VZCZCXYZ0001
RR RUEHWEB

DE RUEHNR #0638/01 0910821
ZNR UUUUU ZZH
R 010821Z APR 09
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 9019
INFO RUCPDOC/USDOC WASHDC 3201
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHXR/RWANDA COLLECTIVE
RUEHBS/USEU BRUSSELS

UNCLAS NAIROBI 000638 
 
STATE ALSO FOR AF/E AND AF/EPS 
 
STATE PASS USAID/EA 
 
STATE PASS USITC FOR ALAN TREAT, RALPH WATKINS, AND ERLAND 
HERFINDAHL 
 
TREASURY FOR REBECCA KLEIN 
 
COMMERCE FOR BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB ECPS EINV EFIN ETRD EAID BEXP PINR ASEC
PTER, KCOR, ENRG, KE 
SUBJECT:  KENYA ECONOMIC NOTES: APRIL 2009 
 
REF: 08 Nairobi 2166 
 
This cable is not/not for internet distribution. 
 
----------------- 
TABLE OF CONTENTS 
----------------- 
¶1.  (SBU) Drought Contributes to GOK Fiscal Woes; A Macro 
Update 
¶2.  (SBU) Shipping News from the Port of Mombasa 
¶3.  (SBU) Coastal Tourism in Decline 
¶4.  (SBU) Broadband Comes to Kenya 
¶5.  (SBU) Anti-Money Laundering Legislation Still Stalled 
¶6.  (U) Kenya Expands Geothermal Production 
 
¶1.  (SBU) Drought Contributes to GOK Fiscal Woes; A Macro Update 
 
Prime Minister Odinga and Finance Minister Kenyatta told a recent 
gathering of potential foreign investors that ongoing drought has 
created widespread food insecurity across Kenya.  Both leaders 
characterized the food shortages as their "number one economic 
challenge," noting that (unforeseen) government expenditures to 
alleviate hunger and high maize prices are deepening the country's 
growing deficit (already roughly 5% of GDP).  On corruption, 
Kenyatta blamed the Kenyan media for portraying the country in a 
negative light; he admonished the private sector for paying bribes 
and being "the flip side" of corruption.  Kenyatta told visiting 
Treasury Acting A/S Andrew Baukol on March 9 something similar, 
arguing that "perceptions tend to dominate over reality" and that 
"sometimes the media overreacts" when it comes to issues of 
governance.  Odinga defended his record on corruption, noting that 
he had never been implicated in a "major scandal," and that 12 
investigations into malfeasance at parastatals had resulted in the 
removal of six CEOs.  The two leaders attenuated investor concerns 
about Kenya's double-digit inflation by emphasizing that the current 
government methodology significantly overstates the CPI (reftel); 
inflation would fall to single digits this year, they said.  (The 
IMF estimates an inflation rate of 10.5% by June 2009.) 
 
Consistent with IMF estimates, Odinga and Kenyatta said they 
expected GDP growth of 3% in 2009 (Comment:  we believe growth could 
be much closer to 2% in 2009 but even 3% is equivalent to zero per 
capita growth given Kenya's roughly 3% population growth rate). 
Kenya is on track to receive $100m (likely in the second quarter) 
from the IMF's Exogenous Shock Facility (ESF) for balance of 
payments support.  The IMF Mission to Kenya told us in early March 
that the ESF will come to the Board in April or early May.   Still 
the GOK faces a Ksh 44 billion ($550m) in (as yet unidentified) 
expenditure cuts as it attempts to close a Ksh 72b budget gap 
($900m); the government hopes a combination of domestic borrowing 
and donor assistance will make up the difference.  Finance Minister 
Kenyatta told Acting A/S Andrew Baukol that cuts will be focused on 
infrastructure projects that have not yet started but that, for 
stimulus purposes, the GOK wants to retain as much capital spending 
as it can.  There is no expectation among stakeholders that any of 
the Ksh 8 billion in planned privatization will occur this year. 
 
¶2.  (SBU) Shipping News from the Port of Mombasa 
 
The Managing Director (MD) of the Kenya Ports Authority recently 
told us that the Port of Mombasa is "operating at optimal capacity." 
He said 24-7 ops and the utilization of satellite storage areas have 
reduced the number of stockpiled containers at the port to 6,400, 
down from over 14,000 through much of 2008.  Ships typically hold at 
sea not longer than a few days; the exception being those carrying 
bulk maize which requires space in the silos at the port.  The 
global economic slump and Somali pirates have not, as yet, made a 
discernable impact on the flow of trade into/out of the port, 
according to the MD. 
 
