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Political Risk Analysis Kenya 2012

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Political Risk Analysis KENYA Table of contents Kenya covers an area of 582,646 square kilometers. The land stretches from the sea level (Indian Ocean) in the east, to 5,199 meters at the peak of the snow-capped Mount Kenya. From the coast, the altitude changes gradually through the coastal belt and plains (below 152 meters above sea level), the dry intermediate low belt to what is known as the Kenya Highlands (over 900 meters above sea level).

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The monotony of terrain in the low belt is broken by residual hills, masses of broken boulders and inselbergs. Settlement is confined to places where water can be found. Wildlife are masters of the greater part of the low belt. The famous Amboseli Game Reserve and Tsavo National Parks are situated here. The Great Rift Valley bisects the Kenya Highlands into east and west. Mount Kenya is on the eastern side. The Highlands are cool and agriculturally rich. Both large and small holder farming is carried out in the highlands.

The Lake Victoria Basin is dominated by Kano plains which are suited for farming through irrigation. The northern part of Kenya is plain and arid. However, a variety of food crops do well through irrigation. Kenya is located approximately 8-10 hours flying time from major European cities, and about 16-20 hours flying time from North American cities. 1. 2. CLIMATIC CONDITIONS Kenya enjoys a tropical climate. It is hot and humid at the coast, temperate inland and very dry in the north and northeast parts of the country. The average annual temperature for the coastal town of Mombasa (altitude 17 meters) is 30. 0 Celsius maximum and 22. 40 Celsius minimum, the capital city, Nairobi (altitude 1,661 meters) 25. 20 Celsius maximum and 13. 60 Celsius minimum, Eldoret (altitude 3,085) 23. 60 Celsius maximum and 9. 50 Celsius minimum, Lodwar (altitude) 506 meters) and the drier north plain lands 34. 80 Celsius maximum and 23. 70 Celsius minimum. There is plenty of sunshine all the year round and summer clothes are worn throughout the year. However, it is usually cool at night and early in the morning. The long rains occur from April to June and short rains from October to December.

The rain-fall is sometimes heavy and when it does come it often falls in the afternoons and evenings. The hottest period is from February to March and coldest in July to August. The annual migration of wildlife between Serengeti National Park in Tanzania and Maasai Mara National Park in Kenya takes place between June and September. The migration of almost two million wildebeest, zebras and other species is nature’s greatest spectacle on earth. 1. 3. POPULATION Kenya’s population has rapidly increased over the past several decades, and consequently it is relatively young. Some 73% of Kenyans are under 30.

In 50 years, Kenya’s population has grown from 7 million to 43 million. Kenya is a country of great ethnic diversity. Most Kenyans are bilingual in English and Swahili. Kenya has a very diverse population that includes three of Africa’s major sociolinguistic groups: Bantu (67%), Nilotic (30%), and Cushitic (3%). Kenyans are deeply religious. About 80% of Kenyans are Christian, 11% Muslim, and the remainders follow traditional African religions or other faiths. Most city residents retain links with their rural, extended families and leave the city periodi-cally to help work on the family farm.

About 75% of Kenya’s population lives in rural areas and relies on agriculture for most of its income. Nearly half the country’s 42 million people are poor, or unable to meet their daily nutritional requirements. The national motto of Kenya is Harambee, meaning “pull together. ” In that spirit, volunteers in hundreds of communities build schools, clinics, and other facilities each year and collect funds to send students abroad. 1. 4. BACKGROUND OF KENYA’S ECONOMY (1960-2010) Kenya is the largest economy in east Africa and is a regional financial and transportation hub.

After independence, Kenya promoted rapid economic growth through public invest-ment, encouragement of smallholder agricultural production, and incentives for private (of-ten foreign) industrial investment. Gross domestic product (GDP) grew at an annual average of 6. 6% from 1963 to 1973. Agri-cultural production grew by 4. 7% annually during the same period, stimulated by redistrib-uting estates, diffusing new crop strains, and opening new areas to cultivation. After experiencing moderately high growth rates during the 1960s and 1970s, Kenya’s eco-nomic performance during the 1980s and 1990s was far below its potential.

From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3. 9%. In-flation reached a record 100% in August 1993. In the mid-1990s, the government imple-mented economic reform measures to stabilize the economy and restore sustainable growth, including lifting nearly all administrative controls on producer and retail prices, im-ports, foreign exchange, and grain marketing. Nevertheless, the economy grew by an annual average of only 1. 5% between 1997 and 2002, which was below the population growth estimated at 2. % per annum, leading to a decline in per capita incomes. The poor economic performance was largely due to inappropriate agricultural, land, and industrial policies compounded by poor international terms of trade and governance weaknesses. Increased government intrusion into the private sector and import substitution policies made the manufacturing sector uncompetitive. The policy environment, along with tight import controls and foreign exchange controls, made the do-mestic environment for investment unattractive for both foreign and domestic investors.

The Kenyan Government’s failure to meet commitments related to governance led to a stop-start relationship with the International Monetary Fund (IMF) and World Bank, both of which suspended support in 1997 and again in 2001. During President Kibaki’s first term in office (2003-2007), the Government of Kenya began an ambitious economic reform program and resumed its cooperation with the World Bank and the IMF. There was some movement to reduce corruption in 2003, but the government did not sustain that momentum. Economic growth began to recover in this period, with real GDP growth registering 2.

