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Political Fallacies Shouldn’t Drive Economic Behaviour

[vc_row][vc_column width=”2/3″][vc_column_text]In my previous life, I was an executive director on the board of Barclays Bank of Kenya. Being the first female in that position in the bank’s ninety-year history was a testimony to the bank’s progressive shift at the time to a more gender inclusive and younger board. Right outside the 8th floor boardroom at Barclays Plaza, was a toilet facility: for gentlemen only. The ladies toilet was a hop, skip and a jump further down the corridor where the staff bathroom facilities were. Now, a fallacy can be created here: that Barclays Kenya never envisaged a day that women would ever be on their board, and therefore contrived to only have a gentleman’s commode available that was contiguous to the board room. The more likely story is that when the building was constructed, the toilet facility was tucked on as an afterthought, as that boardroom was being partitioned. Back then, it was primarily men on the board and therefore it made perfect sense that it would become a gentlemen’s facility. With the passage of time it was never deemed necessary to add a ladies toilet probably because the female directors on the board never raised it as a mission critical board agenda item. Why do I give this story? I narrate it as it demonstrates how urban legends are created: That women were never imagined to ever join the boardroom and the lack of a toilet is evidence of such myopic thinking. Which is absolutely untrue.

Last week I had an early morning meeting in Upperhill, Nairobi’s rapidly trending “must have” corporate address. I turned onto Hospital Road and the rising sunrays in the salmon colored sky glinted off the steel and glass edifices of several new buildings. Upperhill is a testimony to unplanned gentrification, with a road infrastructure that is struggling to catch up to the real estate capital that has been heavily invested there.

That real estate capital is a further testimony to the fallacy that is often being perpetuated that Kenya is walking an economic tightrope, with certain doom waiting at the bottom of the political circus. The buildings didn’t drop out of a Jupiter sky. They were deliberately constructed by owners of capital that see further past the building’s balance sheet depreciation. I was a little stumped. A building is a large and long-term investment. It is a loud and vociferous “we are here to stay” statement. And there are several of those statements in that square mile or so that forms Nairobi’s emerging financial district. So I asked one of the corporate titans located in Uppherhill as to why there was such growth and development in the area, when the print, television and social media paint such a gloomy picture of the country’s future. His response was reflective of corporate Kenya: Social media in Kenya is an effective pressure valve, it allows for steam to be released regularly to reduce the compressive forces of political dissatisfaction. As a business driver there would be greater fear if voices of dissent had no outlet, as that would mean that the country would be snowballing into a cataclysmic event whose trigger could not be determined, as happened with Tunisia’s Mohamed Bouazizi’s self immolation in December 2010 in protest of police corruption and ill treatment that sparked off the Arab spring. Owners of capital detest the inability to predict or calculate political risk. Kenya’s political risk is seemingly one that can be calculated and absorbed in the cost of doing business in the financial capital of the greater East African region.

Italy provides a classic example of political risk divorcing itself from economic growth. By the time Silvio Berlusconi was taking on the Prime Minister’s office in April 2005 for his third tumultuous shot at greatness, he was forming the 60th government that Italy had had in the 60 years since it had become a republic in 1946. Past Italian governments hardly lasted more than a year on average. Yet Italy remains the 9th largest economy in the world, as well as a card-carrying member of the European Union and the G7 economic powerhouse. How is this possible, when we in Africa have been conditioned to believe that central (and now county) governments are the singular premise on which great economies are grown?

According to a report from Focus Economics, Italy’s economic structure relies mainly on services and manufacturing. The services sector accounts for almost three quarters of total GDP employing around 65% of the country’s total workforce. Within the service sector, the most important contributors are the wholesale, retail sales and transportation sectors. Industry accounts for a quarter of Italy’s total production employing around 30% of the total workforce. Manufacturing is the most important sub-sector within the industry sector. The country’s manufacturing is specialized in high-quality goods and is mainly run by small- and medium-sized enterprises. Most of them are family-owned enterprises. Agriculture contributes the remaining share of total GDP and it employs around 4.0% of the total workforce.
The Focus Economics reports adds that after World War II, Italy experienced a shift in its economic structure. It transformed itself from an agricultural country to one of the most industrialized economies in the world. The force behind the post-war economic miracle was the development of small- and medium-sized companies in export-related industries. In the following decades, the economy has had both ups and downs. It is also noteworthy that Italy is the last Eurozone member on Transparency International’s corruption index at number 69 next to Greece, Romania and Bulgaria. The Italian Court of Auditors estimates corruption to amount to about 40% of public procurement value.
We can and we are already growing into a regional economic powerhouse, if we leave politics to the politicians and simply focus on growing our SME base ourselves. Our stable shilling in recent volatile times also demonstrates our economic resilience. The Italian model substantiates that economic growth, in spite of political turbulence and corruption, is not such a fallacy.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Confluence of Political and Economic Risks

I recently dined with a European diplomat who asked the ubiquitous question that foreign residents in this country like to do: “What do you think will happen at the next Kenyan elections?” Before I tell you what I answered, I have to state categorically and most unequivocally that I am neither a political analyst nor commentator. I do, however, occasionally comment on the confluence of politics and economics as often happens invariably. That confluence is particularly necessary in the banking industry, where I spent many happy years, when analyzing credit risk of a customer for a term loan of not less than five years.

