Global stocks sell-offs cause jitters in Africa

The massive sell-off at the world stocks and commodities markets is set to present fresh challenges to developing economies like Kenya with the capital market, international trade and exchange rates exposed to the vagaries of the global economy.

Analysts say it’s too early to get a feel of the direction of the effects, but the uncertainty prevailing in the western markets is keeping everyone on the edge.

“The sell-off does of course impact emerging markets as international investors opt to keep money local and as the fiscal stimulus recedes from advanced economies, investors are still skittish given the contradictory signals being received out of the advanced world,” said Mr Simon Freemantle, an economist for East Africa at CfC Stanbic Bank.

The torrid sell-off of equities and commodities on Tuesday pushing investors to the safe-havens is a reminder of the bumpy road ahead especially for markets such as Kenya.

“Risk appetite has been choppy and there are doubts about the sustainability of the recent growth and as the fiscal consolidation elsewhere becomes more severe through fiscal cutbacks the growth momentum will starts to wane,” said Ms Razia Khan, chief economist for Africa at Standard Chartered Bank.

Tuesday’s trading data for main bourses such as the London FTSE 100 closed 78.89 points lower at 5,155.95, Japan’s Nikkei fell 1.3 per cent, crashing below the 9,000 barrier for the first time in 15 months and the US Dow ended the day at 1.3 per cent lower at 10,040.45.

The major commodities that recorded price slashes included oil, copper and coffee whose prices fell by two percentage points.

Mr Freemantle said a waning consumer demand in the west through cutback on corporate and household expenditure may push Kenya exports of agricultural produce such as horticulture to levels experienced in 2008.

“The euro zone recovery will be slow and Kenya would do well to use this opportunity to diversify its export markets so as to reduce vulnerability in times of stress in key European destinations,” said Mr Freemantle.

However, Mr Freemantle says that due to Kenya’s less dependent on primary extractive commodities, the global nervousness will have a more limited impact.

According to Ms Khan, the immediate effect of the sale-off will affect stock markets and also expose the local currency to wild swings, a situation that will have impact on balance of payment and the cost of doing business in Kenya.

The weakening of the shilling will make Kenya imports expensive as more shillings will be required to buy the equivalents of hard currencies such as the US dollar, British sterling pound and the euros.

Rising cost of imports will lead to an overall increase in cost of doing businesses as the final products as producers are expected to pass over the additional cost through price increase.

With petroleum being a major import commodity a weaker shilling will lead to rise in pump prices further raising the cost of doing business and living across the economy.

“Near term, the Kenyan shilling has proven vulnerable to global sentiment and when risk appetite seizes up, and the major currencies weaken, the shilling typically weakens as well,” said Ms Khan.