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% in 2003, 4. 3% in 2004, 5. 8% in 2005, 6. 1% in 2006, and 7. 0% in 2007. However, the economic effects of the violence that broke out after the December 27, 2007 general election, compounded by drought and the global financial crisis, brought growth down to less than 2% in 2008. In 2009, there was modest improvement with 2. 6% growth. In May 2009, the IMF Board approved a disbursement of approximately $200 million under its Exogenous Shock Facility (ESF), which is designed to provide policy support and financial assistance to low-income countries facing exogenous but temporary shocks.

The ESF re-sources were meant to help Kenya recover from the negative impact of higher food and in-ternational fuel and fertilizer costs, and the slowdown in external demand associated with the global financial crisis. In January 2011, the IMF approved a 3-year, $508. 7-million ar-rangement for Kenya under the Fund’s Extended Credit Facility. To a considerable extent, the government’s ability to stimulate economic demand through fiscal and monetary policy is linked to the pace at which the government is pursuing reforms in other key areas. The Privatization Law was enacted in 2005, but only became operational as of January 1, 2008.

Parastatals Kenya Electricity Generating Company (KenGen), Telkom Kenya, and Kenya Re-Insurance have been privatized. The government sold 25% of Safaricom (10 billion shares) in 2008, reducing its share to 35%. Accelerating growth to achieve Kenya’s potential and reduce the poverty that afflicts about 46% of its population will require con-tinued deregulation of business, improved delivery of government services, addressing structural reforms, massive investment in new infrastructure (especially roads), reduction of chronic insecurity caused by crime, and improved economic governance generally.

The gov-ernment’s Vision 2030 plan calls for these reforms, but realization of the goals could be de-layed by coalition politics and line ministries’ limited capacity. Economic expansion is fairly broad-based and is built on a stable macro-environment fos-tered by government, and the resilience, resourcefulness, and improved confidence of the private sector. Despite the post-election crisis, Nairobi continues to be the primary commu-nication and financial hub of East Africa.

It enjoys the region’s best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years. Kenya faces profound environmental challenges brought on by high population growth, de-forestation, shifting climate patterns, and the overgrazing of cattle in marginal areas in the north and west of the country. Significant portions of the population will continue to require emergency food assistance in the coming years. Kenya is pursuing regional economic integration, which could enhance long-term growth prospects.

The government is pursuing a strategy to reduce unemployment by expanding its manufacturing base to export more value-added goods to the region while enabling Kenya to develop its services hub. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East Afri-can Community (EAC). The EAC’s objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement paving the way for a common market.

The Customs Union and a Common External Tariff were es-tablished on January 1, 2005, but the EAC countries are still working out exceptions to the tariff. Rwanda and Burundi joined the community in July 2007. In May 2007, during a Com-mon Market for Eastern and Southern Africa (COMESA) summit, 13 heads of state endorsed a move to adopt a COMESA customs union and set December 8, 2008 as the target date for its adoption. On July 1, 2010, the EAC Common Market Protocol, which allows for the free movement of goods and services across the five member states, took effect.

In October 2008, the heads of state of EAC, COMESA, and the Southern African Development Communi-ty (SADC) agreed to work toward a free trade area among all three economic groups with the eventual goal of establishing a customs union. If realized, the Tripartite Free Trade area would cover 26 countries. 2. POLITICAL CRITERIA 2. 1. GENERAL From the moment Kenya became independent, they went through lots of big changes. In 1962 the KANU-KADU coalition government was formed. The coalition government included both Kenyatta and Ngala.

The country was divided in 7 regions and each one of the regions had its own regional assembly. After forming the coalition, the principle of reserving seats in the parliament for non-Africans was abandoned and the first open elections were held in May 1963. In 1964 Kenya became a republic, and constitutional changes further centralized the government (Wikipedia – September 2012). When in 1978 Daniel Arap Moi became president in an authoritarian and corrupt manner, there were several changes in the politic of Kenya.

Moi reduced the power of the Kenyatta’s men in the cabinet by identifying them to be traitors. Also although the parliament started off as coalition during the whole presidency of Moi there was only one party who had all the power. Even after being requested by United States to have multi-party system Moi declined. In the end because of the local and foreign pressure Moi was forced to accept a new party so that the multy-party could be restored. Moi won the elections in 1992 and 1997 where he used fear and electoral fraud to win (Wik-ipedia – July 2008).

In 2002 Moi was not able to present himself in the presidential elections because it is stated in the Kenya’s constitution that a present cannot be in the presidential elections more than three times. Moi unsuccessfully tried to promote Uhuru Kenyatta, as his successor. Moi’s former vice-president Mwai Kibaki was elected president by a large majority. International and local observers reported that the 2002 elections to be generally more fair than those of both 1992 and 1997 when Moi was elected as president. Kibaki lost quickly much of its power because his regime was too close linked with the Moi forces.

The continuity between Kibaki and Moi became one of the reasons for the self-destruction of Kibaki’s regime. In 2007 Odinga attacked the failures of the Kibaki regime. In December Odinga won majority of the seats in the Parliament, but the presidential elections votes were divided. In the end it became never clear who won the elections, still the election committee stated that Kibaki was the winner. Odinga accused Kibaki of corruption which resulted in several big confrontations between followers of Odinga and Kibaki. The European Union did not agree with the outcome either because of the detected fraud in the presidential elections.

