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Viewing cable 08NAIROBI353, KENYA: PRIVATE SECTOR SAYS THE ECONOMY WILL SHRINK IN 2008

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Reference ID Created Released Classification Origin
08NAIROBI353 2008-02-01 13:05 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Nairobi
VZCZCXYZ0014
PP RUEHWEB

DE RUEHNR #0353/01 0321305
ZNR UUUUU ZZH
P 011305Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4529
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
UNCLAS NAIROBI 000353 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA 
DEPT ALSO PASS TO DOT FOR CONNIE HUNTER 
DEPT ALSO PASS TO USTR FOR BILL JACKSON 
DEPT ALSO PASS TO DEPT OF LABOR FOR MICHAL MURPHY, SUDHA HALEY, 
PATRICK WHITE AND MAUREEN PETTIS 
DEPT ALSO PASS TO USAID/EA 
DEPT ALSO PASS TO USITC FOR RALPH WATKINS 
TREASURY FOR VIRGINIA BRANDON 
COMMERCE FOR BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB ETRD KE
SUBJECT: KENYA: PRIVATE SECTOR SAYS THE ECONOMY WILL SHRINK IN 2008 
 
REFS: (A) NAIROBI 336  (B) NAIROBI 192 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY.  FOR 
INTERNAL USG DISTRIBUTION ONLY. 
 
1. (SBU) Summary: The private sector is warning that the Kenyan 
economy will likely shrink in 2008, having already lost tens of 
billions of shillings in January, and with losses that could reach 
Ksh260 billion (over $4 billion) and 500,000 jobs in the first half 
of the year.  Claims by Government of Kenya (GOK) officials that the 
crisis is just a temporary blip and that the economy can still grow 
at 7% in 2008 appear to be a cheerleading effort to maintain public 
and business confidence.  The sharp drop in the Nairobi Stock 
Exchange (NSE) and the shilling suggests their efforts are failing 
to impress the private sector.  Facing these economic challenges may 
have helped persuade President Mwai Kibaki and Opposition LeaderRaila Odinga to meet and announce the start of the negotiation 
process.   End summary. 
 
Private Sector's Grim Forecasts 
------------------------------- 
2. (U) The Kenya Association of Manufacturers (KAM) said January 
sales volumes in the manufacturing sector fell 90% below normal, as 
the sector was disrupted by congestion at Mombasa port, road 
insecurity, and fuel shortages linked to the post-election political 
violence which erupted in late December.  Based on anecdotes from 
members, KAM estimates that, absent a quick political settlement and 
return to normality, economic losses from reduced production in the 
first half of 2008 will reach Ksh260 billion (over $4 billion), 
about 500,000 jobs will be lost, and that GDP would experience 
negative growth in 2008, even if the second half saw growth at 2007 
levels.  Even in a more optimistic scenario in which higher 
operating levels brought estimated losses below Ksh 200 billion 
(about $2.86 billion), 2008 GDP would still see negative growth. 
 
3. (U) Based on an informal survey of its 2,500 members, the 
Federation of Kenyan Employers (FKE) estimated they have already 
lost Ksh58.2 billion (about $90 million).  Even if there were an 
immediate political settlement, about 90,000 people will be laid 
off.  If there is no political settlement within two weeks, 
businesses will lose Ksh230.5 billion (about $3.3 billion) in the 
first half of 2008, and lay off 240,000 workers.  While many 
companies indicated they would minimize income and job losses if 
there was a quick political settlement, Executive Director Jackie 
Mugo said the economy would otherwise go into free fall. 
 
GOK officials Try to Reassure Public and Investors 
--------------------------------------------- ----- 
4. (U) Responding to fears that Kenya's 2008 economic growth would 
dip far below the forecast 7%, Central Bank Governor Njuguna Ndung'u 
on January 10 downplayed the impact of the violence, calling the 
crisis a short disruption that would not have a major impact on GDP 
growth.  The dip in growth will not signal a recession nor change 
Kenya's strong long term growth trajectory because of Kenya's strong 
fundamentals, but he conceded that supply constraints would trigger 
inflation in the short term. 
 
5. (U) Ignoring private sector warnings of a massive impending 
downturn, Finance Minister Amos Kimunya claimed on January 29 Kenya 
would suffer only a slowdown in economic activities in the first six 
months of 2008, not a recession.  He said that Kenya's fundamentals 
were still sound, and that sectors other than tourism would recover 
quickly after a solution is found to the political crisis.  Kimunya 
acknowledged that the tourism sector, which garnered $1 billion in 
hard currency for the first time in Kenya's history in 2007 (ref A) 
and generates an estimated Ksh65 billion/year, would take longer to 
recover.  Kimunya accepted that revenue collection would fall below 
the FY07/08 target of 406.9 billion shillings (about $6 billion) in 
2007/08, but claimed the Ksh8 billion surplus tax revenues (about 
$118 million) collected in the first half of the year, plus the 
extra Ksh20 billion (about $294 million) collected in the Telkom 
privatization would cushion some of the shortfalls. 
 
Renewed Violence Smashes Slow Return of Normality 
--------------------------------------------- ----- 
6. (U) Violence died down the week of January 21, and people began 
to feel normality was returning, but this faint revival of 
confidence was aborted by the sudden January 26-28 attacks in the 
previously peaceful South Rift Valley towns of Nakuru and Naivasha, 
road and rail blockades, the murder of an opposition MP in Nairobi, 
and the resulting violence in Nairobi's slums.  The attacks on 
flower farm workers around Naivasha and on buses and trucks at 
roadblocks on the Nairobi-Uganda highway threatened the critical 
flower industry at the start of the peak Valentines Day season. 
Shaken by the violence, the NSE's market capitalization plunged 
Ksh40 billion (about $570 million) or 5% on January 29.  The NSE-20 
share index fell by 235.5 points (5%) to close at 4576.3 points, a 
drop of 14.3% from its December 21 level of 5339.75.  On January 30, 
the NSE recovered some of its lost ground, buoyed by the 
Kibaki-Odinga agreement to start negotiations, but investors remain 
skittish.  On January 29, the shilling fell 4.1% to 72.75/$, and 
fell 4.2% to Ksh107.59/Euro.  As of January 30, the shilling has 
fallen 16.3% since its December 2007 peak of Ksh62.54/$, and most 
analysts predict it is likely to stay above the Ksh70/$ level. 
 
Comment 
-------- 
7. (SBU) Although GOK officials have not yet publicly acknowledged 
the crisis' damage to the economy, it is likely that private sector 
warnings, the January 26-28 violence, and the plunging stock market 
and shilling helped persuade President Mwai Kibaki and Opposition 
Leader Raila Odinga to meet and announce the start of the 
negotiation process.  If they can reach some preliminary agreement 
within a few weeks, and make strong efforts to rein in the violence, 
the economic damage may be minimized, and recovery could begin.  If 
negotiations drag on too long, and/or if political leaders find that 
the violence spirals beyond their control, Kenya could face a major 
economic downturn in 2008. 
 
RANNEBERGER