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