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Cablegate: Kenya: Private Sector Says the Economy Will Shrink in 2008

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PP RUEHWEB

DE RUEHNR #0353/01 0321305
ZNR UUUUU ZZH
P 011305Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4529
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS NAIROBI 000353

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA
DEPT ALSO PASS TO DOT FOR CONNIE HUNTER
DEPT ALSO PASS TO USTR FOR BILL JACKSON
DEPT ALSO PASS TO DEPT OF LABOR FOR MICHAL MURPHY, SUDHA HALEY,
PATRICK WHITE AND MAUREEN PETTIS
DEPT ALSO PASS TO USAID/EA
DEPT ALSO PASS TO USITC FOR RALPH WATKINS
TREASURY FOR VIRGINIA BRANDON
COMMERCE FOR BECKY ERKUL

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ETRD KE
SUBJECT: KENYA: PRIVATE SECTOR SAYS THE ECONOMY WILL SHRINK IN 2008

REFS: (A) NAIROBI 336 (B) NAIROBI 192

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1. (SBU) Summary: The private sector is warning that the Kenyan
economy will likely shrink in 2008, having already lost tens of
billions of shillings in January, and with losses that could reach
Ksh260 billion (over $4 billion) and 500,000 jobs in the first half
of the year. Claims by Government of Kenya (GOK) officials that the
crisis is just a temporary blip and that the economy can still grow
at 7% in 2008 appear to be a cheerleading effort to maintain public
and business confidence. The sharp drop in the Nairobi Stock
Exchange (NSE) and the shilling suggests their efforts are failing
to impress the private sector. Facing these economic challenges may
have helped persuade President Mwai Kibaki and Opposition LeaderRaila Odinga to meet and announce the start of the negotiation
process. End summary.

Private Sector's Grim Forecasts
-------------------------------
2. (U) The Kenya Association of Manufacturers (KAM) said January
sales volumes in the manufacturing sector fell 90% below normal, as
the sector was disrupted by congestion at Mombasa port, road
insecurity, and fuel shortages linked to the post-election political
violence which erupted in late December. Based on anecdotes from
members, KAM estimates that, absent a quick political settlement and
return to normality, economic losses from reduced production in the
first half of 2008 will reach Ksh260 billion (over $4 billion),
about 500,000 jobs will be lost, and that GDP would experience
negative growth in 2008, even if the second half saw growth at 2007
levels. Even in a more optimistic scenario in which higher
operating levels brought estimated losses below Ksh 200 billion
(about $2.86 billion), 2008 GDP would still see negative growth.

3. (U) Based on an informal survey of its 2,500 members, the
Federation of Kenyan Employers (FKE) estimated they have already
lost Ksh58.2 billion (about $90 million). Even if there were an
immediate political settlement, about 90,000 people will be laid
off. If there is no political settlement within two weeks,
businesses will lose Ksh230.5 billion (about $3.3 billion) in the
first half of 2008, and lay off 240,000 workers. While many
companies indicated they would minimize income and job losses if
there was a quick political settlement, Executive Director Jackie
Mugo said the economy would otherwise go into free fall.

GOK officials Try to Reassure Public and Investors
--------------------------------------------- -----
4. (U) Responding to fears that Kenya's 2008 economic growth would
dip far below the forecast 7%, Central Bank Governor Njuguna Ndung'u
on January 10 downplayed the impact of the violence, calling the
crisis a short disruption that would not have a major impact on GDP
growth. The dip in growth will not signal a recession nor change
Kenya's strong long term growth trajectory because of Kenya's strong
fundamentals, but he conceded that supply constraints would trigger
inflation in the short term.

5. (U) Ignoring private sector warnings of a massive impending
downturn, Finance Minister Amos Kimunya claimed on January 29 Kenya
would suffer only a slowdown in economic activities in the first six
months of 2008, not a recession. He said that Kenya's fundamentals
were still sound, and that sectors other than tourism would recover
quickly after a solution is found to the political crisis. Kimunya
acknowledged that the tourism sector, which garnered $1 billion in
hard currency for the first time in Kenya's history in 2007 (ref A)
and generates an estimated Ksh65 billion/year, would take longer to
recover. Kimunya accepted that revenue collection would fall below
the FY07/08 target of 406.9 billion shillings (about $6 billion) in
2007/08, but claimed the Ksh8 billion surplus tax revenues (about
$118 million) collected in the first half of the year, plus the
extra Ksh20 billion (about $294 million) collected in the Telkom
privatization would cushion some of the shortfalls.

Renewed Violence Smashes Slow Return of Normality
--------------------------------------------- -----
6. (U) Violence died down the week of January 21, and people began
to feel normality was returning, but this faint revival of
confidence was aborted by the sudden January 26-28 attacks in the
previously peaceful South Rift Valley towns of Nakuru and Naivasha,
road and rail blockades, the murder of an opposition MP in Nairobi,
and the resulting violence in Nairobi's slums. The attacks on
flower farm workers around Naivasha and on buses and trucks at
roadblocks on the Nairobi-Uganda highway threatened the critical
flower industry at the start of the peak Valentines Day season.
Shaken by the violence, the NSE's market capitalization plunged
Ksh40 billion (about $570 million) or 5% on January 29. The NSE-20
share index fell by 235.5 points (5%) to close at 4576.3 points, a
drop of 14.3% from its December 21 level of 5339.75. On January 30,
the NSE recovered some of its lost ground, buoyed by the
Kibaki-Odinga agreement to start negotiations, but investors remain
skittish. On January 29, the shilling fell 4.1% to 72.75/$, and
fell 4.2% to Ksh107.59/Euro. As of January 30, the shilling has
fallen 16.3% since its December 2007 peak of Ksh62.54/$, and most
analysts predict it is likely to stay above the Ksh70/$ level.

Comment
--------
7. (SBU) Although GOK officials have not yet publicly acknowledged
the crisis' damage to the economy, it is likely that private sector
warnings, the January 26-28 violence, and the plunging stock market
and shilling helped persuade President Mwai Kibaki and Opposition
Leader Raila Odinga to meet and announce the start of the
negotiation process. If they can reach some preliminary agreement
within a few weeks, and make strong efforts to rein in the violence,
the economic damage may be minimized, and recovery could begin. If
negotiations drag on too long, and/or if political leaders find that
the violence spirals beyond their control, Kenya could face a major
economic downturn in 2008.

RANNEBERGER

© Scoop Media

 
 
 
 
 
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