Kenya's Economic Crossroads.

15th February, 2024.

Navigating the Impending Recession and Rescuing Private Equity Investments.

As the clouds of economic uncertainty loom over Kenya, concerns about a looming recession are gaining traction. The Central Bank of Kenya's recent decision to raise interest rates by 50 basis points to 13 percent has sparked discussions about the potential consequences for the economy. This article delves into the potential effects on private equity investment areas and proposes strategies to navigate the storm.

Understanding the Economic Indicators:

The recent interest rate hike is seen as a measure to combat high inflation, but fears arise that it might lead to an overtightening of the economy, potentially triggering a recession. The full impact of interest rate hikes typically takes 12 to 18 months to materialize, suggesting that the effects may be felt between the fourth quarter of 2024 and the second quarter of 2025.

1. Yield Curve Inversion: One alarming sign is the yield curve inversion, where short-term government bonds yield more than long-term bonds. As of February 7, the two-year government bond yields more than the 20-year bond, indicating investor skepticism about the government's ability to honor long-term debts.
2. Real GDP Growth Concerns: Real GDP growth projections for 2024 reveal potential challenges. While the overall growth is forecasted to increase, a key driver, agriculture, is projected to contract. This is a red flag, especially considering that food prices have been a significant driver of inflation in recent years.
3. Current Account Deficit and Import Prices: Kenya's current account deficit is expected to worsen in 2024, coupled with a further slide in the shilling against the dollar. This may lead to increased import costs, discouraging foreign investments and potentially causing capital flight from Kenyan companies.

Private Equity and the Threat of Recession:

The private sector, including private equity investments, is vulnerable to the economic downturn. Signs of manufacturers planning production cuts and potential job losses indicate a ripple effect that could lead to a recession by the end of 2024.

Proposed Strategies to Mitigate Recession:

1. Ease Business Conditions: To prevent job losses and the exit of international corporations, Kenya needs to ease business conditions. Addressing issues such as skyrocketing electricity prices and providing support to local manufacturers can stimulate economic activity.
2. Monetary Policy Adjustment: Lowering interest rates can boost liquidity and stimulate aggregate demand, crucial in preventing businesses from cutting production and jobs. A careful balance in monetary policy is needed to support economic growth.
3. Support for Local Manufacturers: The private sector has faced increased regulations and tax rates, impacting productivity and discouraging foreign investors. Reversing these measures can empower local manufacturers and attract foreign investments, promoting economic resilience.
4. Addressing Government Size and Expenditure: Aggressive borrowing, interest rate hikes, and tax increases are attempts to address the government's deficit spending. Addressing the size and expenditure of the government can alleviate the burden on taxpayers, allowing for increased purchasing power that stimulates aggregate demand.

As Kenya stands at the brink of potential economic challenges, proactive measures are essential to steer clear of a recession. Private equity investors and businesses must remain agile, adapting to the evolving economic landscape. By addressing key indicators, easing business conditions, and fostering a supportive environment, Kenya can navigate these challenges and emerge stronger on the other side.