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Mind the gap

Jan 26 2012 07:15 Reuters

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Nairobi - In a cafe on the terrace of a Nairobi mall, well-heeled Kenyans sip coffee as shoppers in the car park navigate between BMW X5s, Toyota Land Cruisers and Mercedes. A nearby cinema last month advertised an array of Hollywood fare including Brad Pitt's Moneyball.

Sales at this Java House outlet along the Ngong Road were up last year, said Kevin Ashley, a Californian who co-founded the chain of 14 coffee houses 13 years ago. Kenya's rich and new middle classes have a growing taste for lattes and ice cream.

That's just one sign that African states such as Kenya are changing. Even as rich countries face a slowdown, sub-Saharan African economies are expected to post nearly 6% average growth in 2012, according to the IMF.

A study by the International Finance Corporation, part of the World Bank, has pointed to the potential of the continent's more than 1 billion people, millions of whom have moved out of subsistence agriculture and into urban jobs over the past decade.

Such promise has helped fuel foreign investment. Kenya alone has had a capital influx of billions of dollars in recent years: the latest official figures show around $800m came in in 2008.

But the wealth on show at the mall has a flip side. The consumption boom has been fuelled by fast-growing credit. In Kenya and elsewhere that has sucked in imports - cars, shoes, clothes, wines and whiskies - and swelled the current account deficit. Inflation in Kenya is now nearing 20%. As always, high inflation hurts the poorest most.

Java House employs 700 workers and plans to open new outlets soon, but its co-owner worries about price rises.

The cost of sugar, electricity and gas has doubled. A volatile currency has fed into coffee prices, which are paid in dollars. A sack of green coffee costs close to $500, up from $150-$200 per sack three years ago.

"This particular case right now of inflation is a dangerous phase," Ashley said. People who were taking a bus to work may now walk, somebody who was driving may take a bus, and somebody who was eating in Java might now carry their own food to work.

The risk is that Africa's consumers are harvesting their gains before their economies can bear it, economic analysts say. As more people see inequalities widen, that could fuel unrest.

"Minimum wage earners in urban centres in East Africa are encountering a simply unprecedented squeeze," said Aly Khan Satchu, a Nairobi-based independent trader and analyst, and himself solidly middle class. Inflation is a major concern, he said. "It creates a sort of reverse Robin Hood effect where the poor carry the main burden."

A boom that hurts

Western investors have become accustomed to Africa as a boom story in recent years. As demand from places such as China and Brazil pushed up commodity prices, investment poured in. Since the financial crisis, investors have ventured into Africa in search of higher returns.

In Kenya, firms have been hiring and property prices have risen exponentially, creating a feel-good factor for home owners, especially in towns and cities. That, in turn, has fed the appetite for consumer goods.

"Africa is about consumers," Stephen Murphy, managing director at private equity firm Citadel Capital, told a conference in Nairobi in December. "It is about high-impact infrastructure investing and it is certainly about value-added exports and not just commodity exports."

But not everyone has welcomed the growth. Food prices - especially meat - have risen sharply. In a rain-soaked field outside the Kenyan capital, it's easy to see why. Farmer Joseph Kiarie puts the fertilizer on his crop of cabbages by hand from a plastic bucket, and says rising costs have cut his earnings by two-thirds in the past year.

"This has been a terrible year," he said.

A 52 metre tower

Razia Khan, head of Africa research at Standard Chartered in London, said the problem is an Africa-wide one. "More rapid growth was accompanied almost everywhere by a surge in imports, especially capital goods imports related to infrastructure development."

Like other African countries, Kenya has yet to make good use of the capital pouring into the country and encourage manufacturing.

"It is good if people think Kenya is a good place to park their money but what Kenya needs most is long-term investments that go into productive industries," said Wolfgang Fengler, the lead economist at the World Bank office for Kenya.

Unlike countries such as Ghana, Nigeria, or Zambia, Kenya doesn't have significant mineral or oil resources.

But its economy has been lifted by infrastructure investment - including a high-speed internet connection. That should help spread the wealth, and is already attracting home thousands of skilled, educated Kenyans, many of whom work in the booming financial sector.

Satchu, the trader and analyst, is one of them. He returned five years ago after working with various banks in London all his adult life, at one point managing a balance sheet in excess of $17bn for Sumitomo Bank.

