Boston, MA -- (SBWIRE) -- 08/29/2013 -- Kenya's military embroilment in an escalating inter-clan conflict in Somalia, where the KDF has promoted its relationship with the Ogadeni clan to the detriment of relations with other groups, risks destroying its original publicly stated rationale for intervening in the country-ie securing its borders and creating a friendly buffer zone.

Having grown by a robust 5.2% year-on-year (y-o-y) during the first quarter of 2013, the Kenyan economy is set to expand by 5.7% for the year as whole with private and public investment and consumption expected to perform strongly. We are expecting growth to accelerate to over 6.0% in 2014 provided that there are no external shocks such as a recurrence of drought.

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Kenya's external accounts have weathered the threat posed by the general election held on March 4 and, with reserves rising sharply during the second quarter of the year, appear to be in an increasingly healthy overall position. That said, we note that a large, structural current account deficit which relies on a capital and financial flow labelled 'short-term including errors and omissions' for coverage, means that the country will remain susceptible to shocks.

Kenya's 2013/14 budget, announced by Finance Minister Henry Rotich on June 13, is expansionary with expenditure set to rise by 10.1% to KES1.4trn. Revenue targets, although ambitious, will be made more achievable by the prospect of strong economic growth and the introduction of several controversial new tax measures.

The overall deficit, which the finance ministry is expecting to reach KES329.7bn, will be financed using a combination of domestic and external resources with a debut eurobond likely to make up a large proportion of the latter.

Major Forecast Changes

No major forecast changes.

Key Risks To Outlook

The weather poses risks to our views on growth, inflation, the currency and the balance of payments position. Another season of inadequate rain would undoubtedly have negative ramifications for all of these.

Although the smooth electoral process has lowered perceptions of political risk and has boosted sentiment, voting patterns suggest that Kenyans continue to overwhelmingly vote along ethnic lines, meaning that risks of instability from ethnic rivalries have by no means disappeared. An escalation in tension could serve to undermine investor confidence and render our growth outlook overly optimistic.

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