Quantum Global’s independent research arm, Quantum Global Research Lab., has released its latest Africa Investment Index 2016. According to the index, Kenya is the 15th most attractive economy for investments flowing into Africa.

“Supported by a stable macroeconomic environment, Kenya presents investors with relatively high exchange rate risk, low levels of liquidity and very low import cover. However, going forward, the government policy of capping domestic interest rates is limiting growth on domestic credit to the private sector. This has the potential of being a drag on future economic growth, in an otherwise dynamic economy,” Prof Mthuli Ncube, Head of Quantum Global Research Lab said while commenting on the Kenyan economy.

According to the research by Quantum Global, Kenya’s rate of economic growth is on track to exceed the average for sub-Saharan Africa for the eighth year in a row. This growth performance has been driven by strong domestic demand and public infrastructure investment in a context of low oil prices and domestic macroeconomic stability. Domestic consumption has been growing rapidly on the back of a growing middle class, rising incomes and rapid expansion of credit.

Public investment and fiscal transfers to countries have ensured that the growth has been geographically broad-based. Low oil prices and a surge in remittances have allowed a contraction in the current account deficit recently, although the gap between imports and exports is still wide and presents a risk, especially if oil prices rise. Economic growth has been reasonably well diversified, especially in services sectors, although manufacturing has underperformed. Low inflation and currency stability over the past two years have been conducive for investment.

The research also highlights that Kenya faces a number of external and internal risks that could dampen the economy in 2017 including global financial volatility (especially following the election of Donald Trump in the United States), and a risk of capital flight from frontier economies. Oil prices are expected to lift modestly next year, but the impact on the balance of payments could be offset by the recovery in tourism and FDI. The major internal risks relate to possible political instability in the run-up to the 2017 elections, associated delays in fiscal consolidation, and the recent capping of interest rates, which could restrict access to credit and impair bank performance. It is worthy to note that in 2015, Kenya attracted a net FDI of $1.5bn and its economy is doing favourably however economic headwinds can dampen investor sentiment.

“Overall, the outlook for Kenya’s economy over the coming years looks bright. Both the World Bank and International Monetary Fund (IMF) are forecasting growth rates of around 6 percent for the next 3-4 years. Growth will continue to be supported by robust domestic consumption, public infrastructure investments in transport, energy and information and communications technology (ICT), and remittances from abroad, ” Mthuli concluded.

According to the Index, the top five African investment destinations attracted an overall FDI of $13.6 billion. Morocco was ranked second on the index based on its increasing solid economic growth, strategic geographic positioning, increased foreign direct investment, import cover ratio, and an overall favourable business environment. Egypt was ranked third due to an increased foreign direct investment and real interest rates, and a growing urban population. The fourth country on the list, South Africa, scored well on the growth factor of GDP, ease of doing business in the country and significant population. Zambia was the fifth country on the list due to its significant domestic investment and access money supply.

How the Index was Constructed

The Africa Investment Index (AII) is constructed from macroeconomic and financial indicators and the World Bank Group’s Ease of Doing Business Indicators (DBI). The DBI ranks countries in terms of a regulatory environment conducive to business operation. The AII focuses on six pillars or factors from a wider range of investment indicators, which include the share of domestic investment in the gross domestic product (GDP), the share of Africa’s total Foreign direct investment (FDI) net inflow, GDP growth rate forecast, population augmented GDP growth factor, real interest rate, the difference of broad money growth to the GDP growth rates, inflation differential, credit rating, import cover, the share of the country’s external debt in its Gross National Income (GNI), current account ratio, ease of doing business and the country’s population size. The AII indicators are based on secondary data collected from World Bank Development Indicators,the International Monetary Fund (IMF) World Economic Outlook, the United Nations Conference on Trade and Development (UNCTAD) Data Centre and own estimates.

The AII is a combination of individual indicator’s rank into a single numerical ranking. It averages the country’s macroeconomic and financial indicators rankings on the six different factors. Each indicator, and hence factors, receives an equal weight. Their rank score is then averaged to produce the total average score, which is consequently ranked from 1 to 54. The lower the value of the ranking, the better the implied business investment climate.

To produce an index score that captures medium-term changing aspects, individual country’s ranking is scaled relative to a benchmark or reference value (i.e., the past three-year rolling average ranking). In addition to the intended measurement, this approach enables us to avoid periods of structural changes (which may compromise the index) that may be present in a longer time span, whether we consider a change from a reference average value or a historical reference period.

Click here to access the full Africa Investment Index 2016

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