African Consumers Grow Despite Inflation

A posh coffe shop in kenya's capital, Nairobi

In a cafe on the terrace of an upmarket Nairobi mall, well-heeled Kenyans sip coffee as shoppers in the car park navigate between BMW X5s, Toyota Land Cruisers and Mercedes.

Sales at this Java House outlet along the Ngong Road were up last year, says 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 many African states such as Kenya are changing.

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 $800 million came 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 per cent.

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

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, (with a dollar exchanging at about Sh87).

The risk is that Africa’s consumers are harvesting their gains before their economies can bear it, economic analysts say.

“Minimum wage-earners in urban centres in East Africa are encountering a an unprecedented squeeze,” said Aly Khan Satchu, an 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.”

Western investors have become accustomed to Africa as a boom story in recent years. 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.”

Razia Khan, head of Africa research at Standard Chartered in London, says 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, a 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 $17 billion for Sumitomo Bank.

When he first returned, Satchu headed straight to his hometown, Mombasa. In the back garden of his home, he erected a 52-metre tower to get a decent connection to the internet and access the New York Mercantile Exchange.

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 strong 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.

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.