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Analysis

State House winner faces mixed economic bag

A decision on whether to remove capping of the interest rates will be among the priorities as well as jump-starting growth in agriculture, managing national debt and how to handle expected oil exports

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Whoever wins Kenya presidential ticket in this year’s elections will face economic opportunities and challenges that if well harnessed, may take the country closer to its dream of becoming a middle-income country by 2030, analysts told Xinhua.

A decision on whether to remove capping of the interest rates will be among the priorities as well as jump-starting growth in agriculture, managing national debt and how to handle expected oil exports.

Rate Cap

Kenya capped interest rates on bank loans to 14 percent last year following a public outcry over high rates charged by banks that averaged 18 percent, sparking credit squeeze to the private sector.

Lack of cash flow especially for micro and small businesses and also reduced lending of personal loans has been the main result of capping as banks run away from borrowers considered high risk.

At least a dozen banks have petitioned the Central Bank of Kenya (CBK) to review the capping. On the surface, low cash flow has limited expansion of micro and small businesses and therefore slowed new employment.

Equity Bank CEO James Mwangi told Xinhua in a recent interview that the capping of the interest rates has been the biggest drawback for banks.

“The rates were caped yet the CBK lending rate at 10 percent did not change. This has become a significant industry challenge. As a result, the value of banking stocks at the Nairobi Securities Exchange has dropped by an average of 30 percent,” he said.

Interest rate capping has also affected profitability of the industry which has come from a high of 26 percent in 2014, to 5 percent in 2015 and negative 4 percent in 2016.

“Capping was like pricing all risks the same meaning that banks are afraid to lend to small businesses that carry higher risk,” he said.

The government is rated to have a risk of 0 percent (zero), blue-chip companies at 0.2 percent and large enterprises at 0.5 percent.

Small, medium and micro enterprises have risk ratings ranging from 1 percent to 3 percent meaning they are now being staved off credit by banks.

Raila-with-uhuru-1 State House winner faces mixed economic bag

Presidential contenders Uhuru Kenyatta and Raila Odinga at a past engagement.

“What capping of the rates meant is that the market mechanism is not working in Kenya. That is why we have companies like East Africa Breweries which has issued a commercial paper and based on the interest, they are ready to borrow higher than the 14 percent market rates,” said Mwangi. He called on the government to rethink the issue of capping.Kenya suffered severe drought earlier this year that made worse growth of agriculture whose growth had decelerated in 2016.

Economic Survey for 2017 indicates that growth in agriculture value added decelerated from a revised 7.2 per cent in 2015 to 4.4 per cent in 2016 occasioned by insufficient rains.

Most affected was Kenya’s staple crop maize whose production declined from 42.5 million bags in 2015 to 37.1 million bags in 2016.

The winner of the poll may borrow from the recommendations by state-funded think tank Kenya Institute for Public Policy Research and Analysis (KIPPRA), whose recent brief to the government called on training of farmers on technology-led appropriate farming methods to improve food security.

The growing effects of climate change that has affected rain patterns means that there is also need to increase investments in small and large scale irrigation systems.

KIPPRA also recommended solutions to reduce post-harvest losses that are estimated to be 20-30 percent of the harvested crop.

Additionally, the winner of presidential poll will need to address the collapsing sugar industry, which is blamed on several factors among them poor choice of cane grown by farmers and failure to modernize and privatize various state-owned sugar factories.

Sugar growing is the key driver of western Kenya’s economy.

Interventions such as last week’s State deal with a local bank to extend credit to small scale farmers will help. Kenya’s agriculture is dominated by small scale farmers owning an average of two acres of land, according to government data.

The deal, between the government and Equity Bank will see the bank loan 3 million U.S. dollars to small scale farmers.

“This new credit guarantee scheme will enable small scale farmers’ access funds to cater for critical inputs like seeds, fertilizers and pesticides,” said Cabinet Secretary for Agriculture, Livestock and Fisheries Willy Bett.

Plastics ban

Starting end of this month, Kenya will ban manufacture and use of plastic bags because they are blamed for environmental degradation.

The ban is bound to affect the manufacturing sector and may result in loss of jobs and income for thousands of traders.

The National Environmental Management Agency (NEMA) has maintained that the ban will not be reversed despite protests by Kenya Association of Manufacturers (KAM) including a petition to President Uhuru Kenyatta to intervene.

“Currently, we have over 176 plastic manufacturing companies in Kenya which directly employ 2.89 percent of all Kenyan employees and indirectly employ over 60,000 people,” said KAM CEO Phyllis Wakiaga.