As relation mass protest were triggered, bring-ing simmering ethnic tensions. The protest and the ongoing violence between several groups continued and became worse over the months. Between December and February 1. 500 people died and 600. 000 people became homeless. The United Nations tried to settle and offered a compromise whereby Kibaki stayed president and Odinga became Prime Minister (Chartis – February 2008). In August 2010, a reference date taken on a new Kenyan constitution. The new Kenyan con-stitution restricted the power of president which would benefit to the parliament and re-gions.

The reference date was accepted by the majority of parliament and passed peacefully. 2. 2. THE POLITICAL BALANCE OF POWER Various people speak of the heritance of Moi when looked at Kibaki and the amount of pow-er he has. Moi reduced the power of the cabinet – this resulted in more power for him, the president. When Kibaki became the president he had his first years as much power as Moi had in his years. But the second time Kibaki became president there were many protests against him becoming the president. Many people and also Odinga accused him winning unfairly.

United Nations stepped in and made Odinga prime minister and shortly after that the Kenyan constitution changed. With the new Kenyan constitution rules Kibaki, or the pre-sent president, is not allowed to appoint more than 50% of the ministers. The rest of the ministers can be chosen by the prime minister. In this way the president is never able to al-ways have full support by his ministers. Nowadays you can speak of a power-sharing cabinet in Kenya. The cabinet is fifty percent Kibaki appointed ministers and fifty percent Odinga appointed ministers.

At the moment we can speak of balanced coalition when we look at Kenya. 2. 3. PRESENT GOVERNMENT AND HIS ATTITUDES AND PROGRAMS Although many opposed of Kibaki to become the president Kenya again in 2007 he did by some say an outstanding job. The country is compared to the Moi years much better man-aged and has by far more competent personnel (Wikipedia – October 2012). Many sectors of the economy have recovered from collapsing in 2003. So did many state corporations who had collapsed during the Moi years have been revived and are performing profitably. Also the infrastructure has been going through changes.

Several ambitious infra-structural and other projects are planned or ongoing. Kibaki also introduced the Constituency Development Fund, this was introduced in 2003. The fund was designed to develop resources across regions and to control imbalances in regional development. The CDF program has invested in putting up new water, health and education facilities. There was also special attention for the remote areas of Kenya; these areas were usually overlooked during projects (CDF – official website). Another fact is since the presidency of Kibaki the dependence of Kenya on aid by western donors has been decreased.

The country is still getting funded significant but is now finding more fund by internally generated resources, such as tax. During Kibaki presidency, Kenya was more democratic and freer than before. When Kibaki came to power in 2003, he gave away free learning in primary school as well as in secondary school. This resulted in increase of number of children in primary- as in secondary school. 2. 4. POLITICAL STABILITY IN KENYA Before August 2010 all the power laid in the hands of the president. Ex-president Moi for example used his position for his own benefits.

After the new Kenyan constitution the power changed of only one person, the president, too have it shared with the cabinet. With the new Kenyan constitution it results in a more stable government. When we look at the further the cabinet of Kenya will go through huge changes starting from 4 March 2013, because the general election will then be held. So far Kibaki did not state that he will run in the president elections next year. Odinga will be participating as well as several other ministers, for example: the Deputy prime minister and the Cooperative minister (Wikipedia – October 2012). . CRITERIA RELATED TO DOMESTIC ECONOMY 3. 1. GENERAL INFORMATION Most of Eastern Africa’s economy is centralized in Kenya, although this gives them a power-ful position they still suffer from corruption and the low prices of their most important ex-port products. Lately the government has lacked investing in infrastructure which leaves them in danger of losing the position of the largest economy in Eastern Africa. The government is accused of the lack of attempting to stop the corruption which opened the doors to a lot of scandals within Kenya’s economy.

This has led to a deduction of financial support options. Recently Kenya have had a lot of setbacks like: high food and fuel import prices, a severe drought and reduced tourism resulted in rise in the interest rated and an increased cash re-serve. 3. 2. GDP The GDP in 2011 was $ 72, 34 billion, in 2010 this was $ 68,9 billion and in 2009 $ 2,6 billion. GDP growth in % Because of violence used during the elections plus the global financial crisis have led to a deduction in the GDP, in 2008 the growth was only 1,7% but luckily the economy rebounded since the year 2009.

Now in 2011 the growth was only 4,3% due to the inflation and currency depreciation. The GDP per capita was $1,700 in 2009 and in 2010 and increased to $1,800 in 2011. If you would compare this with the rest of the world this leaves Kenya on the 195th place in the, which is dangerously low when we look at the risk of doing business with Kenya. Year PPP growth 20051398. 7034. 74 % 20061490. 4066. 56 % 20071592. 9866. 88 % 20081604. 9250. 75 % 20091616. 1430. 70 % 20101675. 9183. 70 % Even though historical facts do not look good, the forecast concerning the GDP are looking better.

The GDP is likely to increase due to expansions in tourism, telecommunications, transport and construction and recovery in the agriculture, one of the most important sec-tors for Kenya’s GDP. 3. 3. MOST IMPORTANT SECTORS AND PRODUCTS As mentioned before, one of the most important sectors in Kenya’s economy is the agricul-tural sector, forestry and fishing accounted for 24% of the total GDP, 18% of the wage em-ployment and 50% revenue from exports. Especially the tea production and export are likely to increase because of prosperous weath-er forecasts; the coffee industry has stagnated and is not likely to increase in the near future.

