Tuesday, 25 Sep 2012
Overseas Business Risk - Kenya
Political and Economic
Kenya’s economic fortunes are largely determined by commodity prices for its agricultural exports, and oil, the country's major import. Horticultural products and Tea are amongst the leading export commodities. Foreign remittances and Tourism are also leading foreign exchange earners. Agriculture employs around 75% of the population, and represents over 50% of the country's export earnings and 24% of GDP.
The over reliance on rain for agricultural production often slows down and erodes economic gains in periods of drought. In addition, the drought situation experienced within the first half of 2011 significantly affected power production since the majority of Kenya’s electricity is generated from hydro-power (52%).
In times of drought the country reverts to expensive fossil fuel based thermal generation and power rationing proves costly to industries and slows production.
According to the IMF, Kenya’s GDP growth in 2011 was 5% and the growth focus for 2012 is estimated at 5.2%. The year 2011 was characterised by a high inflation rate that peaked to 19.72% in November 2011 after the Kenya Shilling sank to a record low against the US$. However, inflation of 18.93% in December 2011 signalled a gradual decline after the Central Bank of Kenya took measures that included raising interest rates. April 2012 inflation was measured at 13.06% and CBK has a target of maintaining inflation at single digit levels.
The UK is the 6th largest exporter of goods to Kenya, with an average 4.6% market share in 2011 after United Arab Emirates, India, China, South Africa and Japan in that order. Trade between the UK and Kenya increased between 2010 and 2011 by 38.9% (UK Exports to Kenya) and 9.2% (UK Imports from Kenya). The UK was the second most important destination for Kenya’s goods (9.2%) after neighbouring Uganda with a 14.6% market share in 20010/11.
The Financial Services sector contributes about 5.4% of GDP, which makes it the fifth largest sector in the economy after Agriculture (24%), Transport & Communications (12%), Manufacturing (9.1%) and Education (6%).
Diaspora remittances continue to play a significant role in stabilizing foreign currency inflows with month on month inflow registering significant increases. March 2012 remittances were US$106.4 million compared to US$71.6 million in March 2011. Remittances in 2011 totaled US$891.1 Million compared to US$641.9 in 2010.
The Equity market seemed to have withered effects of high inflation in 2011 as it witnessed a continuous decline in equity turnover from May 2011 to February 2012. However March and April 2012 have seen significant improvements with the Nairobi 20 Share Index and FTSE NSE 15 Index gaining 5.34% and 4.9% respectively. This is probably due to a decline in inflation that is now aiming for single digit levels and a drop in bond turnover by 25% over the same period. Foreign Investors’ have also made a return to trading in the stock market after their participation increased to 53% in April 2012 from 40% in March 2012.
The high inflation witnessed of the last year caused the Central Bank to raise interest rates which as at April 2012 stood at 18%. As a result the commercial banks lending rate stands at 20.34% within the same period. This provided an opportunity for foreign funding opportunities for various projects especially targeted at the property market.
Standard & Poor’s maintained Kenya’s credit rating at B+ in 2011 after being raised from B as a result of reduced political risk after enactment of a new constitution in 2010 as well as an improved economic outlook. The effects of higher inflation witnessed in 2011 did not affect this rating as S&P had an Outlook of ‘Stable.’
Kenya has a relatively free press, open politics and functioning market economy. However, all that was put in jeopardy by the ethnic violence that followed Kenya’s disputed 2007 elections, which left over 1,100 dead and up to 600,000 displaced, and took Kenya to the brink of civil war. The African Union led by Kofi Annan, brokered peace and created a Coalition Government, which agreed to a political reform agenda - the National Accord - to address the underlying causes and to prevent a recurrence. The coalition government has held despite various challenges.
A new Constitution approved in a referendum in 2010 was a significant step forward. Some progress has been made, including on judicial reform, a new election framework, and the passing of new police legislation providing for strengthened management, greater oversight and firearms controls. But much remains to be done before elections in March 2013, including implementation of the new police legislation, and agreeing how to devolve substantial powers, and allocate resources to, to 47 newly created counties. After failing to establish a local mechanism to try the perpetrators of the post election violence, Kenya’s case was referred to the International Criminal Court in 2009. In September 2011 ICC judges confirmed charges against four Kenyans, including presidential aspirants Deputy Prime Minister Uhuru Kenyatta and MP William Ruto, former head of Civil Service Francis Muthaura and radio journalist Joshua Sang. Despite some anti ICC propaganda, public support for justice remains strong,
The next general election, likely in March 2013, will be a test case for Kenya. The UK and others have engaged closely to encourage reform to prevent a return to violence. As a regional gateway, all eyes will be on Kenya.
