Money Markets

Fitch warns Kenya of shock from cut in US economic stimulus programme

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 An investor monitors trading on the electronic board at the NSE. Fitch says US stimulus cuts will affect NSE. Photo/File

An investor monitors trading on the electronic board at the NSE. Fitch says US stimulus cuts will affect NSE. Photo/File 

By John Gachiri, jgachiri@ke.nationmedia.com

Posted  Tuesday, December 17  2013 at  20:47

In Summary

  • Kenya stands to suffer from a sudden drop in inflows that have been supporting the economy through the stock market and foreign direct investments.
  • Earnings from imports are lower than exports, current account deficit is 10.5pc of GDP.
  • The trade imbalance is however masked by strong inflows into the stock market and investments into the oil exploration and services sectors.
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International credit ratings agency Fitch has warned that Kenya is among African countries that are at most risk from the impending cut in the US economic stimulus programme due to its heavy reliance on foreign capital.

Kenya has been a key beneficiary of the US economic stimulus programme which has seen the Federal Reserve Bank inject $85 billion every month through a bond buying programme.

Fitch, however, warns in a new report that Kenya stands to suffer from a sudden drop in inflows that have been supporting the economy through the stock market and foreign direct investments.

“The impact of Fed tapering (cut in economic stimulus programme) poses the biggest potential risk for Sub-Saharan Africa in 2014. Countries with large twin deficits and/or a heavy foreign investor presence in local capital markets — Ghana, South Africa, Kenya and Nigeria — will be most vulnerable,” says Fitch.

Kenya’s earnings from imports are perennially lower than exports, as reflected by a current account deficit of 10.5 per cent of GDP.

The trade imbalance is however masked by strong inflows into the stock market and investments into the oil exploration and services sectors, which help to provide foreign exchange for covering imports.

Economic experts, including the World Bank, have however warned that the huge deficit is unsustainable, suggesting that the only long-term solution is growth in the export base.

The Fitch report projects that Kenya’s economy will grow by 5.8 per cent this year and 5.9 per cent in 2014, which is higher than the World Bank’s projections that put growth estimates at five and 5.1 per cent respectively over the two years.

Fitch says the expected Fed tapering will affect the Nairobi Securities Exchange, which has mainly been driven by foreign investors in recent years.

“As well as South Africa, these include Ghana and Nigeria, where foreigners own over 20 per cent of the local market, and Kenya where, like South Africa, short-term foreign portfolio flows fund a sizeable part of the current account deficit,” says Fitch.

Economic analysts backed Fitch’s view, pointing out that the government was borrowing too heavily and spending too much on salaries and other recurrent expenditures.

Nelson Wawire, chair of Kenyatta University’s macroeconomics department, said that unless serious steps are taken to mend the country’s finances, current growth targets are not feasible.

“I see a situation where debt sustainability is going to be a cause for alarm,” Dr Wawire told the Business Daily. This will result in more money going towards debt repayment over development expenditure, which could slow down the country’s growth momentum, he added.

Kenya’s public debt currently stands at Sh1.89 trillion or about 50 per cent of GDP. The government’s ability to borrow from the international market to construct roads, ports, damns and other infrastructure projects should not however be affected, Fitch predicts.

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