Kenya vulnerable to US rate hike, says report

Money Markets

Workers at the standard gauge railway construction station. Imports for major infrastructure projects have helped widen the current account deficit. PHOTO | FILE |   NATION MEDIA GROUP

By CHARLES MWANIKI and KIARIE NJOROGE, cmwaniki@ke.nationmedia.com AND gkiarie@ke.nationmedia.com

In Summary

• Outlook report for 2016 says rise in US interest rates, expected next week, will affect economies in Africa by making imports more expensive and lowering capital inflows as the dollar strengthens.
• Economies that have large import–export imbalances are at risk of suffering when imports become more expensive in the face of a stronger dollar.
• exchange earnings from agriculture and tourism have been depressed.
• Kenya’s economy is, however, likely to be shielded from further distress due to the fact that the country is not dependent on commodity exports to China, according to the ICAEW report.

Kenya’s widening current account deficit and private sector dependence on debt have left the economy increasingly vulnerable to shock of a US rate hike, a report by UK accountants says.

The outlook on African economies for 2016 by the Institute of Chartered Accountants in England and Wales (ICAEW) says rise in US interest rates, expected next week, will affect economies in Africa by making imports more expensive and lowering capital inflows as the dollar strengthens.

“Kenya ranked in sixth position (out of 53) in terms of vulnerability scoring just under 250 points out of 300. This can be attributed to the nation’s current account deficit, which stands at 10.4 per cent,” says the ICAEW report.

“Growth in private sector credit also presents a risk, as it indicates a dependence on debt to drive growth. Within the major African economies, Ghana tops the list, with a private sector credit growth rate of 18.4 per cent followed closely by Kenya with a rate of 17.8 per cent between 2013 and 2015.”

Economies that have large import–export imbalances are at risk of suffering when imports become more expensive in the face of a stronger dollar.

A rise in US rates is likely to prompt emerging economies to raise rates, which would threaten economic growth.

The spectre of the US rate hike has hung over markets this year, leading to capital flowing back into the US market hurting growth prospects of smaller economies.

The stock market, which acts as one of the early indicators of capital flow trends, has seen foreign investors record six straight weeks of outflows. Market data at the Nairobi Securities Exchange shows foreign investors were net sellers in November at a net Sh1.5 billion, compared to net inflows of Sh871.5 million in October.

“The sustained foreign investors net outflow can be linked to a shift in global investor portfolio flows based on the impeding rate increase in the US that has reduced their risk appetite for securities in emerging and frontier markets,” said investment advisors Cytonn Investments in a market review.

READ: Kenya among top 10 states exposed to portfolio flows risks -IMF

The shilling has been exchanging above the 100 unit level to the dollar since July, partly due to the stronger dollar and the country’s current account deficit.

Imports for infrastructure projects such as the standard gauge railway have helped widen the current account deficit, also coming at a time when the country’s foreign exchange earnings from agriculture and tourism have been depressed.

Kenya’s economy is, however, likely to be shielded from further distress due to the fact that the country is not dependent on commodity exports to China, according to the ICAEW report.

Commodity-backed economies such as Nigeria, Angola and South Africa are set to experience exposure to the slowdown of the Chinese economy as well as the Asian giant’s shift towards a more consumption and services-driven economy as opposed to a manufacturing and export model.

According to the report, Ghana is Africa’s most vulnerable economy, with a score of 273 out of 300, due to a high current account deficit and a history of rapid credit growth. Seychelles came in second followed by Guinea, Tanzania and the Democratic Republic of Congo.