Kenya to feel the pain of Britain’s possible EU exit

Money Markets

Workers at a flower farm in Oserian, Naivasha. Agriculture firms stick out as the ones who would take the brunt of the downturn in demand. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• CBK governor Patrick Njoroge said East Africa’s largest economy would “feel the shock wave” alongside other global economies should Britain vote to leave the EU.
• Kenya is particularly seen as vulnerable to possible loss of trade, exchange rate pressure and capital outflows should Britons vote to leave the bloc.
• Listed companies that export goods and services to the UK also face the risk of a prolonged slowdown or even decline should Britain exit the EU and its economy suffers a downturn as a result.

Kenya is one of the countries at a high risk of being hit by economic shocks associated with Britain’s plebiscite tomorrow on whether to dump or keep its membership in the European Union, economists said.

The Central Bank of Kenya governor Patrick Njoroge, who is a former IMF economist, said East Africa’s largest economy would “feel the shock wave”  alongside other global economies should Britain vote to leave the EU.

Dr Njoroge’s pronouncement was seen as expressing concerns that Kenya’s economic policy makers have over the outcome of Thursday’s vote, whose impact some economists have said could equal that of the 2008 global financial crisis.

Kenya is particularly seen as vulnerable to possible loss of trade, exchange rate pressure and capital outflows should Britons vote to leave the bloc.

Nairobi is seen as being at risk of massive capital outflows arising from the strong wave of anxiety in global markets, which is expected to follow an exit vote.

Increased capital outflows would, for instance, hurt trading at the Nairobi Securities Exchange, whose activity has more recently been anchored on strong foreign participation.

Listed companies that export goods and services to the UK also face the risk of a prolonged slowdown or even decline should Britain exit the EU and its economy suffers a downturn as a result.

Standard Chartered head of research for Africa Razia Khan said the shilling was likely to come under pressure if Britain exits and subsequent investor capital flight to relative safe havens such as US treasuries – ultimately triggering a stronger dollar.

“Any vote in favour of ‘leave’ is widely acknowledged as being a negative for global risk appetite.  In this case, should it come about – the polls are extremely close at the moment – it would be a negative for all emerging and frontier markets, Kenya included,” Ms Khan said, adding that Kenya will not be spared the resulting risk selloff under such a scenario.

“Outside of the very considerable financial market risks, Kenya’s real economy would also be impacted by an exit vote.  Any eventual need to renegotiate trade agreements outside of the EU would create more uncertainty for Kenyan exports,” she said.

A possible strengthening of the dollar against the Kenyan shilling in the wake of an exit vote is also expected to pile upward pressure on inflation or cost of living for a net importer like Kenya.

That would ultimately force the Central Bank of Kenya to react with a tightening of monetary policy and a rise in interest rates. 

Trade is, however, the more immediate of the concerns, analysts said while issues around capital flows would take root over time as markets adjust to a new reality of a reformed Europe. The Netherlands and the UK are two of Kenya’s biggest export destinations.

Trading statistics for the first quarter of this year show that the two EU states together accounted for 18.3 per cent or Sh22.7 billion of Kenya’s total exports worth Sh123.9 billion.

Kenya mainly exports horticulture products to Europe, with the Netherlands and the UK as the main landing points.