Europe’s fiscal woes force Kenya export market into lean times

About a quarter of Kenya’s exports are at risk this year, and could lead to limited flows of hard currency as many analysts and multilateral donors say that the eurozone economy will contract by at least 0.5 per cent.

Data show that many European economies have begun to contract or decline in the fourth quarter of last year and some institutions such as Citigroup are predicting this decline might go as far as 1.2 per cent for this year.

Already Britain saw its GDP decline by 0.2 per cent in the fourth quarter of 2011 while Spain shrank by 0.3 per cent in the same quarter. The economy of the Netherlands – a major buyer of Kenya’s cut flowers – began its decline in the third quarter of last year when it shrank by 0.2 per cent.

The International Monetary Fund (IMF) predicts that European economy will shrink by 0.5 per cent and has already predicted that as a result the Chinese Gross Domestic Product, on which many African economies are increasingly depending for commodity exports, will itself go down by four percentage points.

Christoph Evard, investment manager for Nairobi-based regional office for German development and financial organisations KfW/DEG, said that “the immediate impact on Kenya will be “less demand for its exports and overall lower commodity prices as European recession or even a Euro breakup will have material adverse effects on the world economy.”

Possible escalation

Mr Evard said the key issue is that “too much austerity [as is being pursued by a number of countries] will lead to higher unemployment and risks choking off economic recovery. There is a real risk of a vicious circle and a self-fulfilling prophecy, leading to the insolvency of some European countries.”

The gloomy predictions for the European economies are being made against the possible escalation of the sovereign debt crisis in the region that has traditionally been a major buyer of African commodities.

Because of the significant trading values, the slowing European growth is a major issue for the Kenya shilling that saw its value swing at values between Sh81 to the dollar and Sh107 in the last 13 months.

Though top bank executives have recently waxed optimistic about the Kenya shilling in a Central Bank of Kenya (CBK) survey, they said the European sovereign debt crisis remained a key risk factor.

As chairman of the Monetary Policy Committee, CBK governor Njuguna Ndung’u has noted the risks posed by the European crisis for the Kenya shilling and the economy. He betrays the fact that monetary authorities are painfully aware of what the retreat into the hard currencies – including the dollar and gold – is likely to have on frontier and emerging market currencies.

Mr Evard noted that Europe is currently performing a delicate balancing act to re-stabilise the region. The focus is now on countries whose sovereign debt has become increasingly unsustainable while the private banking entities are facing chances of their capital being eroded by a haircut on bonds they took from Greece in the days the country was on a spending spree.

And there is the whole question of economic and political governance of the European Monetary Union to ensure that members adhere to the agreements that have been signed.

“On the one hand, reliable GDP growth is needed to ensure tax income to increase government liquidity and to lower unemployment. Unemployment rates are stubbornly high in many European countries – Spain has had a youth unemployment rate of over 40 per cent for the past year – which is both extremely costly because of welfare payments and lack of income taxes to government, and can also lead to social unrest,” said Mr Evard.

On the other hand, he said, austerity measures are needed to decrease overall government spending, increase competitiveness of key industries and give capital markets comfort about budgetary deficits in order to minimise interest rates for debt that governments raise. But there is a limit to austerity, Mr Evard notes.