The most profitable sector in Kenya is the service sector with tourism dominating that sec-tor. About 63% of all GDP is generated by tourism. Most tourists come from Germany and the Uniting Kingdom; they are attracted to the coastal beaches and the big game reserves. The tourism sector had a downfall because of negative attention in the media and the unsafe environment. The government is currently addressing the security problems within Kenya by introducing a tourism police and by launching marketing campaigns in key tourist origin markets.

The most important sectors are: consumer goods (mobile, batteries and textile), agriculture, oil, aluminum, steel, cement and tourism. 3. 4. INFLATION RATE Inflation in consumer prices in % The inflation rate in 2011 was 14%. As we can see on the chart the inflation rate fluctuates a lot which means it will have a negative effect on the analysis on the risk. The Kenyan inflation rate has been on an average of 12,6%, from 2006 until 2012. The ultimate high was 31,5% in May 2012 and 3,2% in October 2011. On the following chart we can see the inflation rate more specified in recent times.

Even in the last months there has been a lot of fluctuation in the inflation rate. The main reasons for the fluctuations are droughts and uncertainty in the import and export prices. 3. 5. THE GROWTH OF THE POPULATION The current total population is 43,013,341 (July 2012). In this chart we can see that the population always has had a steady growth. 3. 6. DOMESTIC INFRASTRUCTURE Kenya has an extensive road network of 152887 kilometers but most of the roads are in bad state unfortunately. For example of the total of 63. 800 ilometers of high way only 8,868 are paved. There is currently a project designed for creating links between all major and minor roads and to rehabilitate 20. 000 kilometer of roads in the urban centers. Kenya has a state owned railway corporation which is managing the single track railway station. It runs from Mombasa through Nairobi to the Ugandan border. Certain institutes are investing in the railway corporation to make it viable. The government is working on making the railway a private owned company. Either way, the Kenyan railway station is in a bad state.

Kenya has a port located in Mombasa; it has a freight throughput of about 8. 1 million tons. Kenya has an airport that recently has changed from a state owned company to a public/private company. This has been successful since Kenya now is the key gateway to Africa Communications Overall Kenya has a well-established communication system More than 90% of the population has access to GSM signals. Kenya Posts and Telecommunications Corporation provides international direct dialing and subscriber trunk dialing, mobile telephones, telex, facsimile, data communication and related services.

Substantial investment for the expansion of these facilities is under way and various internet providers have made their entry into Kenya. 4. CRITERIA RELATED TO FOREIGN ECONOMY Economic Cooperation, Regional Integration & Trade The East African Community (EAC) countries – Kenya, Tanzania, Uganda, Rwanda and Burun-di – transformed into a fully ? edged and enforceable customs union on 1 January 2010. They adopted a common external tari? (CET) with three bands: 0% (raw materials and capital goods), 10% (intermediate goods) and 25% (? nished goods). Tari? of up to 100% are appli-cable to products that are deemed to be sensitive to member states. These include maize, rice, cement, sugar and dairy products. Members will continue to collect customs receipts separately until a revenue sharing mechanism can be agreed. Furthermore, the EAC Common Market Protocol came into force on 1 July 2010, potentially allowing for the free movement of goods, services, people and capital in a zone with a com-bined population of some 135 million people. Given the large amount of legislation that needs to be amended in all countries to comply with the protocol, the transition is expected to proceed slowly.

Kenya has already taken signi? cant steps to domesticate and embrace the provisions of the protocol. A task force charged with reviewing national laws and aligning them with the Common Market Protocol has completed its report. Areas that need harmonization include investment, tax, labor, education, standards, competition, transport, communications and ? nancial services. The report was forwarded to the attorney general who was expected to prepare a miscellaneous amendment bill to be tabled in parliament. Non-tari? barriers (e. g. road blocks, varying quality standards, the ine? ient functioning of the port of Mombasa and other red tape) continue to impede the free trade in goods and add to the costs of doing business. The replacement of paper-based customs administration practices with an electronic inter-face system, Simba, is a strong step towards enhancing competitiveness and trade facilita-tion. With the bringing into operation of Simba customs checks are subjected to computer-ized scanning and fewer physical checks are undertaken. The programme has enabled im-porters and exporters to lodge their documentation on line.

In 2012, the Simba upgrade is expected to increase automation of goods clearance across all Kenyan border crossings. 4. 1. IMPORT 2011 While Kenya had just spent 3. 3 billion US Dollars on merchandise imports in 99’, they imported goods worth to 13. 49 billion US Dollar in 2011 which is an increase of over 400%. The depressed performance during the 2008-09 was due to a number of adverse shocks including the post-election violence in early 2008, a severe drought that affected most parts of the country, high international commodity prices and spillover effects of the global financial crisis, but the econ-omy rebounded in 2010.

Import Products The major import products for the year to June 2011 were oil, manufactured goods, chemi-cals, machinery and transport equipment. The increase in the value of imports was mainly due to imports of oil, machinery and transport equipment, and manufactured goods. Oil imports accounted for 24. 2% of the total import. International oil prices increased from USD 74. 8 per barrel in June 2010 to USD 112. 15 per barrel in June 2011. Imports of machinery and transport equipment accounted for 28. 9% of total imports, and increased from USD 3 212 million to USD 3 942 million.

This was due to the ongoing infra-structure development. Imports of manufactured items, mainly intermediate goods, accounted for 14. 8% of the im-port bill and increased from USD 1. 625 million to USD 2. 021 million while chemicals ac-counted for 13. 5%. Major Import Partners Kenya’s major import partners for merchandise are (2011): 1United Arab Emirates13. 0% 2China12. 1% 3India11. 6% 4South Africa5. 8% 5United Kingdom4. 6% 4. 2. EXPORT 2011 Kenya had received 2. 2 Billion US Dollar in 99’, while they could increase their receiving for ex-ports in 2011 to 5. 77 Billion US Dollar.

