Cablegate: Kenya Gdp Growth and Inflation Stay Strong

VZCZCXYZ0002
PP RUEHWEB

DE RUEHNR #4824/01 3551252
ZNR UUUUU ZZH
P 211252Z DEC 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 3996
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS NAIROBI 004824

SIPDIS

DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA
DEPT ALSO PASS TO USTR FOR BILL JACKSON
TREASURY FOR VIRGINIA BRANDON

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV KE
SUBJECT: KENYA GDP GROWTH AND INFLATION STAY STRONG

1. Summary: The Statistics Bureau estimated that real GDP grew 7.1%
year-on-year (YOY) in the second quarter of 2007, based on growth in
all sectors. Overall seasonally-adjusted inflation in the second
and third quarters remained above 10%, and underlying inflation hit
the Central Bank's 5% warning level. Forecasts for 2007 and 2008
growth remain around 7%, despite the general election campaign.
Fitch Credit rating agency gave Kenya a B+ stable outlook rating.
Analysts are concerned, however, that high inflation, campaign
promise-expanded government deficits, and infrastructural
bottlenecks could constrain growth in 2008. End summary

Economy Continues to Grow Strongly
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2. The Kenya National Bureau of Statistics (KNBS) revised its first
quarter real GDP growth rate upwards from 6.3% to 6.6% YOY. For the
second quarter of 2007, KNBS estimated real GDP growth accelerated
to 7.1% YOY. Agriculture grew 5.4% in the second quarter, with
exports of cut flowers up 7.7% and vegetables jumping 26.2% YOY.
Manufacturing output grew 8.6% YOY, a significant increase over the
Q2/2006 rate of 4.9%. Production of food products rose 9.7% and
non-food items rose 8.1%, indicating broadly-based strength in the
manufacturing sector. The hotel and restaurant sector grew 11.1% in
the second quarter, but overall tourism receipts in the first thee
quarters of 2007 leaped 18.6% YOY to Sh49.2 billion ($757 million).
Communication, transportation and utilities all reported strong
growth in the second quarter as well.

3. GOK tax revenues also benefited from the robust growth. Kenya
Revenue Authority (KRA) collections in the third quarter exceeded
the Ksh 98.6 billion ($1.5 billion) target by 3%. The depreciation
of the dollar against the shilling caused shilling-denominated
export earnings to fall, but cut the costs of imports, and buffered
somewhat the rise in oil prices.

Inflation Remains High
----------------------
4. Average annual (seasonally-adjusted) overall inflation stayed
between 10% and 11% in the second and third quarters, driven
especially by food, energy and housing price increases. In the
months of June-September, the Nairobi lower income group especially
faced significant increases in their cost of living. YOY underlying
inflation (which excludes volatile food, energy, and
transport-communications) stayed above 5% in Q2 and Q3, peaking at
5.6% in July. Average annual underlying inflation rose steadily
through both quarters, and finally reached the Central Bank of
Kenya's (CBK) 5% target ceiling for monetary management in October.
Broad money supply continued to climb strongly as the economy
expanded, despite CBK's efforts to mop up liquidity through repo
sales.

5. Overall inflation fell slightly from its August peak of 10.7% to
10% in November, but appears likely to remain in the double digits
for 2007, driven by high world energy and food prices, plus strong
investment in real estate (driven partly by growing remittances).
Underlying inflation is likely to remain above the CBK's target
rate, but analysts hope the CBK will improve its control of the
money supply after the election and its constraints on interest rate
hikes is over on December 27.

Outlook Remains Strong
---------------------
6. Although some analysts had expressed concern the uncertainties
caused by the December 27 general election might cause some
investors to hold back and thus slow growth, the private sector
remained buoyed by strong fundamentals. Fitch credit rating agency
gave Kenya a B+ stable outlook rating, citing Kenya's diversified
economy, large and vibrant private sector, and developed financial
markets. Fitch predicted the election would not materially affect
the direction of economic policy. A recent survey by Reuters showed
an overall expectation that economic growth would remain about 7% in
the second half of 2007 and the first half of 2008, supported by
strong exports, tourism, and the continuing sale of parastatals to
fund the GOK's budget. Analysts were divided whether the shilling
would continue to appreciate against the dollar, and some expressed
concern that high inflation could reduce consumer spending that has
become a powerful engine for growth.

Candidates Promise Increased Spending
------------------------------------
7. All the presidential candidates promised to increase spending on
education, health, infrastructure, agriculture, and other
initiatives. If translated into budget allotments, the GOK will
need to find more money. The Kibaki administration planned to
launch a $300 million Euro bond in 2008 to fund infrastructure
projects, aided by the Fitch and S&P sovereign credit ratings.
Analysts worried the GOK might also have to increase borrowing in
the domestic market, raising interest rates and cutting into private
investment and growth.

Comment
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8. Kenya's economic fundamentals are strong, and whoever leads the
next government is likely to maintain Kenya's generally sound
macro-economic management, despite all the campaign promises.
Overall inflation in the 10%-12% range does not seem to deter
growth, but it puts workers and low income groups in a squeeze, and
requires a stronger CBK response. Kenya's robust growth is running
into bottlenecks, including energy production, transportation
infrastructure, and hotel space. Nairobi traffic is now at a
stand-still for long periods of each day, yet auto imports continue
unabated. If plans for infrastructure expansion are not implemented
swiftly, these bottlenecks could constrain growth below
expectations.

RANNEBERGER

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