ 1 Economy: Agriculture 36%, Industry 17%, Services 47% Kenya has one of the largest, most diverse economies in East Africa with established banking and tourism sectors and a nascent energy sector. Kenya has a reputation for entrepreneurship and attracting multinational companies as a top destination for foreign direct investment (FDI) in Africa. China is becoming an increasingly important commercial partner and supporter. The oil sector has the potential to have a positive long-term fiscal, external, and economic impact. Kenya s main short-term challenge is to reduce its fiscal deficit and debt ratios. Kenya has a precautionary arrangement with the International Monetary Fund (IMF) which the government intends to renew in Another key challenge stems from instability in the region which negatively affects economic growth. In 2017, Kenya had a contested presidential election that was challenged in court but eventually resulted in incumbent President Uhuru Kenyatta being re-elected. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 1,319 1,431 1,448 1,552 1,678 1,790 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of Imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Haver Analytics, IMF 599

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB B+ BB- BB- B+ B B B B Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Kenya 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 600

3 Kenya Strengths Development Kenya is the most industrialized country in East Africa and among the most developed in Sub-Saharan Africa. It has some of the best infrastructure, friendly business conditions, and a well-trained labor force. Not surprisingly, Kenya is among the leading African countries in FDI inflows. In fact, among Greenfield FDI projects in Sub-Saharan Africa, Kenya ranked second after South Africa in Kenya is also a business hub of East Africa and several large companies have their regional headquarters in Kenya such as IBM, Google, Pfizer, and PwC among others 3. Dynamic Economy Kenya has one of the most dynamic and diverse economies in the region with established banking and tourism sectors and a nascent energy sector. Kenya enjoyed strong growth following peaceful presidential election in 2013 with average growth of 5.6% from Despite electoral uncertainty in 2017, the economy is expected to growth by 5% 4 and average 6% in The government has ambitious infrastructure plans to sustain high growth, including the recently begun construction of a new port in Mombasa, which will increase shipping capacity by 50%. 6 Other plans include an airport expansion and improvements to the domestic railway system. The government s ultimate goal is to transform Kenya to a middleincome industrialized country, and a regional transportation and financial hub by Tourism Kenya has a strong tourism sector as it is a top destination for safaris, and Nairobi is a regional airport hub. The tourist infrastructure is among the best in the region, and numerous hotels have recently been built targeting both business travelers and tourists. Tourism directly accounted for 3.7% of 2016 GDP and is expected to rise to 6% in the next decade. Similarly, tourism currently accounts for 3.4% of total employment and is expected to increase to 8.9% by However, tourism in Kenya has been hurt by terrorist attacks by the Somali rebel group, Al-Shabaab, and political uncertainty following the contested presidential election in leading to a 12.6% decline in the number of tourists versus Nascent Oil Sector Kenya s oil sector shows signs of potential growth as significant discoveries have been made; however, they have not yet been declared commercially viable. Oil production has the potential to have a significant positive long-term fiscal, external, and economic impact. From a fiscal standpoint, it could result in higher tax and royalty revenue. On the external front, the country could reduce or eliminate its reliance on energy imports and potentially become an oil exporter. Lastly, from an economic standpoint, oil has the potential to increase FDI and increase wealth levels. However, even if Kenya s oil projects are commercially viable, it will be several years until they reach full production. Kenya expects to produce 2,000 barrels per day (bpd) as early as June The UK company Tullow is the main player in the country, and it has discovered an estimated 750 million barrels of oil. 11 The company estimates that Kenya has the potential to export at least 100,000 barrels per day, which is more than its current consumption of 81,000 bpd. Kenya had planned to build an oil pipeline from Uganda, but Uganda opted to route the pipeline through Tanzania, so Kenya will instead build a shorter pipeline from Lokichar to the Lamu port 12 at a cost of $2.1 billion, which is expected to be completed by

4 Lazard Emerging Markets Debt The China Factor China is becoming an important trade partner, helping to reduce dependency on Europe and the United States. Total trade with China, which is mostly imports, has steadily increased, and since 2015 China has surpassed both India and the United Arab Emirates as the largest source of imports. 14 Meanwhile, the Chinese are investing large sums into the construction, manufacturing, and communication sectors. China s investment for infrastructure projects in Kenya is estimated at US$6.5 billion, as of August 2016, 15 accounting for about half of all infrastructure projects. 16 IMF Program Continuity The government continues to make progress on an IMF program approved in February The previous agreement, which ended in December 2013, included important fiscal and valueadded tax reforms that allowed Kenya to avoid a balance-of-payment problem and helped the country to strengthen its economic position. Kenya has consistently made progress on structural reforms, and in March 2016 the IMF extended a US$1.5 billion Stand-By Arrangement and Stand-by Credit Facility as precautionary measures. 17 The program is set to expire in March 2018, but the government has indicated their intention to renew the program. 18 Less Volatility Linked to Electoral Cycles Kenya had a history of experiencing economic slowdowns following election years. Politically charged violence and uncertainty have contributed to this pattern which has occurred in seven of the past 10 elections. However, the economy did not experience a slowdown following the 2013 election as better governance and electoral reforms have helped address these issues. Additionally, the 2017 presidential election did not result in an outbreak of violence despite the results being challenged in court by opposition leader Raila Odinga, demonstrating the strength of democratic institutions in Kenya. Transparency Kenya s economic data is some of the most reliable in Sub-Saharan Africa. The Central Bank of Kenya publishes detailed economic data on a monthly basis, and the lag of the economic, fiscal, and balance-of-payment data is less than that of other African countries. 19 Although large revisions to economic data are not uncommon, the quality and transparency of Kenya s date are still considered very good by Sub-Saharan Africa standards. Weaknesses Market Intervention In August 2016, President Uhuru Kenyatta defied opposition from the central bank and signed legislation imposing limits on bank lending and deposit rates in an effort to increase bank lending. This was viewed as a populist move that threatens Kenya s reputation as a free market financial center in the region. Moreover, evidence from other countries suggests that these types of measure rarely help the population and may in fact have the opposite effect of what is intended. 20 In its November 2016 review, the IMF expressed concern that these measures would have an adverse impact on the economy, a point that was reiterated in