This is an increase of about 260%. The depressed performance during the 2008-09 was due to a number of adverse shocks including the post election violence in early 2008, a severe drought that affected most parts of the country, high international commodity prices and spillover effects of the global financial crisis, but the economy rebounded in 2010. Export Products The agricultural sector continues to dominate Kenya’s economy, although only 15 percent of Kenya’s total land area has sufficient fertility and rainfall to be farmed, and only 7 or 8 per-cent can be classified as first-class land.

It is the mainstay of Kenya’s economy, contributing over one third of the Gross Domestic Product (GDP). AGRICULTURAL PRODUCTS:Tea, coffee, horticultural products, pyrethrum, pineapples, sisal, tobacco and cotton. TOP 1 – TEA Kenya is one of world`s top producers and exporters of high quality tea and coffee. Value of the produce was boosted by the average auction price TOP 2 – HORTICULTURE The robust flower industry in Kenya sees flower exports ac-counting up to 35% of all Europe’s flower imports. The good performance recorded in the horticultural sub-sector was due to improved external demand.

OTHER EXPORTS:Beside this also iron, steel, petroleum products, cement, arti-cles of plastics, medicinal and pharmaceutical products, and leather are exported Textile is Kenya’s leading manufactured export. Soda ash (used in glassmaking) is Kenya’s most valuable min-eral export and is quarried at Lake Magadi in the Rift Valley. SERVICES: Transport, tourism and telecommunications services are the top three service exports in the country. Kenya’s services sector, which contributes about 63 percent of GDP, is dominated by tourism. TOURISM: In 2011 tourism experienced signi? cant gains with earnings rising by 32. %. The United King-dom continued to be the country’s main departure point for tourists with 203. 290 arrivals. Tourism is the second most important source of foreign exchange. To maximize on this growth trend, the Government is working together with the private sector in carrying out marketing as well as in strengthening linkages between tourism and the rest of the economy. Major Export Partners The market for Kenyan exports has been transformed over the years due to changing policy environment, regional integration and other initiatives providing market access to 12 key trading blocks.

The initiatives include the East African Community, the Common Market for Eastern and Southern Africa (COMESA), Cotonou ACP/EU Partnership Agreement, and the AGOA initiative, among others. COMESA is Kenya’s key export market, absorbing about 35% of total exports. The European Union market is the second most important, absorbing about 30% of total exports. Kenya’s major export partners for merchandise are (2011): 1COMESA (e. g. Uganda, Tanzania etc. )35. 0% 2European Union30. 0% 3United States5. 6% 4Pakistan4,2% 5United Arab Emirates4,1%

Kenya’s relations with Western countries are generally friendly, although current political and economic instabilities are sometimes blamed on Western pressures. ? 4. 3. THE IMBALANCE IN TRADING Kenya is largely a trade deficit country. The negative balance of trade occurs because the country’s exports are vulnerable to both international prices and the weather conditions. Since independence, Kenya has enjoyed close international relations, particularly with the western countries. It is also a member of several regional trade blocs, such as the COMESA (Common Market for Eastern and Southern Africa) and the EAC (East African Community).

These blocs are key components of Kenya’s trade volumes. The 2011 Kenya’s trade performance was mainly affected by rise of oil prices globally which led to increase in the import bill and the depreciation of the Kenya shilling, while exports remained stagnant. The gap between imports and exports, also called current account deficit, now stands at above 10% of GDP – one of the highest in the world! Today, Kenya’s main exports don’t even earn enough to pay for its oil imports, 4. 4. KENYAN CURRENCY The recent history of Kenyan currency

On 14 September 1966, the Kenyan shilling (KES) replaced the East African shilling at par, although it was not demonetized until 1969. The Central Bank of Kenya issued notes in de-nominations of 5, 10, 20, 50 and 100 shillings. Locals in Kenya call the Kenyan shilling also “Bob”. The Kenyan Shilling: Development of the Kenyan shilling Overview of the development of the Kenyan shilling (blue) compared to the US Dollar (red) between 2002 and 2012. Exchange rate in October 2012: EUR / KES 1 Euro = ca. 110,38 Kenya shilling 100 Kenya shilling = ca. 0,91 Euro EUR / USD 1 Euro = ca. 1,29 US Dollar 100 Kenya shilling = ca. ,18 US Dollar 4. 5. KENYAN MONETARY POLICY The year 2011 was tumultuous for the monetary authorities in Kenya with high inflation rates and a heavily depreciated currency. The month–on-month inflation rate averaged 12. 9% from January to October and peaked at 19. 7% in November 2011 against a target of 5%. The high rate of inflation was mainly driven by a rise in food and non-alcoholic beverage prices and transport charges. The food and non-alcoholic beverages index rose by 26. 2% compared with October 2010 while the transport index rose by 26. 22%. The rise in transport index reflected the sharp rise in fuel prices.

According to the Central Bank of Kenya (CBK), the euro-area currency crisis also had a desta-bilizing effect on the price level. Inflation is expected to drop to single digits in the next two years thanks to improved production of food and stability of fuel prices. In 2011 the Kenyan shilling depreciated (=im Wert gefallen) by a margin of 25. 2% against the US dollar (USD), dropping from an average of KES 81. 11 per USD 1 in January 2011 to KES 101. 51 in October 2011. It depreciated against the euro (EUR) from an average of KES 108. 29 per EUR 1 in January to KES 139. 07 in October 2011.

