Global slowdown opportunity for Kenya to put house in order

Opinion and Analysis

The sharp fall in both the local and the global markets this week is nothing but smart money trying to lock in its profits before it evaporates. BD GRAPHIC | NATION MEDIA GROUP 

By Mohamed Wehliye

In Summary

• Investors should sit tight given that whenever a turmoil of this nature has happened, this has been a great boon for investors who have medium and long term perspective. There are always opportunities in every threat.

It has been a very bad week for the world stock and currency markets. The tumble was triggered by troubles brewing in the Chinese economy and crash in commodity price, raising concerns about a prolonged global slowdown.

According to some experts, the global rout has already wiped more than $8 trillion from stocks across the globe, and emerging-market currencies are sliding in tow, evoking memories of the 1998 Asian crisis.

In our domestic market, a bear run that started even before this crisis has seen investors lose billions of their wealth since the beginning of the year. The shilling continues to depreciate to touch an intra-day low of 104.05 against the dollar on Tuesday.

But a slowing world economy is not the end of the world.

A slowing China, weak recovery in the US and troubles in Europe and Japan once again shifts the global focus to other parts of the world which means we have a good opportunity to emerge as the winner among the pioneer economies.

But for that to happen we need to set our house in order. How can we do this?

First, the government should continue stepping up public spending in infrastructure. There has been a lot of obsession with our fiscal deficit and its unsustainability but expenditure on infrastructure is the best avenue for our economy to grow.

Without proper infrastructure, expansion will slow or worse, stall. More factories means more electricity is needed from power stations. The goods these factories will produce will need to be shipped through a wider network of roads, railways, ports, and airports.

Nairobi, with global aspirations cannot run without power, clean water, telecoms, and efficient public transport such as a metro system and buses to serve burgeoning urban population.

If you want to grow, you need people to invest and consume. So far, there has been little or no private sector investments. We caught the global bug where cheap money has been used by individuals, firms and financial institutions not to lend to companies creating jobs, but to make money from money, shares and bonds.

Our stock market, like the US one, hit record highs and more financial wealth has been created since the financial crisis than any other time. And this was when the economy wasn’t growing too strongly.

You saw in the local newspapers how a few of our billionaires wealth was increasing by hundreds of billions every other week last year and how that dropped since the beginning of this year.

When there is so much money to be made from money, who in his right mind will put up factories and roads in the hope that they will yield a positive return? The sharp fall in both the local and the global markets this week is nothing but smart money trying to lock in its profits before it evaporates.

If the private sector and citizens are unwilling to invest in the real economy, the logical thing for the government to do is to continue to invest in infrastructure.

During such difficult times, the only entity that can act is the government, which technically can spend even without having the money. A few may not like this, but the reality is that when nothing works, the government has to work.

If the government was not spending on infrastructure in the last few years, we definitely would be in a worse economic situation today.

Growth and deficits are inversely related — when growth rises, the fiscal deficit falls as more tax revenues get generated; when growth falters, it is foolish to ask governments to cut spending, even more to balance budgets. The trick is to get revenue spending down and to boost capital expenditure.

If the fiscal deficit grows or remains high only due to capital spending, it is money well spent. The problem is when we borrow to finance recurrent expenditure.

With the teachers' Supreme Court ruling this week, it would a crime for the National Treasury to finance the pay raise through borrowing. The Treasury must cut spending via a supplementary budget.

It must, however, not do the cutting where the spending will provide the much needed impetus to the economy. Spending push to develop public infrastructure is key to grabbing our opportunity in a slowing world economy.

Second, investors’ are becoming more and more worried about the slow progress of key reforms steps as promised by the Jubilee administration. We need tax, land, financial sector, mining and labour law reforms etc.

The administration needs to show enough pluck or the gumption needed to harness favourable winds to put the economy on a much higher trajectory.

In fact, other than piecemeal ‘ease of doing business’ tweaks here and there, what major big ticket economic reforms has Jubilee undertaken in the last two-and-a-half years it has been in power? Zilch.

An incremental change — a little tweak here and a push in the right direction there, is not going to move the economy to double-digit growth any time soon. We need big-bang economic reforms if we are to grab our opportunity, especially in the case of a slowing world economy.

Even the so called parastatal reforms looks dead on arrival. Like many things Kenyan, the excellent proposed process of rationalisation seem to have been politicised and stalled by vested interests wanting to mark their territories and retain the status quo.

The business of government is not business and the government must get out of the businesses it is already in. Both Kenya Airways and the sugar millers are bleeding ulcers that the taxpayer could do without.

We have so many State commercial entities that are the most inefficient users of capital, thanks to overstaffing and excessive interference in day-to-day management by ministers and politicians. This means privatisation has to be brought back on the agenda and quickly.

Industry is becoming impatient about the inability of Jubilee to walk the talk on reforms and if we are to come out on top in a slowing world economy, the coalition must get its act together on the big ticket reform front.

Finally, I don’t think it is the end of the bull run for our local market. If the rest of the world is going down, we will once again become an obvious magnet.

With a weakening shilling, foreign institutional and portfolio investors selling will become uneconomic at some point and inflows attractive.

The reason for the sharp market fall across the world is simple: when markets decide to move in one direction, they develop a herd mentality. Herd mentality rules during a crisis because people naturally follow the crowd when times are uncertain and they don’t know what to do.

It is not as if our listed companies have all of a sudden become junks. Once the bottom is reached, the NSE will start its upward momentum.

Investors should sit tight given that whenever a turmoil of this nature has happened, this has been a great boon for investors who have medium and long term perspective. There are always opportunities in every threat.

Mr Wehliye is senior vice president, financial risk management, Riyad Bank, Saudi Arabia.