Central bank boss warns of reduced FDI due to Brexit

CBK Governor Patrick Njoroge speaks during a media briefing in Nairobi on May 24, 2016. PHOTO | SALATON NJAU  

By BRIAN NGUGI

In Summary

• He also cited a possible impact on the stock of FDI to Kenya from the EU particularly from the UK with Europe accounting for over 40 per cent of total FDIs to Kenya.

The banking industry regulator expects the exit of the UK from the European Union (EU) to reduce foreign direct investment (FDI) and trade in Kenya.

While noting that Kenya’s financial markets had shown some initial resilience to bounce back from the June 23 Brexit shock, Central Bank of Kenya (CBK) governor Patrick Njoroge warned that second round effects were likely on the way and would negatively impact the economy.

Dr Njoroge said the delayed impact of Brexit would affect even Kenyan foreign exchange earnings because many of local exports go to Europe.

“Whereas the first round effects have had minimal effect on the financial market, we expect long-term implications on economic growth and development given that Kenya has significant trade links with Europe as our main foreign exchange earners notably tea, horticulture and tourism are to the EU region,” said Dr Njoroge in Nairobi.

He also cited a possible impact on the stock of FDI to Kenya from the EU particularly from the UK with Europe accounting for over 40 per cent of total FDIs to Kenya.

READ: Brexit slows down Kenyan firms hiring

“There are several European companies that have invested in Kenya… The UK alone accounts for 23 per cent. A reduction though unlikely in the short term in both trade and investment may have negative implication on the Kenyan economy,” said the CBK boss.

Other shocks the CBK sees impacting on Kenya’s growth prospects include the slowed global economy, rebalancing of the Chinese economy, lower commodity prices and geo-political developments.

Accommodative stance

“The fact that central banks in advanced countries are maintaining an accommodative stance is a clear indication that global economic growth and inflation has not recovered to sustainable levels. In addition, most of the emerging countries have been faced with volatile capital flows and exchange rates attributed to the accommodative policies,” said Dr Njoroge.

“Actual growth is projected at 3.1 per cent for 2016… so things are bad in terms of the global economy,” he added.

The governor cited the divestiture of major multinationals around Africa marked by downsizing their assets through outright sale and transfer to domestic companies, technically referred to as de-risking, as the other potential shock.

“This is a big risk for Africa and we will continue to champion that agenda against de-risking trends,” said Dr Njoroge.

The CBK, he said, however has taken adequate measures in anticipation of the shocks including narrowing the current account balance as well as maintaining adequate reserve buffers.