Transcript Made-to-Measure? 2009 East Africa Budget

Economic review
Alykhan Satchu
Kenya: From Hero To Zero To Hero?
A Bird’s Eye Perspective
Aly-Khan Satchu
www.rich.co.ke
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2009 East Africa Budget
© 2009 Deloitte & Touche
GDP overview
• GDP has shown above trend growth in the immediate
post-Independence phase and again during the coffee boom years
of 1976,1977 and then the steady rise which peaked at 7.1% in
the fourth quarter of 2007.
• It is clear that in order to stand still (because of the demographic
surge) we need to be growing at a rate of above 3.5%.
• The picture the GDP paints is of a high beta economy.
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GDP overview
30.00%
28.57%
28.40%
25.00%
20.36%
20.00%
19.27%
16.67%
17.78%
17.74%
15.00%
13.99%
11.11%
10.00%
8.07%
6.06%
5.00%
3.56%
-0.10%
0.00%
1.01%
0.00%
0.00%
1964
1965
1966
1967
1968
1975
1976
1977
1978
2002
2003
2004
2005
2006
2007
2008
-5.00%
GDP growth %
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New income streams
• Remittances
• Privatization Receipts
• Better Revenue Capture and Collection by Kenya Revenue
Authority
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Privatization receipts
30
25
20
15
10
5
0
Agriculture and
Forestry
Mining and Quarrying
Manufacturing
2002
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2003
Electricity and water
supply
2004
2005
2006
Construction
2007
Hotel and Restaurants
Transport and
Communication
2008
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Collection by Kenya Revenue Authority
400
384
322.3
300
256
237.7
200
100
0
2004/05
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2005/06
2006/07
2007/08
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Historical income streams
• Agriculture remains a mainstay of the economy.
• It is a fact that our yields are in line with the Sub-Saharan
averages which, in turn, are materially below worldwide averages.
• Malawi (with 3 consecutive surplus harvests in excess of
1.2 million tones) has proven that it is not rocket science that is
required but small holder access to subsidized or credit extension
fertilizer at the start of the planting season.
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Recorded marketed production in agriculture and
horticulture
200000
180000
178644
178857
160000
133136
140000
149673
123270
120000
99404
103272
104823
100000
80000
67254
60000
40000
20222
26722
28840
32591
57966
38838
43121
20000
0
2001
2002
2003
2004
Agriculture
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2005
2006
2007
2008
Horticulture
© 2009 Deloitte & Touche
Tourism
• Tourism crested a wave coincident with GDP which peaked in
the fourth quarter of 2007 and has substantially slowed down.
• The multiplier effect is difficult to model but is obviously material.
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Tourism earnings
70000
65450
60000
56200
52710
48874
50000
40000
38457
26382
30000
24256
21735
20000
10000
0
2001
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2002
2003
2004
2005
2006
2007
2008
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Tourism
• There is debate over the exact skew between development and
recurrent expenditure in the Kenyan Economy.
• What is clear is that the recurrent expenditure side has put
a massive squeeze on development expenditure.
• Given this internal dynamic Kenya exhibits high beta GDP
correlation.
• In effect these short spikes (1964-1967, 2002-2007) whilst
welcome have not been of long enough duration to ignite and
embed above trend growth for a significant time.
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Near term landscape
• It is now self-evident that the Frontier Markets Theory (lack of
correlation to developed markets) has been disproved.
• Two key pillars where this has been disproved are floriculture and
tourism and that the impact on our economy is actually an outsize
one given our small size.
• One would be hard pressed to find any income stream that has
managed to hold its own(apparently avocadoes have).
• The near term landscape is putting unprecedented pressure on
the Budget.
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Near term landscape
• For example: The Government of Kenya is seeking to borrow
KShs 109 billion from the domestic market . The lemon is being
squeezed and it is unclear how much more squeezing it can take.
• This is reminiscent of the Dutch boy, his 10 Fingers and the Dyke.
• In order to reignite growth we need to square the circle. That
circle being a KShs 109 Billion plus overdraft plus finding $ 2-2.5
Billion of new money to inject into this economy.
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Kenya bets big on ICT
• The under sea cables represent an outsize bet by Kenya on ICT.
• It is currently possible to model the positive GDP outcome but
I expect it to be in the region of 3% annually from 2010.
• This might well be a catalyst for returning to trend growth and
entirely fortuitous.
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Political analysis
• Massive and quite recent urbanization.
• A demographic skew where 60% of the population is under
18 signal a very fragile dispensation.
• We need to create jobs, slogans are not enough.
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Breakthrough thinking
• In order to accelerate convergence we need to regain above trend
growth in the order of 7-10%.
• A sustained infrastructure/development spend of $2 billion
equivalent per year for the next 5 years is required.
• How do we do this?
• Today from East to West the talk is of infrastructure and its
multiplier effect.
• We fell far behind Singapore from the time of our Independence
but just as the cables have landed in the year 2009 we now
have an opportunity to leverage the catch-up.
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Where do we source this new money?
• We need to do Infrastructure Bond Issues totaling $10 billion over
the next 5 years.
• We need to create a layer of smart IT which can measure in real
time traffic flows and deliver this data to our bondholders.
• We need to segregate toll receipts and this was done in the
90s by the Italian government ( which used to fall every month) Autostrada Bonds.
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Conclusion
• Impossible is Nothing.
• Talk is Cheap.
• We need to execute and execute now.
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