The law states that children under 16 are not allowed to engage in work that is exploitive, dangerous, or would otherwise prevent them from attending school. Children under 13 are banned from any sort of employment. However, despite these laws, and as a result of the widespread poverty, many children continue to work. Reliable data on child labour is limited but it is thought that levels of child labour have reduced since primary and local secondary school in Kenya became free of charge.
The UN Committee for Economic, Social and Cultural Rights has expressed concerns that refugees are de facto excluded from employment in the formal sector. In the informal sector, refugees often work under poor conditions and for very low wages.
Half of the labour force in the agricultural sector consists of women. A recent report by the Kenya Human Rights Commission, entitled, ‘Wilting in Bloom’, described gender discrimination experienced by women in Kenya’s cut-flower factories, an important part of the horticulture industry, Kenya’s biggest export earner. The report reveals that some employers withhold salaries while the employees are on maternity leave and only pay the dues a whole month after they resume duty – denying mothers an income at a crucial time. Further, 20% of the flower companies in the study forced women to proceed on maternity leave 2 months before their due date; which in some cases results to women taking less than 2 months maternity leave after delivery, thus violating women’s rights to time to recover after delivery and care for their newborn child. The state is obligated under ILO convention 183 to put in place measures that ensure that women do not get disadvantaged as a result of the increase in the maternity leave period.
A 39% of Kenyans lack access to financial services, and of these, the majority are women. Credit is often linked to land tenure and for cultural reasons land is disproportionately owned by men. The new constitution commits to the elimination of gender discrimination in land tenure.
The new constitution guarantees Kenyans the right to join and form unions and to engage in collective bargaining. About five per cent of the Kenyan workforce belongs to a union – however these are often highly politicised with stronger links upwards to sponsoring politicians, than downwards, to working members. The constitution also gives every work the right to fair remuneration and reasonable working conditions. On Labour Day 2012 (1st May) the Kenyan government raised the minimum wage to around $145USD per month – however this minimum is regularly flouted.
Bribery and Corruption
Businessman reading newspaper
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Corruption has been a major obstacle in recent and past governments. Various scandals in the grand coalition government have eroded the people’s confidence and implicated cabinet ministers and high-ranking government officials. The Kenya Anti-Corruption Commission (KACC), a body that was set-up to fight graft lost its credibility especially after interference in its operations by political leaders and bringing to question its independence. Its successor body, the Ethics and Anti Corruption Commission, remains in limbo after Parliament failed to agree senior appointments. Kenyan courts are weak and there is a huge backlog of cases. Impunity is pervasive: not a single high ranking official has been convicted for some of the largest corruption scandals in Africa.
Kenya has facing being black listed by the Financial Action Task Force for failing to implement anti-money laundering legislation. However, in April this year the government announced its establishment of a Financial Intelligence Unit, which it is hoped will avoid this happening.
Recently the threat to stability emanating from Somalia has been growing. Kenya decided to intervene militarily in southern Somalia on 15 October following attacks against tourists on the coast and against aid workers inland in areas near to Somalia. The impact on tourism (we have tightened travel advice) and investor confidence will make an already tough economic situation worse.
The East African region remains prone to the threat of terrorism due to political instability in Somalia.
Attacks are highly likely and could affect British travellers. Attacks may target Kenyan government and other public institutions, but could be indiscriminate including in places frequented by expatriates and foreign travellers, such as hotels, bars, shopping centres and beaches. We advise British nationals to exercise extra vigilance and caution in public places and at public events.
There is a high threat of kidnapping in the areas within 60km of the Kenya-Somalia border and in Garissa District. Westerners have previously been the target of kidnaps and further attacks in these areas are likely.There were two attacks by armed gangs in small boats against beach resorts on 11 September (Kiwayu) and 1 October 2011 (Manda Island, Lamu). Both attacks were on beach-front properties, with two Westerners kidnapped and one murdered. Security in these areas has been tightened. However, beach-front accommodation and boats off the coast in areas close to the Somali border remain vulnerable.
It is advised that crowded places should be avoided. Shippers to the coast of Mombasa and other neighbouring ports also face the threat of Somali pirates in the Gulf of Eden where ships have been hijacked and ransom demanded.
Protective Security Advice
Businessman working at a computer
It is necessary for Business travellers to consult with their travel agents or trip planners as well as hotel security about security measures while in the country. Low-income areas are to be avoided and extra precaution should be taken when travelling at night.
Other areas to be avoided include Northern Kenya especially within 30km of the border of Somalia where frequent fights occur.