A deep water port at Lamu is desirable, the MD said, to capture 
trade using the largest ships which the Port of Mombasa cannot 
accommodate due to its shallow and winding channels; a port in Lamu 
could also more efficiently deliver goods to/from southern Sudan and 
Ethiopia.  China, Kuwait, and Qatar have all reportedly expressed 
interest in funding development of a port in Lamu.  The MD welcomed 
a proposed visit by the U.S. Coast Guard in May 2009 to Mombasa to 
review compliance with the International Ship and Port Security 
Facility Code. 
 
In a separate meeting, a private ship handling company told us that 
despite container decongestion, the port remained a difficult place 
to do business primarily due to inefficiencies at the Kenya Revenue 
Authority (KRA).  According to the ship handler, KRA continues to 
resist full automation and greater transparency because of 
entrenched smuggling interests.  The company also noted the 
deterioration of Kenyan rail (which hauled 8 million tons in 1960 
and only 1 million in 2008) as a primary cause of constrained trade. 
 
 
¶3.  (SBU) Coastal Tourism in Decline 
 
The Kenya Association of Hotel Keepers and Caterers reports a 
significant decline in tourism in recent months, which it attributes 
to the global economic slump.  Hotel occupancy rates in the coastal 
region, traditionally popular with Europeans, are down to only 
10%-15% (80%-90% is normal for this time of year) - a level worse 
than during the aftermath of 2008 ethnic violence.  Normally, the 
coast receives some 60 charter flights per week from Europe; in 
recent weeks there have been only five.  Despite the recession and 
incidences of Somali piracy, cruise ship traffic has remained 
steady, but the Association laments that passengers are especially 
transient and low-budget spenders.  Child sex tourism continues to 
plague the coast, especially in private, unregulated villas in the 
Malindi area. 
 
¶4.  (SBU) Broadband Comes to Kenya 
 
In June 2009, SEACOM (75% African owned, 25% international) reports 
it will "switch on" its submarine fiber optic cable, providing East 
Africa with its first broadband connection to the Internet.  The 
$600m cable will deliver 1.28 tbs of bandwidth to enable HDTV, 
peer-to-peer networks, and other services requiring significant 
bandwidth.  SEACOM says it will provide open access, low cost 
service to remain competitive and spark innovation - generating even 
greater demand for its cable; rival broadband connections are due in 
the near term. 
 
¶5.  (SBU) Anti-Money Laundering Legislation Still Stalled 
 
During his March 9 meeting with Finance Minister Kenyatta, Acting 
Treasury A/S Andrew Baukol encouraged passage of Anti-Money 
Laundering legislation ahead of the upcoming AGOA Forum as one sign 
that Kenya was on track.  Kenyatta indicated that there had been 
considerable consultation and that the GOK was ready to take a 
number of amendments to the bill on board and "publish a new bill" 
when Parliament resumes April 21.  Finance Ministry officials 
claimed they had made a significant push on the legislation at the 
end of the previous session.  Some contacts told us that it would 
return in the next Parliament without having to start the 
legislative process again.  That no longer appears to be the case. 
As we currently understand it, the bill will need to begin the 
process again when MPs return. 
 
¶6.  (U) Kenya Expands Geothermal Production 
 
Vice President Kalonzo Musyoka gave the keynote address at the March 
5 dedication of Olkaria III, a 35MW expansion of an existing 13MW 
geothermal facility (Olkaria II) near Lake Naivasha - the only 
privately owned and operated geothermal plant in sub-Saharan Africa. 
 Ormat Technologies, based in Reno, Nevada, financed the $150 
million project, which its chairman describes as the "largest 
private US investment in a single renewable energy project in 
Africa."  (Note: Ormat is generally considered an Israeli company, 
headquartered in Nevada.  However, much of the equipment used to 
outfit both Olkaria II and Olkaria III was bought from American 
companies.)  On an annual basis, the expanded power plant will save 
Kenya an estimated 120,000 tons of imported oil and reduce carbon 
emissions by 200,000 tons.  The cost of energy remains high in Kenya 
due to low hydro power output and the need to import fuel using a 
weakened shilling. 
 
VP Musyoka declared that the grand coalition government recognizes 
that geothermal is "critical" to Kenya's power needs.  He announced 
that it would devote KSh4.5 billion (about $60 million) towards the 
formation of a parastatal, the "Geothermal Development Company" 
(GDC), to undertake upstream activities, namely exploratory 
drilling.  According to Energy Minister Kiraitu Murungi, who also 
spoke at the dedication, another parastatal, the Kenya Electricity 
Generating Company (KENGEN), will continue to conduct exploratory 
drilling in the Olkaria Domes, Eburru, and Menengal.  Otherwise, the 
GDC will be henceforth responsible for drilling.  Murungi contended 
Kenya has a geothermal potential of 7,000MW. 
 
 
RANNEBERGER