The Kenya Economic Survey for 2017 shows that the real output of the manufacturing sector grew by 3.5 per cent in 2016 compared to a revised growth of 3.6 per cent in 2015.

The growth was as a result of reduced cost of production and increased volume output.

The matter is unlikely to come to rest and will form a priority agenda for the person who wins the Tuesday presidential election.

National debt 

Kenya has borrowed heavily in the past 15 years to finance mega infrastructure projects that are laying its foundation to transition to a middle income country.

The latest mega project is the 480 kilometer Standard Gauge Railway from Mombasa to Nairobi that is set to revolutionize Kenya transport sector.

KIPPRA data shows that the debt to gross domestic product (GDP) ratio is now at 54 percent, surpassing the 50 percent ceiling set by the East Africa Community.

“The high level of public debt in Kenya narrows the window for future borrowing, and increases vulnerability to fiscal risk in the event of any urgent need for borrowing,” notes KIPPRA in the just released Kenya Economic Report 2017.

But the National Treasury says borrowing should not raise alarm as the debt is manageable, a statement supported by the International Monetary Fund which in March said that Kenya’s risk of external debt distress remains low, while overall public debt dynamics are sustainable.

“The bulk of Kenya’s external public debt carries concessional terms,” the IMF, while calling for a go slow on commercial borrowing. The debt issue will be a priority in the next presidency.

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Analysis

Subsidised cooking gas project kicks off

National Oil intends to distribute 4.3 million new cooking gas cylinders over the next three years in an initiative that would be implemented by chiefs and their assistants

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The government has begun piloting the sale of National Oil Company (Nock) subsidised cooking gas.

Dubbed Gas Yetu, the gas will be retaining at Ksh 2,000 per 6-kilogramme cylinder as opposed to the conventional Ksh 5,000. The full package also includes a burner and grill.

The project, known as Mwananchi Gas, aimed at cutting back the use of kerosene, firewood and charcoal, the two main sources of cooking fuel for poor households.

The cylinders, dubbed Gas Yetu, will be distributed to the poor across the country by State-owned National Oil.

Under the plan, which has been piloted in Machakos and Kajiado counties, the ministry of Energy will buy about one million new cylinders for distribution.

“This campaign is meant to increase the uptake of cooking gas by low-income households,” National Oil CEO MaryJane Mwangi said. The company sells a complete 6kg cylinder of its flagship SupaGas brand at about Ksh 5,000.

Related: Turkana oil being sold in black market?

National Oil intends to distribute 4.3 million new cooking gas cylinders over the next three years in an initiative that would be implemented by chiefs and their assistants. It is being touted as a cost-effective, eco-friendly source of fuel that would help reduce deforestation once full embraced.

National Oil plans to put up a mini plant and distributors across all the 47 counties to ease the access to the cylinders.

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Analysis

Bleak projections as political standoff persists

While businesses can prepare for short-term uncertainty created by the elections, they can’t do much about protracted turmoil and violence

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Joyce Njeri stands outside her clothes boutique in Nairobi trying to entice a handful of passers-by to look at the clothes she has for sale. There aren’t many takers.  
 
Commerce in Nairobi’s central business district already started tailing off before presidential elections on August 8 that the Supreme Court annulled following vote-rigging allegations. It’s slowed dramatically during the twice-weekly protests the opposition called to demand an overhaul of the electoral commission before a rerun of the vote.
 
“My clients are afraid of coming into the CBD because the protests can mean you either get tear gassed or robbed,” Njeri, 33, said in an interview. “The human traffic to the shop is almost nothing. We just want to go back to normal.”
 
Hopes that fresh elections this month would end the turmoil were dashed Tuesday when opposition leader Raila Odinga withdrew from the October 26 vote, saying the commission hadn’t made enough changes to ensure a free and fair election. With the stage set for a prolonged political standoff, Kenya’s stellar growth rate and reputation as one of Africa’s top investment destinations are now increasingly at risk.
 
“The economy is slowly shutting down as we wait for political issues to be resolved,” Anzetse Were, an independent economist, said by phone from Nairobi. “People are holding onto their money, businesses are suffering and contracts have been delayed. We are in uncharted ground and nobody knows how this will end.”

 Sagging growth

 Treasury Secretary Henry Rotich warned last month that the protracted election period and a drought were hurting output, spending and tax revenue, and said projections of 5.5% economic growth this year may have to be revised downward. Growth has averaged 5.2% over the past decade, an expansion that’s drawn investment from companies including Google Inc., Toyota Motor Corp. and General Electric Co.
 
