Kenya in a Globalised World -- Where is the Balance Shifting?

By Aparupa Chakravarti, Director, Botho Emerging Markets Group

In a world of shifting alliances and spheres of influence, countries must think strategically about their bilateral and multilateral relationships in order to better anticipate evolving challenges and opportunities. This is particularly necessary to hedge against fluctuating sources of global turbulence and uncertainty. As Kenya contends with volatility among some of its most influential external partners, notably the United States, the United Kingdom, and China, the country will soon chart new waters with these long-term partners while deepening those with promising new and  unconventional partners amongst its African and emerging market peers.

Ambiguity in US-Kenya Trade Due to Protectionist Administration and Slowing Economy  

With $572 million in Kenyan imports in 2017, the US is one of Kenya’s top 3 trading partners. Notably, 70% of Kenya’s exports to the US, which are largely agriculture and apparel, fall under provisions of the African Growth and Opportunity Act (AGOA). AGOA aims to stimulate economic growth, encourage economic integration, and facilitate sub-Saharan Africa's integration into the global economy through duty-free imports of African goods. Although AGOA was recently extended to 2025, its status as a United States Trade Act -- rather than a trade agreement -- means that it can, at any time, be “amended, extended or repealed for example through an Act of Congress.” Given the Trump Administration’s threats to undermine core principles of multilateral trade and skepticism of long-standing pillars of US commercial diplomacy such as NAFTA, no trade agreement is safe -- AGOA included. Considering the central role that AGOA plays in US-Kenya trade, volatility in US trade relations would have a disproportionate effect on Kenyan exports.

Furthermore, with the US economy projected to lose momentum this year due to the risk of a recession in 2020, Kenya is likely to feel the impact through a knock-on reduction in remittances, the country’s largest source of foreign-currency. While it is too early to ascertain the exact impact of the US slowdown on the Kenyan economy as some analysts argue that the forecasts are overstated, the shadow of a sluggish US economy undoubtedly adds an additional layer of ambiguity to the future of US-Kenya trade.

Brexit Brings Mixed Benefits for Kenya
Like the US, the UK’s foreign policy future remains uncertain, as Whitehall prepares to exit the EU this year. While Brexit propels the UK to build new trading partnerships, Theresa May and her government have signalled their intention to leverage the Commonwealth to plug the trade gap. However, African countries might not benefit as much as anticipated: developing countries stand to lose trade preference to the UK that allow them to export their goods with low or no customs. The EU has existing trade deals with more than 70 countries including Kenya, which the UK would lose in the event of leaving without a deal. While the UK has pledged to replicate these existing deals, as of February 2019, it had only signed continuity deals with members countries of the Eastern and Southern Africa (ESA) region, which includes Madagascar, Mauritius, Seychelles and Zimbabwe. Without a trade deal between the UK and Kenya, tariffs will be set in accordance with World Trade Organization (WTO) rules.

This shift in status would substantially affect Kenya as the UK is its third largest trading partner.  One of the clear effects is a potential hike in tariffs. In the case of Kenya, this could be to the tune of over 5% of the value of Kenya’s exports to the UK. Kenya’s rapidly growing flower industry alone faces an additional £3.6m annually.

New Chapter for China-Kenya
China represents another uncertain area for Kenyan trade diplomacy due to a slowing economy, which has dropped to its lowest annual rate in three decades, partially fuelled by China-US trade friction. Kenya has another pressing cause for concern: its loan repayments to China for the Standard Gauge Railway are set to triple this July, as the five-year grace period extended by Beijing in May 2014 draws to a close. A depressed economy is likely to dampen Beijing’s willingness to extend this grace period further or to negotiate repayment terms. Furthermore, there are other developments in China that also merit attention: recently, for example, the Chinese government introduced a tax cut for Small and Medium Enterprises (SMEs) in China in an effort to boost local manufacturing. For Kenya, this is likely to result in cheaper imports competing with domestic producers. In 2017, China was Kenya’s top import origin, with trade topping $3.91B.  To reduce over-reliance on Chinese goods and ease competitive pressure on Kenyan manufacturers, Kenya might consider sourcing products from neighbours as well as other emerging global manufacturing behemoths such Vietnam, Indonesia, or Bangladesh, in tandem with bolstering domestic manufacturing capabilities.

Promising Horizons Across The Red Sea
Given uncertainties of trade relations with the US, UK, and China, Botho Emerging Markets Group recommends that the Kenyan government and private sector should explore high-potential partnerships with Gulf state allies, particularly the UAE and Saudi Arabia.

The UAE and Saudi Arabia are the second ($11 billion) and fifth ($3.8 billion) largest investing countries in Africa by capital investment. Both countries also rank among Kenya’s top 5 import origins. Saudi Arabia and the UAE have positive, if modest, growth projections for 2019 - 2.4% and 3.7% respectively, according to the IMF - driven in part by a bid to diversify their economies into non-oil sectors.

The Red Sea region, in which Kenya is often included, has the potential to be far more than a mere geographical demarcation. Comprising 28 countries with a collective GDP of close to USD 2 trillion,  the Red Sea accounts for an estimated 10% of all global maritime trade. Yet, intra-regional trade is relatively low - 16% as of 2015 compared to 69% for the EU - despite the existence of compelling asymmetrical opportunities. For example, even though roughly 30% of Sub-Saharan Africa’s non-oil exports are food products and GCC countries are net food importers, the majority of the GCC’s food imports is sourced from non-Red Sea countries.

Looking at the Horn of Africa, specifically, Gulf countries have increasingly solidified their presence in the region, fuelled by geopolitical and economic interests. Ethiopia is progressively asserting itself as both a political and economic powerhouse within the region, re-establishing old ties, such as with Eritrea - that too, under the aegis of Saudi Arabia - and positioning itself as a regional manufacturing hub. In order to effectively tap into the Gulf investment community and growing interest in commercial partnerships, Kenya must bolster its commercial diplomatic efforts and leverage its status as East Africa’s largest economy to attract more Gulf capital to fuel its developmental ambitions.

For Kenya to maintain and reinforce its position as a regional leader, the country must diversify its risk in a turbulent global economy. Central to this is building new relationships with non-traditional trading partners, such as the UAE and Saudi Arabia, as well as bolstering relationships with neighbours in the region.