To arrest the fall of the Kenyan shilling, the monetary policy committee (MPC) progressively increased the central bank rate (CBR) from a low of 6% in January 2011 to a high of 18% by December 2011. The inflationary pressure experienced in 2011 and the depreciation of the Kenyan shilling can directly be traced back to the Central Bank of Kenya policy adopted in 2010, when it cut the central bank rate from 7% in January to 6% in December. This was meant to revive lend-ing and stimulate the economy through increased consumption. The policy was highly suc-cessful as evidenced by the 5. 6% growth attained in 2010.

However increased consumption pushed up consumer prices and put pressure on the Kenyan shilling as it heightened demand for imports, which rose from USD 11,283 million in year 2009/10 to USD 13,659 million in year 2010/11. Furthermore, in year 2010/11, domestic credit increased by KES 254. 4 billion (23. 4%) against a target of KES 205. 9 billion (18. 9%). The excess credit growth reflected a stronger domestic demand than previously estimated. 4. 6. KENYAN’S DEBT SITUATION Kenya’s external debt (or foreign debt) External debt is that part of the total debt in a country that is owed to creditors outside the country.

This is not to be confused with actual government debts. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. List of countries by external debt (End of 2011): External debt. (in USD)per capita% of GDP 1 United States14,710,000,000,00050,266103 2 United Kingdom9,836,000,000,000156,126390 3 France5,633,000,000,00074,619182 4 Germany5,624,000,000,00057,755142 5 Japan2,719,000,000,00019,14845 Italy2,684,000,000,00036,841108 7 Netherlands2,655,489,600,000226,503344 8 Spain2,570,000,000,00018,26084 16 Austria 883,500,000,00090,128200 92 Kenya 7,935,000,00020025 The debt service ratio The debt service ratio is the ratio of debt service payments (principal + interest) of a country to that country’s export earnings. A country’s international finances are healthier when this ratio is low. The ratio is between 0 and 20% for most countries. For example, if a country has export revenue of ? 100bn and pays ? 15bn interest payments on its external debt, then its debt service ratio is 15%.

A rising debt service ratio is often the sign of an imminent economic crisis. Debt service ra-tios may rise because of: •A fall in exports •Lower price of commodities which are main exports of a country. •Higher Borrowing •Higher interest rates increasing cost of debt repayments •Devaluation increasing cost of external repayments. 5. CONCLUSION All in all Africa has a big potential for exports and investments as there are still big growth opportunities. Kenya has the greatest growth potential in the Sub-Saharan area followed by South Africa. However there are some recommendations to bear in mind (e. . Letter of credit, creditworthiness check,… see list at end of paper) Following there is an overview of the key advantages and disadvantages for exporting to or investing in Kenya: +- Stable economy and good eco-nomic prospectspolitical instability ? political riskBUT: increasing political stability since peaceful referendum in 2010 ? adoption of a new con-stitution Favourable strategic geographical position and access to export mar-kets (? Eastern Africa) corruption and impunity (=Straflosigkeit) BUT: High efforts to bring the problem under control: since 2010 ?

Kenyan Anti-Corruption Commission forced high-profile cabinet ministers to step aside and the International Criminal Court publicly named perpetra-tors of violence (=Gewalttater) Membership of the largest African common market, the EAC (Eastern African Community), COMESA and the Southern African Development Community (SADC) ? enables the free movement of goods and ser-vices across the member statesInadequate infrastructure for absorption of economic devel-opmentBUT: High efforts to catch up on infrastructure English languagewidespread poverty ? crime Mombasa seaport ? most impor-tant seaport + Nairobi ? olitical and economic stronghold in the Eastern African Areacompanies are often undercap-italized ? risk of late or non-payment Small time difference Small taxes and levies (=Abgaben) Low wages compared to European countries and well trained em-ployees Emerge of a middle class with increasing purchasing power Kenya plays a major role in the Eastern African economy. Mombasa is the most important seaport in Eastern Africa and Nairobi is the economic and political stronghold in this area. One big plus for exports to or investments in Kenya is that the country has a quite stable economy. Even there were some setbacks in the past (e. . violence during the last elections in 2008, global financial crisis) the outlook for Kenya’s economy and GDP is quite favourable for the future. Due to the expansionary of fiscal measures and by structural business reforms driven by the IMF the economy of Kenya will further improve in the past few years. Addi-tionally the recovery of agricultural production and investment in infrastructures will also contribute to the dynamism of the economy. These are quite good prerequisites for potential exporters and investors. Even if Kenya’s investment prospects are quite attractive they had been marred by political risk for a long time.

Violence during the election in 2008 frightened away many potential investors. The turning point for Kenya was the peaceful referendum in 2010 where a new country’s constitution was decided (? separation of powers). The peacefulness around the referendum had a huge positive impact on the country. Following this event Standard and Poors increased the credit rating to level B+ which brings Kenya closer to a score that foreign investors regard as an all-clear signal. Nevertheless exporters and investors need to be careful about the political situation in Kenya as new elections will take place in March 2013.

The electoral campaign carries significant risks of a resurgence of the violent confrontations within the ethnic groups in Kenya. Our opinion is that Kenya has a huge potential for exporters and investors. It has a solid eco-nomic basis and political stability is already improving, so we would export to or invest in Kenya. Our recommendation prior to do export or investment is the following Exporters/Investors… •… need to check the local partner/customer in Kenya carefully It is very important to have a reliable, reputable partner in Kenya.

