New investors are holding back planned projects due to uncertainty over the outcome of the March 4 General Election. This explains the slowdown in key sectors that have driven the economy in the recent past.
Kenya Private Sector Alliance (Kepsa) chairman Patrick Obath said new investors were unsure about the elections and the political risks associated with policy changes by new leaders.
â€œThe elections, just like elsewhere in the world whether peaceful or not, could result in a new leader whose policies could significantly alter the investment climate,â€ said Mr Obath.
Activities in sectors such as construction, mining and quarrying, and the hospitality industry contracted in the second and third quarters of 2012 on what analysts linked to jitters over the polls.
The construction sector grew by 0.6 per cent in the third quarter of 2012 down from 1.4 per cent and 3.2 per cent in the second and first quarters respectively, new data from the Kenya National Bureau of Statistics (KNBS) shows.
The mining sector grew at 1.8 per cent in the third quarter from 2.9 per cent and seven per cent in the second and third quarter respectively.
Players in the construction sector said property developers were not willing to put up new units for fear that they would not find customers, leaving them under pressure to service the loans.
â€œKenyans set a precedent during the 2007 elections and investors who are yet to commit will be waiting to see while those who had committed will have no option but to continue,â€ said Michael Turner, the regional director of Actis, a London based private equity firm with ownership in major real estate developments in Nairobi.
The considerable slowdown in construction was mirrored in the production and consumption of cement whose growth slowed down by 0.6 per cent and 1.5 per cent during the third quarter compared to expansions of 8.9 and 7.7 per cent, respectively over a similar period in 2011.
â€œIt has less to do with interest rates as it is an election issue,â€ said Justus Cheva, a senior finance manager with Mavji Construction, one of the key property developers in the country. â€œInvestors still feel that the 2007 post-election violence could be repeated.â€
Robert Shaw, a Nairobi-based independent analyst, said the quarter-on-quarter decline in the construction sector was a pointer to investment being held back ahead of the elections.
And Farhana Hassanali, a property development manager at Hass Consult said: â€œDuring elections there is normally a reduction in the number of buyers. This makes developers to go slow since they donâ€™t want to have new houses that are not being bought or rented. It is a wait and see approach.â€
Property developers say there is a possibility that the violence which rocked Kenya in 2007 after a dispute over the outcome of the presidential election could recur.
â€œItâ€™s make or break for Kenya and the wider region because if you have a repeat of the same violence or even worse than we had in 2007/2008, you are not going to get investment,â€ Mark Bohlund, a senior economist for IHS Global Insight, an economic forecasting group toldÂ ReutersÂ last week.
The minister for Finance, Njeru Githae, had said the economy would grow 5.6 per cent in 2013, outpacing this yearâ€™s forecast of 5.1 per cent. But many analysts say growth was likely to have slowed down in the fourth quarter unless the Central Bank lowers interest rates further.
Mr Shaw, however, said that it was unlikely that the Central Bank would cut interest rates in the first quarter of 2013 given that it had made cuts of 700 basis points since July.
â€œThe latitude for further rate cuts is limited since the swelling current account deficit could topple the shilling out of its current 85 to the dollar bracket,â€ said Mr Shaw.
Commercial bank lending rates had slowed down to an average of 19 per cent in the third quarter from over 20 per cent in the first quarter. Despite the gap between inflation and interest rates widening, the Central Bank has remained on a tight monetary policy stance, leading to weak economic growth.
Inflation numbers averaged at 6.4 per cent during the review period from a high of 16.5 per cent during the third quarter of 2011. Inflation figures released on Friday show that the general price level rose by 3.2 per cent this month, slower than the 3.25 per cent recorded in November.
The Central Bank embarked on an easing cycle in July 2012, cutting the policy lending rate over six months to 11 per cent from 18 per cent. The policy rate, however, is more than 50 per cent higher than the seven per cent that obtained in July 2011.
KNBS data released on Christmas eve showed that the economy grew overall by 4.7 per cent in the third quarter to September compared to 4.1 per cent in the second quarter ended June.
The pick up in the third quarter was led by agriculture, which accounts for a quarter of the economy. The growth was also supported by expansion in the fishing and manufacturing sectors. Agriculture grew by 6.9 per cent during the third quarter, up from 0.2 per cent growth in the same period last year.
Kenyaâ€™s tourism sector has already been hit ahead of the elections because of fears of a repeat of the ethnic violence that rocked the country in 2007. The Kenya Tourist Board (KTB) said the sector recorded a decline of 23.3 per cent in tourist arrivals this year.
Kenyaâ€™s current account deficit widened to Sh105 billion in the third quarter compared to Sh63.3 billion in the second, signalling a drop in inflows.
However, the current account deficit narrowed by 21 per cent to Sh105.4 billion shillings ($1.23 billion) from Sh133.5 billion during the same period last year.