The year that was
The year 2017 was a year full of anxiety and even turmoil for some Kenyan entrepreneurs and SMEs. Typically , Kenya’s election years are usually characterized by a “wait and see” atmosphere. This year was no different However, this election was rather special. We ended up having 2 elections, 2 supreme court petitions, 2 nail biting rulings and eventually an inauguration celebrated by the ruling party’s supporters and shunned by the opposition. This scenario prolonged it from a “wait and see” to a “lets talk after all the election madness is over” . The prevailing drought situation affected agricultural output which is a big part of our economy and further dampened the mood in the country. MPs passed a bill capping interest rates at 14.5% in a move to stem the high interest rate regime. However, as the government borrowed heavily to fund its operations and service its every growing debt, lenders shifted their attention to lending government and not SMEs, pushing SMEs into a corner where funds were not available for their operations. In short it was a tough year and many entrepreneurs felt like they were between a rock and a hard place. Some shut down, some became politicians(temporarily if they lost) and some strengthened their faith in order to keep the doors open. Everyone held on to their money. No new ideas or programs were being funded. Everyone adopted the excuse ” lets talk after elections” . Payments were withheld. If there is a time to begin planning for the next election, its not 4 years from now, its NOW.
The year to come
Despite the bleak 2017, the Future looks a lot brighter. What can we look foreward to in 2018 and beyond?
Despite the continued low key political risk that threatens to blow up into protests at any given time, we are likely to see a number of trends in 2018 and beyond
Interest rate capping reversal.
In 2018, we are likely to see a Reversal of the 14.5% interest rate capping. The central bank governor has already signaled that they will be pushing for its reversal based on a study of its devastating effects towards SME lending and unsecured lending in general. There is likely to be intense lobbying from lenders as well as other key stakeholders for the reversal. Should the reversal happen, lending towards SMEs will resume against a backdrop of a growing post-election economy.
Foreign Direct Investment
Whilst Kenya saw a dip in foreign direct investments in 2017, it is likely that foreign investors will troop back into the country citing a more stable political environment and clear policy direction from the Kenyan government. Many deals that were in negotiation phase in 2017 were put on hold pending the election outcome and those negotiations are likely to be revived within the first quarter of 2018. There has been increased interest in Kenya by American, Chinese and a few European union countries like France in making investments in Kenya. Sectors of interest have been agriculture, energy and construction. This will present an opportunity for SMEs to position themselves as service providers or partners for the foreign investors. There will also be an increased appetite for mergers and acquisitions as an entry strategy by medium or large multinationals into the East and Central African Market.
The Nairobi Securities Exchange
The stock market is also on the upward trend, something that happens after every election. This usually acts as a signal of the confidence that international investors have in our economy.Since we have continued to experience Economic growth, smart SME owners will invest extra income into strategic companies that are poised to keep generating great returns in the next few years before the next election cycle begins. We are yet to see any major entrants into the GEMS SME segment of the NSE due to the complicated nature of listing and the fear of Kenyan SMEs to open themselves up to public scrutiny.
The president in his inauguration speech made some bold declarations. Like visa on arrival for all Africans. This set the tone for other bold pronouncements and the government has since set out to focus on 4 main areas.We are likely to see growth and opportunities for SMEs in these sectors .The details are still sketchy but here is what we know so far.
- Housing – The government plans to build 1 million houses in the next 5 years. Which translates to roughly 200,000 units a year, A feat never seen before in Kenya. Will they uphold the promise despite the demand for housing growing by an estimated 100,000-250,000 units against a supply of 50,000 yearly? We wait to see.
- Universal Healthcare – Again the details are still not clear but the government plans to invest in ensuring there is 100% universal health coverage (UHC).
- Food Security and Agriculture – The government has set a target of 100% food security. Details yet to be released.
- Manufacturing – The government has set a target to have manufacturing account for at least 20% of the GDP. We are currently at an estimated 14% of GDP.