President Uhuru Kenyatta shows no sign of giving ground in the dispute. He labeled the judges who nullified his initial victory as “crooks” and told supporters the rerun will go ahead even if he’s the sole candidate. On Wednesday, Kenyatta’s Jubilee party used its majority in parliament to pass an amendment enabling the electoral authority to declare a winner if one contestant withdraws.
 
Odinga had demanded sweeping personnel changes at the electoral body, including the removal of its chief electoral officer, as well as an overhaul of counting procedures, and said protests will continue until his demands are met. The Independent Electoral & Boundaries Commission said on Wednesday the election will go ahead as scheduled.
 
While the opposition demonstrations haven’t led to major upheaval thus far, “risks of violent unrest may be heightened after Tuesday’s announcement,” said Jared Jeffery, an analyst at NKC African Economics in Paarl, South Africa. “The country is set to remain on edge for months.”  

International bonds

Unrest that followed a disputed vote in 2007 illustrated just how violent Kenyan politics can turn — at least 1,100 people died and about 350,000 were forced to flee their homes. The economy also took a battering, with the growth rate plummeting to 1.7% in 2008, from 7.1% a year earlier.
 
Investor unease is evident in the financial markets. The Nairobi Securities Exchange All Share Index has fallen the most in Africa and is the third-worst performer in the world since the election outcome was declared void on September 1, according to data compiled by Bloomberg. The government’s international bonds due in 2024 have also dropped since then, with yields climbing 44 basis points to 6.46%.
ALSO SEE: Raila withdrawal costs investors Sh15.4 billion
  While businesses can prepare for short-term uncertainty created by the elections, they can’t do much about protracted turmoil and violence, Carole Kariuki, the chief executive officer of the Kenya Private Sector Alliance, a business lobby group, said by phone. Kenya’s future electoral processes need to be truncated to safeguard the economy and business from a repeat of the upheaval, she said.
 
“What Kenya now needs is a snappy resolution of the election,” said Ronak Gopaldas, a Johannesburg-based Africa strategist at FirstRand Ltd.’s Rand Merchant Bank. “It is getting the exact opposite. Current developments will only serve to puncture the outlook for the country in the short term.”
 
At her boutique in Nairobi, Njeri can’t afford to wait for the politicians to sort out their differences.
 
“We have no business now to be honest,” she said.
 
– BLOOMBERG 

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Analysis

Nakumatt exposes family-owned chains’ struggle to adapt to changing times

Kenya’s formal retail sector, which has market penetration of 30%, is dominated by family-owned enterprises such as Nakumatt, Tuskys, Naivas, Chandarana and Eastmatt

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Kenya’s second largest supermarket, Tuskys, has come to the rescue of its larger rival, Nakumatt, to save the latter from shuttering. The rescue came after Nakumatt, East Africa’s largest retailer, failed to secure a Ksh7.8 billion (US$75 million) financing deal quickly enough to avoid its suppliers cutting it off.

Rows of empty shelves have become a familiar sight in Nakumatt stores and it has lost customers in droves to rivals. The fruitless hunt for equity financing in exchange for a 25% stake meant Nakumatt never got the money it hoped to raise to help towards settling debt in excess of Ksh18.6 billion (US$180 million).

Instead, the retailer will now access supplies from Tuskys’ supply chain system, based on the goodwill the latter has with its dealers.

Although, the supermarkets declined to reveal what stake Tuskys had acquired from Nakumatt, they confirmed, in a joint statement they are “exploring potential options for synergies, co-operation and business integration between the two family-owned retailers”. Such an arrangement will include
“strengthening and streamlining management, acquisition of assets and eventual merger of the entities”.

In July this year, Nakumatt shut down three branches in Uganda, bringing the total count of closed branches in that country to four. In Kenya, it has shut down three branches this year, some in the guise of conducting a stock-taking exercise. But, it is the avalanche of liquidation suits by its suppliers and legal battles with landlords in Kenya and Uganda that have aggravated its financial woes.

Kenya’s formal retail sector, which has market penetration of 30%, is dominated by family-owned enterprises such as Nakumatt, Tuskys, Naivas, Chandarana and Eastmatt.

The industry’s potential for growth, predicated on a rising local middle class, has attracted global players such as South Africa’s MassMart through the Game brand, Botswana’s Choppies and Carrefour, a French multinational retailers.

At the height of its success, Nakumatt grossed about Ksh72.3 billion (US$700 million) in annual turnover and was seen as illustrative of the fast growing middle class driving retail sector growth in Kenya.

