AFRICA INVESTMENT-Kenya vote to spur economic gain, then pain

Wed Feb 13, 2013 10:24am EST

* Campaign spending may briefly boost economy
    * Tight presidential vote fuels spending race
    * Inflation, weaker currency seen later this year

    By George Obulutsa
    NAIROBI, Feb 13 (Reuters) - Campaign spending in a
closely-fought presidential vote in Kenya will give a brief
boost to east Africa's largest economy before the gain turns to
pain if inflation accelerates as a result and the currency takes
a dive.
    Prime Minister Raila Odinga leads opinion polls in the 
presidential polls, the first since the 2007 vote which was
marred by widespread violence. 
    Deputy Prime Minister Uhuru Kenyatta is running a close
second in the March 4 race, which has sparked a spending spree
by both sides in a tense contest that has attracted other
presidential candidates who also have money to burn even if
their chances of victory are remote.
    The electoral contest also includes polls for regional and
parliamentary positions, further adding to the frenetic
spending.
    The Centre for Governance & Development, a Nairobi-based
think tank, estimates campaign spending by the two leading
presidential candidates' sides alone at 30 billion shillings
($342.86 million), more than five times that spent in the last
vote five years ago.
    Independent analyst Aly Khan Satchu said the campaign
spending could range between $400 million-$500 million, hardly
small change as that would equate to roughly 1.5 percent of the
country's gross domestic product.
    "Expect more consumption of liquor, more consumption of
consumer goods, more spending on transport, advertising and so
on. So that is going to have a positive impact on revenue," said
John Njiraini, the Kenya Revenue Authority Commissioner General.
    This is welcome news because growth was sluggish - at least
by Kenya's recent standards - in 2012 at about 5 percent, and
policymakers have forecast a 5.6 percent expansion this year.   
    "In fact for (some businesses), they wish that we had
elections every year," Treasury Permanent Secretary Joseph
Kinyua told Reuters.
    The campaign teams declined to say what they plan to spend,
but Kenya's politicians are notoriously profligate because there
are no legal restrictions to campaign spending, after lawmakers
failed to pass a law to curb it.
    Analysts say a splurge on the expected scale will almost
certainly stoke inflation and take its toll on a vulnerable
currency.
    The worst case of campaign spending was witnessed in 1992,
when the government of former President Daniel arap Moi printed
money to finance his party's victory. This was blamed for a
spike in money supply and inflation of 101 percent by October
1993, months after the December vote.
    Triple-digit inflation is not seen this time round but it
will likely rise from a moderate 3.7 percent in January.
    The government's medium-term target for inflation is 5
percent, plus or minus two percentage points. The inflation rate
peaked at just under 20 percent in late 2011 after a drought and
weaker currency made imports dearer. 
    "Our best case is single digits, but there is upside risk.  
 Part of that is from election-related spending this half of the
year," Yvonne Mhango, Johannesburg-based Sub-Saharan Africa
Economist at Renaissance Capital, told Reuters.
    "We project inflation of 6.7 percent at the end of this
year, up from 3.2 percent at the end of 2012."
    Razia Khan, head of research for Africa at Standard
Chartered Bank, said price pressures from the poll spending
would likely start to show in June.
     "Assuming we do see much more of a liquidity glut ahead of
the elections, one would only expect this to feed into higher
prices and higher inflation with some lag. So June of 2013 and
beyond may be the points to watch, rather than the run-up to the
election," she said.

    WEAKER CURRENCY    
    Coupled with a widening current account deficit, the
shilling has weakened 1.3 percent against the dollar so
far in 2013, as importers stock up on dollars ahead of the vote.
    The currency is expected to soften further, despite the
central bank's action of mopping up liquidity and injecting
dollars into the foreign exchange market.
    "We could have a mini-consumer boom (and) yes election
spending exacerbates the balance of trade deficit on our current
account," Robert Shaw, a Nairobi-based businessman and
independent economist, told Reuters.
    Kenya's current account deficit narrowed 21 percent to 105.4
billion shillings ($1.23 billion) in the third quarter of 2012
from 133.5 billion during the same period in 2011.
    However, large imports of fuel, helicopters, luxury 4x4 fuel
guzzlers and other equipment to run election campaigns by some
presidential candidates could widen the deficit again.
    Mhango called the shilling at 91 to the dollar by the end
this year, off its record low of 107 to the dollar in October,
2011. 
    She said that worsening the currency's outlook are the
government's plans to spend 17.5 billion shillings on the
elections from its 2012/13 (July-June) fiscal budget.
    "When we say election-related spending we are talking about
all of that cumulatively, including the campaigns. It's part of
the pressures we are talking about," said Mhango.
($1 = 87.5000 Kenyan shillings)

 (Additional reporting by James Macharia and Beatrice Gachenge;
Writing by James Macharia; Editing by Ed Stoddard)