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 
---------------------------------- 
¶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 
------- 
¶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