IMF projects Sh30bn fall in Kenya’s FDI on oil inflows dip
What you need to know:
The International Monetary Fund (IMF) projects that Kenya’s foreign direct investment (FDI) will fall by nearly a quarter this year, thanks to a decline inflows into hydrocarbons exploration and an adverse global economy.
FDI could fall by 23.7 per cent to Sh99.6 billion ($981 million) from the Sh130.4 billion estimated to have been achieved last year. This amounts to a decline of Sh30 billion in one year.
Reduced inflows would have impact on the balance of payments — which has often turned negative when imports far exceed exports — as well as on the international reserves.
The International Monetary Fund (IMF) projects that Kenya’s foreign direct investment (FDI) will fall by nearly a quarter this year, thanks to a decline inflows into hydrocarbons exploration and an adverse global economy.
According to the latest IMF update on the Kenyan economy, FDI could fall by 23.7 per cent to Sh99.6 billion ($981 million) from the Sh130.4 billion estimated to have been achieved last year. This amounts to a decline of Sh30 billion in one year.
The uncertainty of capital inflows is seen as the main risk factor to the growth of the economy.
“A potential increase in volatility of capital flows represents the strongest downside risk; [with] significant uncertainty about FDI in oil and gas exploration,” said the IMF in the staff report.
The IMF recommended Kenya receives the precautionary lending facility of Sh153 billion ($1.5 billion) as a cushion against shilling volatility arising out of reduced financial and capital inflows.
The oil and gas exploration has suffered from low international prices which currently hover around $40 a barrel. Some producers, such as Tullow Oil Plc, have said that oil is still profitable at $25 a barrel but many others do not agree.
When the IMF released the latest World Economic Outlook last October, it projected that oil prices would hover between $30 and $40 a barrel.
In Kenya, several explorers have been selling stakes to other producers and marketers in a bid to stay afloat. Some have opted to borrow cash for operating expenses as others reduced activities.
The IMF report said that besides limited flows into the hydrocarbons sectors, FDI is also likely be adversely affected by the uncertain global economic environment. It is partly due to the uncertainty that Kenya asked for the precautionary facility.
Reduced inflows would have impact on the balance of payments — which has often turned negative when imports far exceed exports — as well as on the international reserves. The IMF says the country remains vulnerable to shocks, especially in view of the considerable current account deficit showing there is still a big gap between exports and imports.
“Kenya could be vulnerable to such shocks in view of its sizeable current account deficit, which is largely financed by non-FDI inflows, and its increased integration into global capital markets,” said the IMF.
The major reason for the vulnerability emanates from the fact that countries such as China, which have been a major source of FDI, are currently experiencing lower economic growth. Growth in many European countries, traditionally major sources of FDI, also continues to be weak.
“But the weaker external environment and more volatile global financial markets have increased the risk of potential capital account shocks,” said the IMF.
On the other hand, due to stronger growth in recent quarters the US Federal Reserve has signalled it will raise rates which is bad for inflows.
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