The government has also began a project to set up incubators and hubs in every constituency through the ICT ministry to support entrepreneurs to grow their businesses.
An announcement was made in 2017 that we achieved Category A status for JKIA which should see an introduction of direct flights to North America from Kenya. This should boost trade and tourism between Kenya and North America and potentially latin america as well.
One compliance body to watch out for is the Kenya Revenue Authority. Several plans have been put in place to rope in additional taxpayers to fund the governments increasing debt and budget. 2017 was the slowest growth in a decade of tax collection in a year where succession plans are in high gear. Will a new broom sweep clean in KRA and will this sweep more evaders into the tax net? A robust itax system together with a business intelligence system linked to the banking as well as government procurement systems will definitely nab more tax evaders and so SMEs that are not yet compliant should note that the authority is closing in on them and soon there will be no easy avenues to hide from paying tax on all business income activities.
On a sad note, the government has announced impending layoffs of 18,000 workers to tame the wage bill and concerns continue to mount over our indebtedness particularly to China.
The world bank has pledged support of approximately USD 150 Million through the Kenya Youth Empowerment Project , that will go to supporting employment creation, entrepreneurship and scaling of SMEs. It is likely that other donors will follow suit in funding similar projects especially agricultural and value chain support programs.
We are likely to see increased Mergers and acquisitions as international players from larger markets seek to aggressively enter the east african market. European, South african, asian and American companies are actively seeking to partially or fully acquire local SMEs who have substantial traction and growth.
A few progressive counties are likely to have great opportunities. If the governors keep their promises . Nairobi county is heavily backed by the central government and its initiatives are likely to face less opposition and budgetary challenges in order to prove a point. Lamu with the LAPPSET project plodding along also benefits from a large state project that is attracting development. Other counties to watch are Machakos, Kakamega and Makueni who have had relatively progressive and development oriented incumbents who will benefit from continuity. Kitui , Kisumu, Kirinyaga and Meru have new governors who have made bold declarations for development and have governors who were previously cabinet ministers who had a track record for development in their respective ministries .
Due to the entrance of the over 1 million kids from the Free Primary Education era into high school a year , there has been an increased demand for private secondary school education. With a transition rate of less than 80% , there is currently a shortage of secondary schools to absorb the primary school graduates. As top schools are forced to introduce day wings, there will be concerns from parents on the quality of education and this is likely to build even higher demand for private secondary schools as happened in the primary school section.
Should there be no drought in 2018 and beyond, there should be improved agricultural harvests. Government investment in food security as well as the increased investments from private capital sources into agriculture (chamas, investment companies and middle class from urban areas) is likely to grow the sector and its output.
Despite the growth of innovations in ICT, a proposed ICT bill is likely to stifle innovation and service provision. We are likely to see a growth of the importance of DATA collected by organisations which will increase the demand for data scientists or entrepreneurs with data oriented solutions. There will however be increased concerns about data protection and privacy and calls for increased regulation around privacy.
Mobile lending that has already been on an upward trend will grow and we are likely to see lenders finding ways of approving larger loans than the current micro loans that have proven successful for banks as well as new micro lending entrants into the sector.
As the region invests more in infrastructure you are likely to have companies , government agencies and development bodies from neighbouring countries turning to kenya for certain expertise. Ethiopia, Somalia, Uganda, rwanda and Tanzania despite the hostility will seek collaborations in kenya that can complement their growth initiatives. The EAC will likely strengthen its trade ties.
Globally, Agriculture remains a great opportunity for Africa as demand for agricultural products for China , US and European markets particularly for Herbs , spices, condiments , specialty foods and meat products grows. etc Our challenge in meeting this demand is the ability to produce consistent quality and ability to supply large quantities of products to wholesale buyers in these large markets.
As a region I see the opportunities for SMEs outweighing the risks and opening up a world of so much potential for Kenyan entrepreneurs who have already braved 2 elections with a lot of resilience and innovation to stay afloat.