When he first returned, Satchu headed straight to Mombasa, a port city on the Indian Ocean. In the back garden of his home he erected a 52 metre tower to get a decent connection to the internet - speeds via commercially available internet service providers were capped at 32 kilobytes per minute - and access the New York Mercantile Exchange. A neighbour was so puzzled he asked Satchu if he was prospecting for oil.

In 2009, though, a high-speed undersea cable plugged Kenya into the global grid. Encouraged by new tech-friendly policies, Kenya has pulled in investments from firms like Britain's Vodafone, France Telecom and India's Essar Telecoms. Mobile commerce is growing.

Now Satchu has moved to Nairobi and follows the global markets through 3G technology.

"I have a supreme conviction that the African convergence with the rest of the world has begun, therefore I needed to place myself not on the beach, but in the thick of things."

Satchu has a well-honed urge to consume. He likes to wear pricey Canali suits and Hermes ties, and drives a Nissan Patrol, a behemoth four-wheel drive. "I prefer to drive a Maserati or a fast car but it is just not practicable on our roads," he said, pointing to one of Kenya's persistent shortcomings.

"A serious opportunity"

Eventually, improved infrastructure might allow him to drive that Maserati. For now, analysts fret about whether Kenya's exporting capacity can keep pace with its imports.

"In most frontier markets... we haven't seen sufficient evidence of this," Khan said. "Exports go up, but not nearly by enough, and imports - especially of consumer goods - go up even more."

Such imports - combined with rising prices for domestic goods such as food - speed up inflation. That's a worry for people like Vimal Shah, a third-generation Indian-Kenyan whose grandfather first came to Mombasa to work on the Kenya-Uganda railway. He now runs Bidco Industries, which was started by his family 25 years ago and sells 30 brands of soap and edible oils.

Bidco is based in Thika, a manufacturing town a half hour's drive from Nairobi, which made a name for itself in the 1970s as The Birmingham of Kenya because of its thriving textiles factories, bakeries and motor vehicle plants.

In the early 2000s, though, it grew to symbolise Kenya's decline. Plants closed, unemployment and poverty grew. Today, it feels like a typical rural Kenyan town - open air markets brimming with fresh cabbages and potatoes, streets crowded with the small minibuses known as matatus.

Shah's firm Bidco survived the hard times. It exports 20% of its output to other African countries with a value of $40m a year, he said. A fast-spoken father of one, Shah believes Kenya should be well positioned to export to markets in east and southern Africa, thanks to regional economic groupings.

The World Bank's Fengler agrees Kenya could turn Mombasa into a trans shipment hub to serve the east African region, which has fast-growing landlocked nations like Uganda, Rwanda and South Sudan.

"It is serious opportunity," said Shah in the company's boardroom, furnished with comfortable, leather-padded seats and soundproofed to muffle the noise of machinery. "All we need to do is work on our costs of doing business."

Energy, transport and labour costs are hurting manufacturing and exports, Shah said. "Our cost of power is more than 20 US cents per kilowatt hour today. If we compare with Egypt, we are eight times higher."

For him, the most important thing for Kenya is to turn its raw materials into things it can sell for more money. "Why export cotton when you can export shirts? All that tea and coffee we produce, we should package it and send it straight to Starbucks."

Poor people's shops?

Or perhaps a homegrown cafe such as Java House. The outlet on Ngong Road is not far from Nairobi's biggest slum, Kibera, a vast shanty town that lacks even basic services such as sanitation. Many Kibera residents - there are hundreds of thousands of them - are angry that while food prices have risen, wages have not. Many say their families now have to forgo meals.

A year ago, 300 shillings ($3.48) bought breakfast, lunch and supper, "but now that is nothing", said Jane Mwalugha, a married mother of five children aged between three and 15, in her one-roomed house. "We have had to cut out lunch this year so we just take supper. Bread is now a luxury so we have cut it out."

A few Kibera residents make their way to supermarkets in a nearby mall to buy tiny portions of food. But they are well out of reach for most. "The government should construct supermarkets for the rich and let us have our own because they have decided in life that there are two tribes, the poor and the rich. They should let us have poor people's shops," Mwalugha said.

Kevin Ashley of Java House said cellphones and the internet mean Africa's young people understand the opportunities people in richer countries enjoy. That will increase the pressure to get the economy right.

"As policymakers and business leaders we need to making sure that not only are we creating wealth at the top," he said. "We need to be creating lots of jobs down there for that group of young people coming now to the workforce." 

africa  |  consumers
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