5 Kenya Fiscal Deficit Kenya s main weakness is the government s balance sheet. The government s fiscal deficit has been steadily increasing, with an expected deficit of 6.6% in 2018, a relatively high figure for a relatively poor emerging markets country. Much of the fiscal deficit is due to infrastructure investment, which is positive for long-term growth. However, pressures to increase wages continue to grow. In 2015, Kenya increased wages by 12% bowing to pressure from unionized labor. 22 Debt ratios are at moderate levels, but increasing at a steady pace. Government debt-to-gdp is expected to increase to 56% in 2018, up from 44% in About half of Kenya s debt is domestic and half is external, the bulk of which is owed to multilateral and bilateral organizations. Security and Ethnic Tension Security problems and ethnic tension are two major sources of political and economic instability. Security problems are mainly related to the instability of Kenya s neighbor, Somalia. In the past, the rebel group Al-Shabaab from Somalia has committed a number of terrorist attacks across Kenya, negatively impacting the tourism industry. With the support of the international community, Kenya and other African countries have responded by fighting Somalia s terrorist groups. Nevertheless, terrorism remains an issue, and in 2015, an attack at Garissa University College resulted in the deaths of almost 150 people. 24 Links to Europe Kenya s economy is closely linked to Europe in a number of ways and is therefore vulnerable to slow growth in Europe. Europe is an important trade partner, with the United Kingdom, the Netherlands, and Germany accounting for almost 20% of total exports. Additionally, nearly half of Kenya s tourists are European. 25 Europe is also a significant source of investment with both private and public sector loans. Lastly, a large share of remittances, which are approximately 4% of GDP, comes from Europe

6 Lazard Emerging Markets Debt Country Background Size Capital Population 580,367 Square KM 2 (50th) Nairobi 47.5 Million Religion Christian 82.5%, Other 17.5% Median Age Literacy Rate 78% 19.7 Years Independence 12 December 1963 Political System Government Leadership Next Election 2022 Presidential Republic President Uhuru Kenyatta Economy Agriculture 35.6%, Industry 17.2%, Services 47.3% Labor Force Agriculture 71.1%, Industry 6.7%, Services 32.2% Merchandise Exports Tea, Horticultural Products, Coffee, Petroleum Products, Fish, Cement Export Partners Uganda 10.1%, Tanzania 8.6%, US 7.7%, Netherlands 7.4%, UK 7.3%, UAE 4.6%, Pakistan 4.5% Currency Shilling (KES) As of November 2017 Source: CIA 604

