UPDATE 2-Kenya's economic growth leaps on strong agriculture

Mon Dec 24, 2012 8:56am EST

* Growth rises to 4.7 percent in Q3 after slow start to 2012

* Investment slowing ahead of 2013 elections, analysts say

* Construction sector slows down, along with hotels, restaurants (Adds analyst comment, details, background)

By Drazen Jorgic

NAIROBI, Dec 24 (Reuters) - Kenya's economic growth leapt in the third quarter, boosted by the agriculture sector, while a gradual slowdown in investment shows investors may be focusing on elections in March 2013.

Growth Domestic Product rose by 4.7 percent in the third quarter from 4 percent in the same period last year, the statistics office said on Monday. The figure was roughly in line with expectations.

The pick up was led by agriculture, which accounts for a quarter of the economy, as well as fishing and manufacturing. Agriculture grew by 6.9 percent during the third quarter, up from 0.2 percent growth in the same period last year.

Economic growth in Kenya was sluggish early in 2012, with the economy expanding by 3.4 percent and 3.3 percent in the first two quarters, as key sectors like construction sagged under the weight of high interest rates.

The tepid first half of 2012 was a hangover from last year when inflation soared and the currency slumped, forcing policymakers to raise rates aggressively, which in turn drove up businesses' borrowing costs.

On a seasonally-adjusted basis, east Africa's biggest economy grew by 2.2 percent in the third quarter, up from 0.5 percent in the second.

"The sequential quarter on quarter increase...shows an improving trend but still speaks of an economy which is soft and feeling the unprecedented squeeze from the high interest rate structure which has been disconnected from the sharp fall in inflation," said Aly Khan Satchu, an independent analyst.

Policymakers embarked on an easing cycle in July, cutting the benchmark lending rate by a total of 700 basis points over three meetings to 11 percent, in order to help economic growth.

Kenya's year-on-year inflation fell for the 12th straight month in November to 3.25 percent, the lowest it has been since Aug. 2010.

The biggest drag on growth was the construction sector, which is highly susceptible to high borrowing costs in an economy, as well as hotels and restaurants.

GENERAL ELECTION RISK

But Mark Bohlund, senior economist for IHS Global Insight, said the third consecutive quarterly decline in the construction sector, even as interest rates fell, was indication of investment being held back ahead of the 2013 elections.

"It's fair to assume that's related to the elections. It's make or break for Kenya and the wider region because if you have a repeat of the same amount of violence or even worse than we had in 2007/2008, you are not going to get investment," Bohlund said.

Kenyan polls since independence from Britain in 1963 have often been marred by tribal violence, typically stemming from long-standing disputes over land. Some analysts fear the March 2013 elections will see another bout of violence similar to 2007, which was the worst in its history.

Kenya's tourism has already experienced a hit ahead of the elections because of fears of a repeat of the ethnic violence that rocked the country in 2007.

Kenya's current account deficit narrowed 21 percent to 105.4 billion shillings ($1.23 billion)from 133.5 billion during the same period last year. However, the deficit widened compared to 63.3 billion shillings recorded in the second quarter of 2012.

Both the shilling and the main stock index were flat after the GDP figures were released.

The Finance Ministry has said the economy will grow 5.6 percent in 2013, outpacing this year's forecast of 5.1 percent

But many analysts say growth is likely to slow down in the fourth quarter unless the central bank lowers interest rates further.

"The economy needs more encouragement to get back to trendline GDP otherwise the looming general election is going to stop this barely discernible and nascent rebound dead in its tracks. Some green shoots but the garden needs more watering and urgently in my view," Satchu added. ($1 = 85.9500 Kenyan shillings)

For more details on Kenya's economic performance, click here (Editing by George Obulutsa, Ron Askew)