Looking for a winner from the oil price slump? Kenya could well be a prime candidate, in the emerging world at least.
The rout has claimed a swath of well-documented victims, from recession-hit Brazil, Russia and Venezuela to the badly holed Nigeria and Azerbaijan and the challenged Gulf states.
However Kenya — with a rapidly falling current account deficit, its first quarterly budget surplus for at least five years and solid economic growth — could be one of the less heralded beneficiaries of the crash in energy prices.
“Kenya is one of the few large African economies that is likely to perform well in 2016. As a net energy importer, it will continue to benefit from low oil prices this year,” says John Ashbourne, Africa economist at Capital Economics.
Charles Robertson, chief global economist at Renaissance Capital, who met officials in Nairobi in January, lauds the 45m-strong country’s “remarkable” improvement in government finances.
Much of the credit can be laid at the door of the tumbling oil price. Between 2011 and 2015, Kenya’s annual fossil fuel import bill was running at about Ks350bn ($3.4bn at the current exchange rate). With oil at $30 a barrel, this could drop to Ks115bn in 2016, according to calculations by Mr Robertson, based on central bank figures.
This is equivalent to a decline from 7 per cent of gross domestic product in 2013 to 4.1 per cent in 2015 and potentially as little as 1.6 per cent in 2015.
“Oil and fuel accounted for 12 per cent of imports in September, compared to a quarter or a third a few years ago. That’s a huge saving,” says Mr Ashbourne.
Sliding energy prices helped fuel a 13 per cent year-on-year fall in Kenya’s total import bill in September. In contrast, exports rose 24 per cent year on year in shilling terms, largely thanks, apparently, to a 58 per cent jump in the value of tea exports as prices rose, says Mr Ashbourne.
This represents a sharp turnround from previous years, when imports were typically rising faster than exports, as the first chart shows.
As a result, Kenya’s current account deficit fell to a five-year low of 5.4 per cent of GDP in the third quarter of 2015, from almost 9 per cent three months earlier.
Renaissance Capital estimates that the full-year deficit for 2015 will come in at about 7.6 per cent of GDP, compared with quarterly deficits as high as 15 per cent in 2014.
This has been achieved despite a fall in tourism revenues in the wake of the terrorist attack on Nairobi’s Westgate shopping mall in September 2014, which left 67 people dead, and a subsequent string of deadly attacks in the capital and elsewhere.
Even in the unlikely event that oil prices were to surge back to their 2014 highs, Kenya should still be better protected than in the past.
The country has used its position in the seismically active Rift Valley to increase its geothermal energy output to more than 300m kWh a year, accounting for 50 per cent of electricity production, up from 20 per cent two years ago, according to Capital Economics.
“It’s clever, they are using their own natural resources to good effect and it happens to be green energy as well, so it ticks a lot of boxes,” says Mr Robertson.
With wind power also expanding fast, “Kenya is really ahead of the curve in renewable power”, says Mr Ashbourne, who speculates that only Iceland may generate a higher proportion of its energy from geothermal power.
Kenya’s finance ministry has also used the fall in the oil price to raise the excise tax on petrol, “so consumers don’t hiss but the Treasury successfully plucks some tax revenues”, says Mr Robertson.
Partly as a result, he estimates the budget deficit fell from 11 per cent of GDP in the 12 months to March 2015 to 8 per cent by September, adding that “a 3 percentage point improvement would be impressive in any country. To achieve it in six months is remarkable, in our view.”
Indeed, in the third quarter the budget balance actually turned positive for the first time in at least five years, as the second chart shows.
Moreover, a supplementary budget later this month is likely to cut the deficit still further, despite elections being just a year away.
One criticism may be that this further reduction may be largely achieved by cutting planned spending on infrastructure projects that have not yet started.
But Mr Robertson says “any ability to send a signal to the outside world, and the credit rating agencies, that Kenya is still targeting a smaller deficit is a positive”.
Economic growth is also on the up, hitting 5.8 per cent year on year in the three months to September 2015, according to data from Trading Economics, up from 4.9 per cent six months earlier and a low of 2.9 per cent in January 2014.
Mr Robertson is cautious about the future path of GDP growth however, given the low tourism receipts, rising interest rates, tighter fiscal policy, higher taxes on cigarettes and alcohol (as well as petrol) and the probable cessation of any investment in an oil discovery in Lake Turkana, in the north of the country, the economics of which he says would be “questionable” even at $70 oil.
However Mr Ashbourne says growth of 6 to 6.5 per cent this year would be “quite good” given that “Africa as a whole is slowing down to about 3 per cent”.
Instead, he has some concerns that Kenya still has a current account deficit of 5.4 per cent of GDP “even with the stars aligning” for the country.
However, he points out that machinery and transport equipment currently accounts for 36 per cent of Kenya’s imports. Although this will include products such as cars, it will also include machinery being used to build a railway between Nairobi and the port city of Mombasa.
Given that this line should unlock significant transportation bottlenecks, he argues that spending on it should be seen as investment rather than consumption.
Mr Robertson says he was told by a Kenyan government official that a significant current account deficit was “normal” given 6 per cent GDP growth and Kenya’s spending on infrastructure, which includes improving the road network and electricity supply, as well as building the railway.
He estimates that the rail project, financed by Chinese loans being spent on construction-related Chinese imports, is adding about 2 percentage points of GDP to the current account deficit.
A separate concern is Kenya’s worsening drought, given that agricultural products such as tea, coffee and fresh flowers are among the country’s leading exports, and that it is a significant generator of hydroelectricity.
Nevertheless, the shilling has been remarkably stable this year (without the need for capital controls to achieve this), admittedly after having fallen 11 per cent against the dollar in 2014. Foreign exchange reserves have risen 12 per cent during the past three months and the Kenyan stock market has significantly outperformed other frontier markets in recent years, as the final chart shows.
Given the turbulence elsewhere in the emerging world, matters could be much worse.