Recession wilts Kenya’s flower export market

Kenya’s economy could take further beating from the global economic turmoil this year as scarcity of trade financing and a slowdown in demand for horticultural produce in Europe withers out growth of the country’s top foreign exchange earner, a new report indicates.

A recent tightening of access to credit and delayed payment for deliveries is slowing down the movement of goods in the multi-billion shilling horticulture industry that trade experts say could further erode Kenya’s balance of payment position and thin out official foreign exchange reserves with serious consequences for the economy.

Exposure of Kenya’s economy to commodity markets arises from the fact that export of flowers and vegetables is the country’s top foreign exchange earner having overtaken remittances and tourism that have been hard hit by the global economic recession.

Kenya needs hard foreign currencies to pay for the billions of dollars worth of imports it consumes every year as well as capital goods to support economic growth.

Central Bank of Kenya has warned that the economy’s exposure to risks arising from continued erosion of her balance of payment position (BOP) may increase with the slowdown in the uptake of key export commodities.

“Recession in advanced countries is likely to restrain, if not reduce, demand for Kenya’s exports including tea, horticulture and coffee in 2009,” Treasury says in a letter of intent to the International Monetary Fund (IMF).

Netherlands-based Centre for Promotion of Imports from Developing Countries (CBI) says concern over falling demand for horticultural produce in Europe has made it difficult for exporters to access trade financing and eroded creditworthiness of buyers slowing down the movement of Kenya’s top export commodities to foreign markets.

Kenya Flower Council chief executive Jane Ngige said scarcity of trade financing has particularly deepened in recent months forcing the organization to petition commercial banks for a review of their position.

“The crisis has caused panic and everyone is trying to find a way to shield themselves,” she said.

“Unfortunately, most of the measures being taken are slowing down business and widening the country’s exposure to the global economic crisis,” she said.

But commercial banks say the introduction of stringent lending measures and a rapid scaling back of consumer lending activities deemed to be risky are meant to reduce their exposure to the risk of massive loan defaults in a turbulent market.

Kenya’s agriculture is considered risky owing to its dependence on unpredictable weather conditions as well as the frequent outbreaks of epidemics. The CBI report says that Kenya’s exposure to the changes in global commerce is rising with the steady decline in demand for luxury products in Europe.

It says demand for exotic tropical fruit and vegetables have particularly slowed down in recent months a trend that may continue into the third quarter of the year.

“There is insufficient demand in local markets. The mismatch between local demand and supply means domestic markets are a poor alternative for exporters,” CBI says in a report published in Kenya Export Promotion Council (EPC) bulletin.

Massive drops
The report indicates that Kenya’s horticultural exporters have recorded massive drops in order volumes as many buyers, who previously ordered bulk consignments, reverted to placing more frequent, but smaller orders.

“Unfortunately, the drop in crude oil prices has not had significant impact on the cost of transport and agricultural inputs such as fertiliser and seeds. In some countries, prices have gone up. Labour and packaging costs are also fairly rigid showing no signs of improvement,” CBI said.

The report indicates that although short-term turnover statistics for most west European countries did not show a severe effect of the current global economic downturn, consumers have recently become more price conscious-leaving products with slightly higher price values at a disadvantaged.

“Replacement of Kenya’s fine beans by other bean varieties is an example of this ‘down trading’ to more basic varieties,” CBI said.

Analysts said this latest developments could spell doom for Kenya especially taking into consideration the fact that horticulture has in recent months become the top earner of foreign exchange having overtaken remittances and tourism that suffered a double hit from the effects of the violence witnessed after the disputed December 2007 Presidential elections and the global credit crunch.

The horticulture industry shrugged off a turbulent business environment in 2008 to realise a 29 per cent climb in earnings to Sh73.3 billion over the previous year. Combined export volumes also rose by 10 per cent to 423,000 tonnes over the previous year.

Horticulture sector players warned that the financing and pricing threats in key export markets pose a risk to continued growth, raising the prospect of deeper erosion of country’s forex receipts.

Economic Survey 2009 shows that Kenya’s BOP position was significantly diluted in 2008 with the decrease in foreign direct investment inflows and a widening of merchandise trade deficit. This saw net official reserves fall by Sh33 billion in 2008 compared to an increase of Sh63.2 billion in 2007.

“The depletion of reserves was occasioned by the growth in import bills and unmatched growth in exports of goods and services and net capital inflows,” the survey said.

Current account balance also took a hit deteriorating to a deficit of Sh136.8 billion in 2008 from a deficit of Sh69.6 billion the previous year.

“Moreover, tourism earnings, remittances and private capital inflows are expected to decline in the current financial year,” Treasury says.

Exert pressure
It further warns that these developments will exert additional pressure on Kenya’s external balance of payments, exchange rate and official foreign exchange reserves in 2008/09.

To mitigate against such knocks, the CBI calls for increased investment in quality and product certification in the horticulture sector. “Effort should be made to increase awareness among buyers.

Specific opportunities may exist for cheaper alternatives of exclusive fruit and vegetable varieties already being marketed in the EU,” the CBI says.

The bureau however warns that concerns among European consumers over the carbon footprint of the food they ate remains an important factor even though a downturn in the airline industry that has resulted in some players lowering their charges has helped exporters.

Though debate over carbon footprint/foodmiles concept has recently fizzled out, it is expected to re-emerge as European economies rebound.