"Kenya Business Forecast Report Q3 2013" is now available at Fast Market Research

The Supreme Court's March 30 confirmation of Uhuru Kenyatta's presidential victory means that the president can begin the task of governing the country. There will be plenty of challenges, including dealing with ongoing ethnic polarisation; tackling the threat of attacks stemming from the ongoing military commitment to Somalia; and having to run the country while fulfilling commitments arising from his trial in the International Criminal Court.

We are expecting the Kenyan economy to expand by 5.7% in 2013 and by more than 6 % in the years thereafter thanks to a post-election boost in confidence and a healthy macroeconomic climate. Private consumption and investment are likely to perform particularly well.

Although the Kenyan monetary authorities have leeway to cut the central bank rate - currently at 9.50% - further during 2013 thanks to low inflation and a strengthening shilling, we believe that they are likely to hold rates steady during the year. This is mainly due to the fact that they will need to continue removing liquidity using the repo market, and a cut to the rate would limit their ability to do this. Instead, we think that there will be a focus on getting banks to pass on cuts already made.

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We believe that the fiscal deficit will begin to narrow as a percentage of GDP in 2013/14 thanks to strong economic growth and the absence of election-related spending. The peaceful passing of March's election, combined with the authorities' desire not to crowd out the private sector, will lead to greater borrowing from international capital markets to finance the deficit. We believe Kenya's maiden Eurobond will be forthcoming in the 2013/14 fiscal year.

Major Forecast Changes

Although the Kenyan monetary authorities have leeway to cut the central bank rate - currently at 9.50% - further during 2013 thanks to low inflation and a strengthening shilling, we believe they are likely to hold rates steady during the year rather than enact the up to 150 basis points of cuts that we had previously projected. This is mainly due to the fact that the bank will need to continue removing liquidity using the repo market, and a cut to the central bank rate would limit authorities' ability to do this. Instead, we expect there will be a focus on getting banks to pass on cuts already made.

Key Risks To Outlook

The weather poses risks to our views on growth, inflation, the currency and the balance of payments position. Another season of inadequate rain would undoubtedly have negative ramifications for all of these.

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