Market Report, "Kenya Business Forecast Report Q1 2014", published

While the challenge of Somalia-based terrorism is likely to continue, we do not believe that it poses a serious threat to Kenya's economy. The Westgate shopping centre siege was an outlier; most attacks are likely to be small-scale operations that cause minimal casualties.

Kenya's economy will accelerate in 2014, growing by 6.1% in real terms. This will be Kenya's fastest rate of GDP expansion since 2007, and BMI believes that growth will stabilise near 6.0% between 2014 and 2018. Rapid economic growth in the other East African Community states will spur demand for Kenyan goods and services.

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The rise in inflation seen in late 2013 was largely due to seasonal factors and the one-time effect of a VAT tax rise. BMI predicts that inflation will moderate in the first quarter of 2014, and that an interest rate hike is unlikely in the first half of the year.

Kenya's current account deficit will remain wide, but will be covered by foreign direct investment and short-term capital inflows. The country's dependence on imported goods will continue, but exports revenues will rise over the longer term.

Major Forecast Changes

No major forecast changes.

Key Risks To Outlook

Climactic factors pose a serious risk to Kenya's agricultural production; poor rains would harm economic growth and also necessitate large-scale food imports, putting pressure on the already stretched balance of payments position.

Although the smooth electoral process in 2013 has lowered perceptions of political risk and has boosted investor sentiment, voting patterns suggest that Kenyans continue to overwhelmingly vote along ethnic lines. This means that political issues can easily take on an ethnic dimension and that unrest is possible in the event of a closely-fought election or a constitutional dispute.

While terrorism poses a relatively minor risk to headline economic growth, a sustained campaign of large-scale attacks on international interests in Nairobi could detract from the city's position as a regional financial hub.

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