Creditworthiness should be checked prior to doing business with them. •…insist on payment by letter of credit Especially when doing business with a customer/partner the first time it is advisable not to sell under open payment terms. It could than occur that the exporter would never receive his money. A letter of credit is used to eliminate the risk such as unfa-miliarity with the foreign country, customs or political instability. •… should not admit corruption Corruption in a foreign country is also indictable in Austria. Austrian exporters may also be reliable for their Kenyan partners.

Therefore it is advisable to agree on anti-corruption clauses in the contract. In case an Austrian exporter would admit corruption the export insurance will not be valid anymore. •… need to consider and watch the political situation When political unrests occur it may be advisable to stop exports until the unrests have calmed down. 6. SUMMARY MILESTONE HISTORYThe independent Republic of Kenya was founded in December 1963. JOMO KENYATTA was the first president (until 1978). Kenyatta’s long presidency provided the country with stability. GEOGRAPHIC FEATURES •580. 000 km2 •42 million inhabitants •Capital City: Nairobi Language: English, SwahiliThe Republic of Kenya is a country in East Africa that lies on the equator with the Indian Ocean to its south-east. It is bordered by Tanzania to the south, Uganda to the west, South Sudan to the north-west, Ethiopia to the north and Somalia to the north-east. Kenya has a land area of 580. 000 km2 (7 times bigger than Austria) and a population of about 43 million residents. It is to stress out that 75% of the population is younger than 30 years. Its capital and largest city is Nairobi. English is the language of choice when doing business in Kenya and is also used in Kenyan schools.

Swahili (also called Kiswahili) is the national language of Kenya. It is a unifying African language spoken by nearly 100 percent of the Kenyan population. CLIMATIC CONDITIONSKenya has a warm and humid climate along its coastline on the Indian Ocean, which changes to wildlife-rich savannah grasslands moving in-land towards the capital. Nairobi has a cool climate that gets colder ap-proaching Mount Kenya (5. 166m), which has three permanently snow-capped peaks. 1. OVERVIEW OF THE COUNTRY 2. POLITICAL CRITERIA 2002 transitional election 2007 accusation of electoral ma-nipulation resulted in violent riots in Kenya

August 2010: peaceful referen-dum in passing a new constitution Kenya has seen significant political changes in the last decade. The his-toric 2002 transitional election, in which the National Rainbow Coalition (NARC) defeated the long-ruling Kenya African National Union, created a major political shift and inspired optimism among citizens about the future of their country as a multiparty democracy. Kenyans went to polls in large numbers for the December 2007 general elections, but the elections turned violent after accusations of electoral manipulation. More than 1. 00 Kenyans died and more than 600. 000 were displaced. Peace was restored following the signing and enactment of the National Accord and the creation of the Grand Coalition Government (GCG), a power-sharing deal ending a political stalemate between President Mwai Kibaki of the Party of National Unity and Raila Odinga of the Orange Democratic Movement. The National Accord also set out an ambitious reform agenda including a review of the country’s constitution. In August 2010, a largely fair and peaceful referendum resulted in pass-ing a new constitution.

The new constitution was a landmark NEW ELECTIONS IN 2013 risk of new post-electoral vio-lence and rumorsachievement for the GCG as it enforces broad changes to the govern-ance framework, including: a new devolved system of government; reduced presidential powers, a reformed electoral process, more defined separation of powers between the three branches of government; land reform; and an expanded bill of rights. Government institutions, civil society, political parties and citizens face an ambitious and challenging period as they enact the reforms dictated by the new constitution.

Kenya’s political dynamics also are likely to be influenced by the outcome of the International Criminal Court (ICC) proceedings in which six prominent Kenyans are accused of involvement in the 2008 post-election violence. It is not yet clear whether the charges will be upheld by the ICC. Kenyan leaders are under increasing pressure to continue rebuilding their country and to avoid a repeat of the 2008 post-election crisis as the country heads into general elections in 2013. 3. KENYA’S DOMESTIC ECONOMY DOMESTIC ECONOMY The economy experienced moderate growth in 2011 but is expected to rise modestly in 2012 and 2013 respectively.

The year 2011 witnessed drastic currency depreciation and rapid inflation, both of which are ex-pected to stabilize in 2012 and 2013. Youth unemployment constitutes 70% of total unemployment. In 2011 Kenya’s economy recorded “checked” growth, primarily driven by financial intermediation, tourism, construction and agricultural sectors. Gross domestic product (GDP) growth rate for the first nine months was estimated at 4. 2%, down from 4. 9% in the same period in 2010. Overall, growth in 2011 was curtailed by an unstable macroeconomic environment characterized by rising inflation, exchange rate depreciation and high energy costs.

The country also experienced limited rainfall in the first half of 2011, which affected aggregate food production. In January 2011, the Kenyan government was forced to ask the IMF for support to counter the mounting financing pressures caused by a widening current account deficit. Certain other structural constraints, such as widespread corruption and poor infrastructure, also continued to undermine Kenya’s growth potential. 4. KENYA & FOREIGN ECONOMY IMPORT While Kenya had just spent 3. 3 billion US Dollars on merchandise im-ports in 99’, they imported goods worth to 13. 49 billion US Dollar in 2011 which is an increase of over 400%.