7 Kenya Country Timeline 1963 Kenya gains independence, with Jomo Kenyatta as prime minister Republic of Kenya formed. Kenyatta becomes president and Odinga vice-president Kenyatta dies in office, succeeded by Vice-President Daniel arap Moi Forum for the Restoration of Democracy (Ford) formed by six opposition leaders, including Oginga Odinga. Party outlawed and members arrested. Creditors suspend aid to Kenya amid fierce international condemnation Approximately 2,000 people killed in tribal conflict in the west of the country. Ford splits into two factions Ford-Asili (led by ex-government minister Kenneth Matiba) and Ford-Kenya (led by Odinga) Demonstrations calling for democratic reform. World Bank withholds disbursement of $5bn in structural adjustment credit. Moi wins further term in widely-criticised elections. His main opponents are former vicepresident Mwai Kibaki and Raila Odinga, son of Oginga Odinga Al-Qaeda operatives bomb the US embassy in Nairobi, killing 224 people and injuring thousands Elections. Mwai Kibaki wins a landslide victory, ending Daniel arap Moi's 24-year rule and Kanu's four decades in power International Monetary Fund (IMF) resumes lending after three-year gap, citing anti-corruption measures Food crisis, caused by crop failures and drought, dubbed "national disaster" by President Kibaki. UN launches aid appeal for vulnerable rural Kenyans Voters reject a proposed new constitution in what is seen as a protest against President Kibaki. The president replaces his cabinet; some nominees reject their appointments Government says four million people in the north need food aid because of a drought which the president calls a "national disaster." 2007 Disputed presidential elections lead to violence in which more than 1,500 die. The government and opposition come to a power-sharing agreement in February and a cabinet is agreed in April Kenya joins its neighbours in forming a new East African Common Market, intended to integrate the region's economy. New constitution designed to limit the powers of the president and devolve power to the regions approved in referendum. Controversy over release of national census figures that include tribal affiliations Kenyan troops enter Somalia to attack rebels they accuse of being behind several kidnappings of foreigners on Kenyan soil. Kenya suffers several apparent reprisal attacks Oil discovered. President Kibaki hails it as a "major breakthrough." Launch of Lamu port project which is to become South Sudan's oil export outlet Uhuru Kenyatta, the son of Kenya's first president, wins presidential election with just over 50% of the vote. A challenge to the results by his main rival, Prime Minister Raila Odinga, is rejected by the Supreme Court. International Criminal Court (ICC) drops charges against Francis Muthaura, a co-accused of Mr Kenyatta, over the 2007 election violence Al-Shabab militants carry out a massacre at Garissa University College in northwest Kenya, killing 148 people President Kenyatta is declared winner of the presidential election in August as well as the re-run in October. Source: BBC 605

8 Lazard Emerging Markets Debt Notes 1 As of December The FDI Report 2016: Global Greenfield Investment Trends, Financial Times, Accessed on 26 November 2016, accessed 9 December IMF World Economic Outlook October index.aspx 5 IMF World Economic Outlook October index.aspx 6 accessed 26 November Travel & Tourism Economic Impact 2017: Kenya, World Travel and Tourism Council, accessed on 10 December 2017, kenya2017.pdf 8 accessed 9 December accessed 26 November accessed 26 November accessed 26 November accessed 26 November accessed 10 December As of December 2017 Source: Bloomberg data 15 accessed 26 November accessed 10 December accessed 26 November html accessed 10 December As of December Source: Lazard 20 accessed 26 November accessed 9 December index.html accessed 26 November IMF World Economic Outlook October index.aspx 24 Levis, Josh and Holly Yan, 147 dead, Islamist gunmen killed after attack at Kenya college, CNN.com, 2 April 2015, accessed on 15 October 2015, 25 Monthly Economic Review, Central Bank of Kenya, June 2013, accessed on 11 December 2013, Central Bank of Kenya MER%20June% pdf. 26 Kenya, IMF Country Report No. 13/107, April 2013, accessed on 11 December 2013, Source IMF

9 Important Information Published on 26 February Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of 24 February 2017 and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Specific to the political, religious and military unrest in Iraq, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. Specific to the political and military unrest in Ukraine and Russia, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and prepayment risk, also apply. High yield securities (also referred to as junk bonds ) inherently have a higher degree of market risk, default risk, and credit risk. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. This document is provided by Lazard Asset Management LLC or its affiliates ( Lazard ) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard s local regulatory authorizations. The Lazard entities that have issued this document are listed below, along with important limitations on their authorized activities. Australia: Issued by Lazard Asset Management Pacific Co., ABN , AFS License , Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2000, which is licensed by the Australian Securities and Investments Commission to carry on a financial services business. This document is intended for wholesale investors only. Canada: Issued by Lazard Asset Management (Canada) Inc., 30 Rockefeller Plaza, New York, NY and 130 King Street West, Suite 1800, Toronto, Ontario M5X 1E3, a registered portfolio manager providing services to non-individual permitted clients. Dubai: Issued and approved by Lazard Gulf Limited, Gate Village 1, Level 2, Dubai International Financial Centre, PO Box , Dubai, United Arab Emirates. Registered in Dubai. International Financial Centre Authorised and regulated by the Dubai Financial Services Authority to deal with Professional Clients only. EU Member States: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D Frankfurt am Main. Hong Kong: Issued by Lazard Asset Management (Hong Kong) Limited (AQZ743), One Harbour View Street, Central, Hong Kong. Lazard Asset Management (Hong Kong) Limited is a corporation licensed by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities only on behalf of professional investors as defined under the Hong Kong Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and its subsidiary legislation. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, People s Republic of China: Issued by Lazard Asset Management. Lazard Asset Management does not carry out business in the P.R.C and is not a licensed investment adviser with the China Securities Regulatory Commission or the China Banking Regulatory Commission. This document is for reference only and for intended recipients only. The information in this document does not constitute any specific investment advice on China capital markets or an offer of securities or investment, tax, legal or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Lazard Asset Management. Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02 One Raffles Place Tower 1, Singapore Company Registration Number W, which provides services only to institutional investors or accredited investors as defined under the Securities and Futures Act, Chapter 289 of Singapore. United Kingdom: Issued or approved by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in England Number Authorised and regulated by the Financial Conduct Authority (FCA), providing services only to persons classified as eligible counterparties or professional clients under the rules of the FCA. United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY