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Kenya: Horizon Scanning 2022

Africa Connected: Issue 7

By James Kamau

What is the current investment appetite?

In Kenya, the COVID-19 pandemic has left many distressed businesses in its wake. While some of these businesses have or are likely to shut down their operations, there are some that are still viable, but will require investment to turn around. This provides an opportunity to invest in such businesses at a much lower valuation than was the case before the pandemic.

Do you see this changing in 2022?

The business climate in Kenya is on the recovery path and in spite of the difficult conditions it has faced, the business community seems to have shrugged off the effects of COVID-19. The challenge in 2022 is unlikely to be the effects of COVID-19, but the upcoming elections, which historically tend to slow down investment as investors adopt a wait-and-see attitude.

In which sectors do you expect to see increased investment and / or financial movement in the next 18 months?

We expect to see growth in the technology (particularly fintech), energy, financial services, and construction sectors.

The technology ecosystem in Kenya is known as Africa’s Silicon Savannah. The country is well-known for fintech solutions and, given the new ways of working, there is greater innovation in this sector as the COVID-19 pandemic has increased demand for ICT solutions for businesses. Some of the sectors that have benefitted from fintech solutions are agriculture, education and healthcare.

Kenya is a pioneer in renewable energy, being home to Africa’s first geothermal power plant and is Africa’s largest geothermal power producer. Owing to the government’s favourable tax incentives introduced through the Finance Act, 2021, reinstating VAT exemptions on renewable energy products including solar and wind generation equipment and clean cooking solutions, there is increased interest in renewable energy such as solar and geothermal. The only challenge is with regard to offtake, which will need to be addressed to attract more investment.

The financial services sector looks promising following the launch of the Nairobi International Financial Centre (NIFC) in partnership with the City of London. It is expected that this partnership will help foster collaboration between the London Stock Exchange and the Nairobi Stock Exchange (NSE). Another area where growth is expected is in sustainable finance. Kenya recorded its first (and East Africa’s first) green bond in 2019 and the NSE is now working on environmental, social, and governance (ESG) disclosure guidelines for listed companies, a move that is expected to promote the uptake of sustainable financing in Kenya.

It is expected that there will be increased investment in the construction industry due to the government's heavy spending on infrastructure. One of the largest infrastructure projects – a four-lane and six-lane dual highway known as the Nairobi Expressway – is expected to be completed in June of 2022 under the PPP model. Other projects include affordable housing, ports and hospitals.

Investment is also expected in the healthcare, education and FMCG sectors due to growing consumer demand.

Where do you see the key areas of growth or opportunity for businesses?

Agriculture – the backbone of the country's economy – contributes around a third of Kenya's GDP and is the main source of employment for many Kenyans. The use of technology is driving strong growth in this sector. There are companies successfully raising debt and equity in this space, including in B2B food distribution that will increase efficiencies in the country's agricultural supply chain.

There is a huge demand for affordable housing due to population growth and an increase in rural to urban migration. The government has identified affordable housing as one of its top priorities. Launched in 2017, the country’s Affordable Housing Program (AHP) aims to deliver 500,000 affordable homes in five years. There have been many tax incentives introduced to promote the construction and purchase of affordable homes. Some of these incentives include no VAT on construction inputs for affordable housing projects and a reduction in the corporate tax rate for developers who build at least 100 units under the AHP.

Manufacturing also presents opportunities. In terms of M&A activity in 2021, it was one of the sectors that had seen the most growth. As the global economy recovers and the availability of vaccines increases, industrial activity in Kenya is likely to continue picking up.

In the healthcare sector, investment has been growing over the past few years and this is expected to continue as Kenya’s growing middle class drives the demand for private healthcare. In the public sector, there are new growth opportunities as the country seeks to increase funding to enhance capacity. By way of example, Kenyatta National Hospital (Kenya’s largest referral facility) has plans to construct a 300-bed private hospital, a PPP project with an estimated value of USD136 million. 

What is the most relevant regional or pan-African economic trend that you expect to see in the next 18 months?

We expect to see borrowing to fund infrastructure developments by countries in the region – for example:

  • Kenya – construction of the Nairobi Expressway by the Kenya government under a PPP framework, Konza Techno City, LAPSSET Project, Mombasa port expansion, affordable housing projects.
  • Tanzania – SGR Project, Bagamoyo port (expected to be the largest in East Africa), expansion of Dar es Salaam port.
  • Uganda – Kampala Bus Rapid Transit (BRT).
  • Rwanda – Rwanda Sustainable Water and Sanitation Program, Kigali Centralized Sewerage System.

These projects are expected to spur growth and employment in the short and medium term. Obviously, there are challenges that come with repayment of large (mainly) dollar-denominated loans, but the trade-off is that the projected gains would in the long term justify the capital expenditure and attendant borrowing or PPP obligations.

What do you expect the general business mood to be in your country in the next 18 months?

The general business mood can best be described as cautious optimism. Businesses are hopeful that the economy will continue to recover given the full resumption of normal business activities after the president lifted the pandemic-containment measures.

Kenya has consistently been ranked as one of the largest tourism economies in sub-Saharan Africa. This sector has been greatly affected by travel bans and it is expected to take a significant amount of time to reach its previous peak.

There is a lot of uncertainty around the 2022 elections. Past election years have been marked by a slowdown in the economy and investment, and this is expected to be the case after the upcoming elections.