The depressed performance during the 2008-09 was due to a number of adverse shocks including the post election violence in early 2008, a severe drought that affect-ed most parts of the country, high international commodity prices and spillover effects of the global financial crisis, but the economy rebounded in 2010. IMPORT PRODUCTS The major import products for the year to June 2011 were oil, manu-factured goods, chemicals, machinery and transport equipment. The increase in the value of imports was mainly due to imports of oil (International oil prices increased) IMPORT PARTNERS1. United Arab Emirates -> 13. % 2. China -> 12,1% 3. India -> 11. 6% 4. South Africa -> 5,8% 5. United Kingdom 4,6% EXPORT Kenya had received 2. 2 Billion US Dollar in 99’, while they could in-crease their receivement for exports in 2011 to 5. 77 Billion US Dollar. This is an increase of about 260%. The depressed performance during the 2008-09 was due to a number of adverse shocks including the post-election violence in early 2008, a severe drought that affect-ed most parts of the country, high international commodity prices and spillover effects of the global financial crisis, but the economy rebounded in 2010.

EXPORT PRODUCTSThe agricultural sector continues to dominate Kenya’s economy, alt-hough only 15 percent of Kenya’s total land area has sufficient fertility and rainfall to be farmed. Tourism currently is Kenya’s third largest foreign-exchange earner after tea and horticulture (flowers) EXPORT PARTNERSCOMESA (East-South Africa) -> 35. % European Union ->30% United States -> 5,6% Pakistan -> 4,2% United Arab Emirates -> 4,1% IMBALANCE IN TRADING Kenya is largely a trade deficit country.

The negative balance of trade occurs because the country’s exports are vulnerable to both interna-tional prices and the weather conditions. The gap between imports and exports, also called current account deficit, now stands at above 10% of GDP – one of the highest in the world! Today, Kenya’s main exports do not even earn enough to pay for its oil imports. ECONOMIC COOPERATION, REGIONAL INTEGRATION & TRADE COMMON EXTERNAL TAFFIFF VISION STRATEGIC OPPORTUNITY

The East African Community (EAC) countries – Kenya, Tanzania, Uganda, Rwanda and Burundi – transformed into a fully-fledged and enforceable customs union on 1 January 2010 allowing for the free movement of goods, services, people and capital in a zone with a combined population of some 135 million people. The next phase of the integration will see the bloc enter into a Monetary Union and ultimately become a Political Federation of the East African States. They adopted a common external tariff (CET) with three bands: 0% (raw materials and capital goods), 10% (intermediate goods) and 25% (finished goods).

Tariffs of up to 100% are applicable to products that are deemed to be sensitive to member states. These include maize, rice, cement, sugar and dairy products. The Vision of EAC is a prosperous, competitive, secure, stable and politically united East Africa; and the Mission is to widen and deepen Economic, Political, Social and Culture integration in order to improve the quality of life of the people of East Africa through increased competitiveness, value added production, trade and investments. EAC has a combined population of more than 135 million people, land area of 1. 2 million square kilometres and a combined Gross Domestic Product of $74. 5 billion. This bears great strategic and geopolitical sig-nificance and prospects of a renewed and reinvigorated East African Community 5. CONCLUSION POTENTIAL OF KENYAAll in all Africa has a big potential for exports and investments as there are still big growth opportunities. Kenya has the greatest growth potential in the Sub-Saharan area after South Africa. However there are some recommendations to bear in mind (e. g. Letter of credit, creditworthiness check,…) ADVANTAGESRISKS

Stable economy and good eco-nomic prospectspolitical instability ? political riskBUT: increasing political instability since peaceful referendum in 2010 ? adoption of a new constitution Favourable strategic geographical position and access to export mar-kets (? Eastern Africa) corruption and impunity (=Straflosigkeit) BUT: High efforts to bring the problem un-der control: since 2010 ? Kenyan Anti-Corruption Commission forced high-profile cabinet ministers to step aside and the International Criminal Court publicly named perpetrators of violence (=Gewalttater) ADVANTAGESRISKS

Membership of the largest African common market, the EAC (Eastern African Community), COMESA and the Southern African Development Community (SADC) ? enables the free movement of goods and ser-vices across the member statesInadequate infrastructure for absorption of economic devel-opmentBUT: High efforts to catch up on infrastruc-ture English languagewidespread poverty ? crime Mombasa seaport ? most impor-tant seaport + Nairobi ? political and economic stronghold in the Eastern African Areacompanies are often undercap-italized ? risk of late or non-payment Small time difference Small taxes and levies (=Abgaben)

Low wages compared to European countries and well trained em-ployees Emerge of a middle class with increasing purchasing power OUR RECCOMENDATIONS Exporters/Investors… … need to check the local partner/customer in Kenya carefully It is very important to have a reliable, reputable partner in Kenya. Cre-ditworthiness should be checked prior to doing business with them. …insist on payment by letter of credit Especially when doing business with a customer/partner the first time it is advisable not to sell under open payment terms. It could than occur that the exporter would never receive his money.

A letter of credit is used to eliminate the risk such as unfamiliarity with the foreign country, customs or political instability. … should not admit corruption Corruption in a foreign country is also indictable in Austria. Austrian exporters may also be reliable for their Kenyan partners. Therefore it is advisable to agree on anti-corruption clauses in the contract. In case an Austrian exporter would admit corruption the export insur-ance will not be valid anymore. … need to consider and watch the political situation When political unrests occur it may be advisable to stop exports until the unrests have calmed down.

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