Future Capital Kenya

Ahhhh, blogging, an art that I often love to indulge in, but more often lack the time for. Yesterday, the Business Daily had an impeccable column from the ever fresh George Wachira. In the article, George Wachira, a petroleum industry analyst did something that a number of economists expressing their views in the media have so far failed to do; explaining what really is ailing our economy. For that; Kudos Mr. Wachira, you have really hit the nail squarely on the head.

To take his points further, I will do what i have developed a knack for; developing analogies. To this end, I write the simple story of a Banker called Ken.

Mr.Ken graduated from high school with some good grades back in 1963. His parents and indeed his whole community had great expectations for him. A man with such undoubted intellect and charisma; a rare mix of resources, would clearly do well in life. Mr. Ken designated himself a career as a banker after some thorough soul searching. Banking, he thought, would be the best way to generate real wealth for himself in the long run.

In his formative years as banker, he caught the common bug that seems to afflict all bankers, the bug is called the "aesthetic fallacy".

The bug works by making the banker think that looking good and working on your appearance are the most critical aspect of making it in the industry. This bug was reinforced into Mr. Ken's mind by his well-heeled superiors from the global head office in London. To this end, Mr. Ken went on a borrowing spree, these loans were taken out so that he Mr. Ken can acquire Italian suits, a German car and hopefully an American wife.

When it came to his modes of investments, Mr. Ken focused on more exotic investments, he invested in "off-shore equities", "forex" and "global fixed-income" investments. These just sounded sexier at cocktail parties.

His high-school colleagues were mis-informed, they invested in "dumber" investments, his friend Hu, kept chickens. Mr. Saivash on the other hand started a potato farm. Mr. Ken was too good for these, in fact, he had started fiddling in tech stocks. Hu and Saivash were way behind the curve.

However, as time progressed, Mr. Ken found himself in a very compromising situation. His disposable income could barely keep up with his lifestyle and committments, his loans were due and this was exacerbated by the fact that he spent all his credit on consumables and worse still; his investments had all stalled, he was in the red. Meanwhile Hu and Saivash, had simply counted on the tried and tested technique of spending way less than you earn, managing your risks and waiting for compount interest to work its magic.

Mr. Ken then realised in his mid-life, that looking good is not what gets you far as a banker, Indeed it does help to look presentable, but what really cut the grade was hard work and ability. Some of his juniors whilst he was a mid level manager were now senior managers. Now, Mr. Ken was just a very presentable mid-level manager at a local subsidiary of a global bank.

Things didn't turn out well for Mr. Ken, his expenses by far exceeded his income and his investments had backfired. Bank's no longer lent to him and his financial counterparties had lost their trust in him. Hu and Saivash's companies were now global conglomerates, a far cry from their humble beginnings.

Lest I digress further, this is the story of Kenya's current woes and worse still, it's future woes; Moreover, this situation is completely self-inflicted. A look at the 2nd half banking sector report shows that over 44% of all loans and advances were advanced for consumption and real estate. Kenyans are selling their productive land so as to build apartments, the government has totally ignored manufacturing and agriculture and instead, it is focusing on an ICT park in the middle of nowhere "no offence if you hail from Malili". We are Mr. Ken, somehow convinced that external appearance matters more than productivity and work. We are also convinced that "sexy" investments like ICT and "regional financial hubs" are more important than the dull sounding agriculture and manufacturing.

Where has this lead us? Balance of payment woes as our expenditure by far exceeds our income. An 8% trade deficit simply means that we export 8% of our wealth to foreigners each year. This number is growing. Shit stuff has hit the fan!

As a country, we need to focus on agriculture and manufacturing. Simply, there is no other way!

I have read a number of articles that lament about Kenyans lacking a savings culture. To crystallize this point, most people quote the savings ratio, measured as gross national savings as a percentage of GDP. The savings ratio has hovered at about the 12% mark. Compared to other countries, this seems to be rather low when you compare it to countries like China and Botswana whose savings rate has historically been in the 20-40% range. Closer to home, Tanzania has enjoyed savings rates of about 21% with Uganda coming second with 18%. So we do not save, and our East African counterparts save more of their wealth than we do. In essence the savings rate measures how much of our wealth that we save, simply calculated as our wealth less what we consume. The result is that from a national income identity perspective, we get to invest only 12% of our wealth. 

Moreover, if we invest more than we save, then by national income accounting identities then the surplus i.e gross savings less gross investments will be equal to the current account balance. In our case, we have a negative current account balance meaning that we invest more than we save. We can only do this by borrowing money. Therefore, we have established two clear factors;

So to analyse this matter, one has to be cognisant of the way national savings are calculated. In the economy there are three players, firms and households, government and foreigners. Therefore, our GDP is a function of how much is spent by firms and households, governments and foreigners.  It thus follows that our national savings is a function of firms and households, governments and to some extent foreigners,with the only change being that foreigners are not included in the calculation of national savings. 

Therefore, savings are a function of how much our firms and households save and how much our government saves. If the latter actually save, or have ever heard of the concept. 

Do our firms and households save, the answer to this is a resounding YES! In 1998, the external debt stock i.e. the percentage of national debt owed to foreigners was 87%. In 2010, the external debt stock stood at 50%. The debt stock grew by a compounded rate of 23% during that period to stand at KShs 1.06 trillion shillings from a total of KShs 252 billion. If the composition of external debt has shown such a precipitous decline, all the while the total debt has been growing, it only suggests one thing. The government has been tapping the local market for their debt requirements. As such, the government can only tap into our "savings" to fund their deficits. Our pension funds, unit trusts and banks have lent more of our "savings" to the government.

The conclusion is simple, when analysing national income statistics, it is good to have an innate understanding of how those parameters are calculated. The national savings is low, not because Kenyans don't save, but because the government is constantly running budget deficits. They can only bridge these deficits by borrowing from us or from foreigners. Therefore, Kenyans do save, in fact they are great savers, they just save for the government.