Within the duration of that loan such a customer is bound to cross the Kenyan election cycle. Depending on the nature of the customer’s business, the company is likely to have difficulties in loan repayments due to cash flow constraints occasioned by poor sales, deplorable debt collections or, heaven forbid, destruction of the company premises therefore impacting on the ability to produce the goods and services that are being procured. My answer to the diplomat saw him imperceptibly swallow and he leaned forward in interest.

“There will be bloodshed in 2017 as the historical patterns demonstrate it.”

“What do you mean?” he whispered.

“In banking, we look at historical behavior as a strong barometer of what future behavior is likely to portend. To understand our history of political violence, you have to start in 1992 when the first multi party elections were held,” I began. “In that year, you had an incumbent who was running against a very strong and credible opposition. That was when Kenya endured the first of several bloody episodes of tribal clashes.” I went on. “In 1997, the same incumbent was running for his second and last term as president. He had the benefit of the state machinery behind him, as well as a fragmented opposition. This time, the political waters were muddied in the coast region, where the pre-election clashes were largely centered. The coastal tourism economy very nearly collapsed and the hotel industry underwent massive bankruptcies.”

“Well what do you make of the peaceful election in December 2002?” the diplomat asked. “Doesn’t that destroy the pattern of electoral violence?”

“Actually, therein lies the pattern,” I responded. “Every time an incumbent is stepping down, there has been a peaceful transition in Kenya. It happened in 2002 and in 2013. But whenever there’s been an incumbent fighting to maintain the status quo, there has been bloodshed; ergo 1992, 1997 and 2007. The 2017 elections are a status quo event. The pattern will be the same.” My lunch partner mulled over this for a few minutes and promptly changed the subject.

In 2008, a few banks took advantage of the politically instigated clashes in the beginning months of the year to blame the growth in non-performing loans. Some of this was not entirely true and was a slick way of reporting previously suppressed bad loans. But you’d think that the regulator would have cottoned on to the games being played. It didn’t. It is not difficult to see why, when you look at the kind of pedestrian analysis the banking supervision department at the Central Bank of Kenya (CBK) undertakes. In the recently released 2014 Bank Supervision Annual Report, the Central Bank dedicates the monumental amount of three sentences to analyze the 2014 asset quality of the entire banking industry. I will pick two of the three sentences as an illustration:

“ The lag effects of high interest regime in 2012/2013 and subdued economic activities witnessed in the period ended December 2014 impacted negatively on the quality of loans and advances. As a result, non performing loans (NPLs) increased by 32.4% to Kshs 108.3 billion in December 2014 from Kshs 81.8 billion in December 2013.”

When your non-performing asset book increases by a third, it requires a fair amount of explaining beyond the vanilla high interest rates and subdued economic activities reasoning. There should be a fairly robust amount of granularity around the specific industries driving the poor performance of loans. It is an open secret that the central government endured inordinate cash flow challenges in 2014 that impacted key suppliers of services, particularly in the construction industry. This would invariably have a knock on effect to the suppliers of construction companies such as cement, cable and ballast for example. But this is what should be of concern as we hurtle towards an election cycle in the next two years. The retail loan book across the banking industry is the single largest loan segment with 3.6 million accounts grossing Kshs 516 billion and accounting for 26.6% of total loans in the market. This is ahead of trade at Kshs 375 billion (19.3% of total loans) and manufacturing at Kshs 237 billion or 12.2% of total loans. Retail loans, codified by the CBK as personal/household loans, are consumer loans and in this market represent the largely salary check off loans that pepper many banks’ unsecured loan offers. It’s highly likely that the bulk of these loans are used to purchase consumer items such as cars, furniture and electronics rather than investment in income generating activities. A political event such as post election violence, followed by an economic downturn caused by reduction in productive capacity of Kenyan companies will lead to retrenchments. You can also never underestimate the capacity of cheeky borrowers to take advantage of politically volatile environments to stop repaying loans due to destruction of work places and such like sob stories. I saw it happen in 2008.

A notable risk therefore sits in the banking industry come 2017: any delays in government payments (partly occasioned by tax collection difficulties on the part of Kenya Revenue Authority) together with probable election related violence will negatively impact bank loan books. Don’t be surprised if you find difficulty getting an answer on your loan application that year. Your bank is just not that into you in an election year.

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Twitter: @carolmusyoka