“Nakumatt is a cautionary and even mind boggling tale. It still remains an enigma wrapped in a conundrum as to how it burned through over $150 million (Ksh15.5 billion), where their business model was built on supplier-credit,” says Aly Khan Satchu, a financial analyst based in Nairobi.

ALSO SEE: Why Tuskys and Nakumatt are perfect marriage partners

Much of its troubles are thought to be linked to an ambitious expansion across East Africa, which locked up much of its cash. Analysts do not also rule out the potential for internal fraud that could have seen it lose a lot of money.

“I believe the family exerted a strong hold on the business and were simply unable to keep up with a fast moving retail sector,” said Satchu. “This is a classic case of a family business being unable to institutionalise itself.”

Tuskys has also had a fair share of turbulence, closing two of its key branches in Nairobi’s busy central business district, citing low sales and fallout with landlords. Uchumi, the only publicly listed retailer in Kenya, has also closed its Uganda and Tanzania subsidiaries and several branches in Kenya due to financial distress and poor performance of affected outlets.

The listed retailer has, however, been working on a recovery plan that includes a potential injection of Ksh3.6 billion ($35 million) equity funding from a strategic investor and another Ksh1.3 billion (US$13 million) financial boost by the state, a key shareholder. Source: Quartz Africa. 

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Analysis

Ties that bind: Why Tuskys and Nakumatt are perfect marriage partners

Joram Kamau, the founder of Tuskys, would get certain goods on credit from Nakumatt’s Mangalal Shah, which he would then sell at discounted prices.

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When reports emerged on Monday that Tuskys Supermarkets was taking over the management of troubled Nakumatt Supermarkets, to the undiscerning eye, it appeared like a purely business-to-business deal.

But many were nevertheless left wondering whether it made business sense to merge with a retail chain that was reeling under mounting debts – with no rescue plan in sight – that have seen suppliers keep off, leading to empty shelves.

However, a closer look at the two retail chains tells an interesting story. Indeed, the Tuskys-Nakumatt deal, if it is eventually approved by regulatory authorities, such as the Competition Authority of Kenya, would be a classic case of a younger brother helping his big kid bro in a time of need.

Nakumatt and Tuskys trace their history to the streets of Nakuru where their earlier casual seller-client encounters blossomed into a big business relationship. The rest as they say is history. Nakumatt was founded in 1947 as a small retail shop in Embakasi, Nairobi, before its owner, Mangalal Shah, shifted to Kisumu in 1965 and later Nakuru.

TUSKYS-PATRIACH-MZEE-JORAM-KAMAU-225x300 Ties that bind: Why Tuskys and Nakumatt are perfect marriage partners

TUSKYS PATRIACH MZEE JORAM KAMAU.

Upon his death, the business was taken over by his younger son Atul Shah, the Nakumatt supermarkets chain’s current managing director. Before his demise, Mangalal Shah had become very close to Joram Kamau, the founder of Tuskys Supermarket.

ALSO SEE: Tuskys, Nakumatt speak out on merger
READ: Coca Cola swallows up its own subsidiary

As a result, Kamau built an empire from a small shop in Rongai, Nakuru, called Magic, which he had established in 1985 to sell mattresses. He would get certain goods on credit from Mangalal Shah across the street, which he  would then sell at discounted prices.

As he prospered, Kamau left Magic to his brother Peter Mukuha Kago, who transformed this into Naivas Supermarkets, the third largest family-owned supermarket chain in Kenya after Nakumatt and Tuskys respectively.

Upon Joram Kamau’s death in 2002, his six children – four sons and two daughters – took over the business but the family friendship never ended.

READ ALSO: Emmah Amoni: From Mtumba dealer to fashion designer

In fact, so close are the two families that for many years, there was speculation that there was cross-ownership of the two retail chains.

However, according to records of Tuskys’ stock ownership as at August 2014, Samuel Kamau and Yusuf Mugweru own 17.5% shares each, Stephen Mukua (14.5%), George Gachwe (10.5%) and his two daughters, who are not named, own 10% each.

TUSKYS-PATRIACH-MZEE-JORAM-KAMAU-225x300 Ties that bind: Why Tuskys and Nakumatt are perfect marriage partners

Nakumatt Patriach Maganlal Shah.

Opinion is divided over whether the merger of Nakumatt and Tuskys, which will see the latter take over the former’s management, will rescue it.

One cynic, perhaps, in reference to family feuds that have been the order of the day at Tuskys, called the deal one where a company with a management crisis is trying to help another with a financial crisis. The other common feature that could help in their merger is the fact that they are both family-owned businesses, which makes it easier to build synergy and trust.

SEE: Bank abolishes tea to cut costs

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