From the outset, Kenya is facing a ‘crisis’ when it comes to the inflow of foreign direct investment. This is largely due to the measures put in place by the current administration to widen revenue inflows and protect local businesses – mostly to the detriment of its ability to attract foreign investors and global multinationals.
For the past 3 years, the net flow of foreign direct investment into Kenya has been on a negative trend. Recent data from the International Trade Portal show that the net inflow of FDI nearly halved in 2022 as compared to 2021. The $770 million received as a result of Foreign Direct Investment is about 0.7% of the country’s total GDP of $110.7 billion. Ordinarily, fashionable economic performance should see Foreign Direct Investment contribute upwards of 3.5% of GDP.
Kenyan firms are now choosing to invest abroad more than they are investing in the country. Most notable outside-the-country investments include Kenya Commercial Bank which has a presence in 6 African markets, Safaricom which is gaining ground in Ethiopia and Equity Group Holdings. There has been an alarming withdrawal of capital from the country by foreign firms. This has been down to increased speculation on changing dynamics within the Kenyan marketplace.
What this means is that the long-term capital the country needs to boost the economy and increase its productive potential is now scarcely available.
The change of heart by foreign investors on Kenya as a potential investment destination is a cause for worry on the side of the government.
Stock market investors are also frantically selling Kenyan government bonds. The value of bonds held by foreigners has plummeted since late 2021. In November this year, Standard Chartered Bank slashed its holding of government securities by 52%. This was a response to growing sovereign risks.
Paradoxically, the outflow of Foreign Direct Investment has accelerated on the back of the government’s increasing global marketing efforts to encourage foreign investors to invest and pump money into the Kenyan Economy. President William Ruto has been on a global mission to market Kenya as an investment hub. He sensationally referred to a World Economic Forum Survey that ranked Kenya as one of the best investment destinations on the continent during an address to delegates at the just concluded COP28 forum in Dubai.
From the outset, and based on available evidence, things do not look desirable. However, there are plenty of reasons that suggest things might not be as grim as they seem to be.
The first is that some of the outflows of Kenyan capital occasioned by Kenyan corporations setting up shops across the continent is merely an attempt to spread their risk and ensure they remain profitable in the long run.
For example, Equity Bank acquired DRC’s second-largest bank – Banque Commerciale Du Congo (BCDC). The market share of the bank within the DRC market has since grown and is now closing in on dislodging the biggest banking establishment in the Central African country. KCB has since also entered the DRC market through mergers and Safaricom maintains a long-standing interest in the market. The success of these corporates in the DRC and other African markets will, in hindsight, represent a victory for Kenya as a brand and as a home for successful cross-border establishments.
In 2022 Equity Group organized a trading expedition to several towns across the DRC where local business owners were introduced to the DRC market. They also had a chance to explore investment opportunities in the DRC. Since then, more than 10 Kenyan businesses have set up shop in Goma and many other towns across the central African country. Through strategic partnerships, success will be realized and the businesses will start turning profits in line with their expectations.
The DRC continues to be a strategic partner to Kenya. The exchange of goods and services continues to grow. There has been an increase of about 20% in both the value and volume of trading exchanges between the two countries. A huge percentage of it is agricultural and fresh produce. This, again, is a victory for Kenya as a country and as a brand.
Another way to look at the outflow of Foreign Direct Investment phenomenon is a direct comparison with other African economies, most notably Ethiopia in the 2010s.
Ethiopian outflow of Foreign Direct Investment rose rapidly in the years following the collapse of the global financial system in 2008. This was made worse by raging internal conflicts and political instabilities for the better part of the 10 years between 2009 and 2019. In 2013, the outflow accounted for upwards of 5.3% of the East African country’s total GDP.
Net Foreign Direct Investment outflows from Ethiopia rose sharply in the years following in the early 2010s as a direct result of an overvalued Birr. This made it cheaper for Ethiopian firms to acquire foreign assets.
It’s not at all obvious that Kenyan firms would be as willing to go on a frenzy to spread risk across the region/the world in the same way their Ethiopian counterparts did. Kenyan capital controls are limiting most Kenyan corporations from pumping massive capital into offshore subsidiaries. This might change as Kenyan legislators and state departments work on making capital repatriation more attractive.
As it stands, Kenya’s outward Foreign Direct Investment seems to be a strategy to spread risk rather than flee the Kenyan marketplace. The Kenyan government can find solace in that, rather than stressing over the fact that capital is leaving the country.
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