Kenya's economy powers ahead, inflation subdued
Date: Thursday, September 30, 2010 @ 17:47:21 CDT
Topic: RavenNuke(tm)


NAIROBI (Reuters) - Kenya's economy expanded 5.4 percent in the second quarter thanks to growth in agriculture, construction and the financial sectors while the inflation rate remained subdued in September, official data showed on Thursday.



First quarter growth was revised up to 4.8 percent from 4.4 percent, meaning east Africa's biggest economy expanded 5.2 percent in the first half and some analysts said more interest rate cuts were now off the table.

"The gross domestic product data release and revisions confirm our view that the central bank is now likely to keep its central bank rate unchanged," said Razia Khan, head of Africa research at Standard Chartered bank.

"There are fewer pressing reasons for more aggressive easing at this stage of the cycle," she said.

A survey showed retailers' optimism leapt in the third quarter after the peaceful passing of a new constitution. The quarterly retailer confidence index published by TNS Research International surged 33 percent to 150.7.

There was good news for tea growers too. Tea exporters in the world's biggest exporter of black tea earned 51 percent more in the first eight months than a year earlier, spurred by demand from India and China.

Kenya's current account also swung to a surplus of 15.5 billion shillings in the first half from a deficit of 54 billion, chiefly thanks to an 88 percent surge in tourism receipts and transport costs.

RECOVER GATHERS PACE

Kenya's economy powered ahead by 7.1 percent in 2007 before post-election violence and the global economic slowdown almost brought it to a halt a year later. The fragile recovery was then hit by drought in the region in 2009.
But the government has boosted spending, especially on infrastructure, in its last two budgets to spur the economy while the central bank has trimmed its benchmark lending rate to 6 percent from a recent peak of 9 percent in December 2008.

"It's quite a while since we saw this kind of growth and there is nothing materially significant that could cause a reversal in the third quarter," said Isaac Njuguna, head of investment at Nairobi-based Zimele Asset Management.

"Actually, I would not be surprised if the third quarter number comes out stronger than this (the second quarter)," he said.

The central bank said earlier this week that leading indicators showed the growth momentum of the second quarter had been sustained in the July-September period.

The government is targeting 4.5 percent growth in 2010 and some analysts said this could now be surpassed. According to the central bank's September market survey, most are now expecting growth in the 4.5-5.0 percent range.

"The economy continues to pick up a head of steam and traction and might well outperform consensus estimates which are now clustering at an elevated 5 percent," said Aly Khan Satchu, an independent analyst in Nairobi.

"I think that the economy is in a sweet spot and that the tipping point for turning this acceleration into a 'boomlet' is when retail borrowing rates drop below 10 percent."

Despite a series of reductions in the central bank's benchmark interest rate, and a slump in yields at the short end of the curve, commercial bank lending rates have remained stubbornly high, or an average 14.18 percent in August.

TELECOMS PRICE WAR KEEPS LID ON INFLATION
The impact of a property boom and new road projects was seen in the construction sector data, where output jumped 18 percent in the second quarter from a year earlier, while financial intermediation leapt 16 percent in the same period.

Agriculture is still the largest component of Kenya's economy -- it accounted for 20 percent of second quarter GDP -- and favourable rains at the start of the year helped pushed output up 5.8 percent in the second quarter from a year earlier.

But Simon Freemantle, East Africa economist at CFC Stanbic Bank, said policymakers would not be over confident about growth as long as there was a risk the global economy may slow again.

"In a global context of a very slow recovery and fears of a double dip, Kenyan policymakers will not take these positive indicators as a directive to be complacent," he said.

Increased agricultural output has also had a benign impact on Kenya's inflation rate over the past few months. But signs of rising prices in the economy were evident in September inflation data released on Thursday.

While the year-on-year rate was unchanged at 3.2 percent, all components of the consumer price basket rose expect communications where a tariff war between operators left prices 24.63 percent lower than a year earlier.

"For the rest of the year and the first quarter, we don't see any significant price reductions in the telecoms sector," said Ignatius Chicha, head of treasury at Citi in Nairobi.

"Food has to go up if rains are insufficient. If pump prices go up, inflation can only go up."
 







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