Kenyan tea exports, shilling suffer from the Egyptian shock
Supporters of deposed Egyptian president Mohammed Morsy hold his portraits and national flags during a rally outside Cairo’s Rabaa al-Adawiya mosque on July 9, 2013. Photo/AFP
What you need to know:
Prolonged poor sales could complicate fortunes of tea farmers and the local currency even as manufacturers expect some reprieve from subsidised Egyptian exports.
But on the positive side, observers pointed out the weakening of Egyptian state could now result in cheaper power from the massive Ethiopian hydro dams.
Kenyan importers will be a happier lot with the turmoil though. Since Egypt joined the Comesa in 1998, local industries have suffered immensely. While Egypt imported Sh21 billion worth of goods last year, it has been notorious for pumping wheat, sugar, fruits, paper and poultry products despite it being a net importer of some of the commodities.
The effects of the political turmoil in Egypt have started being felt at the Mombasa tea auction where nearly a third of the tea on offer went untaken.
Prolonged poor sales could complicate fortunes of tea farmers and the local currency even as manufacturers expect some reprieve from subsidised Egyptian exports.
But on the positive side, observers pointed out the weakening of Egyptian state could now result in cheaper power from the massive Ethiopian hydro dams.
The deposed Islamist president Mohammed Morsy and his handlers had only last month warned the country would not stand by and watch Nile water being diverted, raising the spectre of confrontation between Arab world’s strongest army and the largest Christian Africa nation’s force.
The 6,000 megawatt (five times Kenya’s installed capacity) Grand Ethiopian Renaissance Dam is seen as a game changer which could bring regional power costs down, ironically addressing the threat of Egyptian oil subsidies.
“Ethiopia is happy that Egypt is not in a position to stop them. Kenya and other regional countries can use this to reduce their cost of power,” said Macharia Munene, a history lecturer at the United States International University in Africa (USIU) who sees a foreign hand in the chaos in the Arab world.
The Eastern Africa Interconnector to supply Kenya and even Tanzania —from the country’s 45,000MW potential including Gibe III —is in the works.
Ethiopia and other countries in the region have been unable to exploit Nile waters due to a 1929 agreement signed by Britain, then controlling the Nile Basin, and Egypt.
But of immediate concern to Kenya is the shutting down of the Egyptian tea market as it became clear during the Monday and Tuesday tea auctions in Mombasa.
Peter Kimanga, director at trader Global Tea & Commodities (K) Ltd, said the situation, which has just been complicated by Ramadhan fasting in Pakistan, will not get better at least in the coming three weeks. The two Muslim countries between them take 40 per cent of the Kenyan bulk tea export.
“Egypt seems to be going from bad to worse so that market is off. We have a lot of tea at the wrong time…we may have to adjust downward our tea earnings for the year,” said Mr Kimanga.
The Tea Board of Kenya had earlier forecast earnings to hit Sh120 billion by the end of the year. On Tuesday, 28 per cent of the tea went unsold, despite prices rising, meaning it will return to the market in three weeks at a time supply from Meru and Kericho has defied the cold season due to continuing rains.
The slowdown in forex inflows spells pain for the Kenya shilling which has been losing ground due to the impact of the Egyptian crisis on oil flows especially through the strategic Suez Canal and the effects on local dollar inflows.
“The Kenya shilling weakened on Tuesday as importers bought dollars, with traders expecting the local currency to stay under pressure in the coming days,” said an ABC Bank currency trading report Wednesday.
Mr Kimanga says that while so far trade routes in and out of Egypt remain open and indeed tea consumption is rising, banks are reluctant to open letters of credit to willing buyers. Traders are bulking up dollars at the expense of stock.
“Egyptian consumption is high as people are not going to work but traders are conserving the money, not sure they will be paid for supplying tea,” said Mr Kimanga who advised Kenya needs to urgently diversify its tea markets.
Kenyan importers will be a happier lot with the turmoil though. Since Egypt joined the Common Market for Eastern and Central Africa (Comesa) trading bloc in 1998, local industries have suffered immensely, with Cairo’s industry powered by diesel costing $0.18 (under Sh15.70) a litre at the pump between 2008 and last year, according to World Bank data.
While Egypt imported Sh21 billion worth of goods last year, it has been notorious for pumping wheat, sugar, fruits, paper and poultry products despite it being a net importer of some of the commodities.
Specifically, Egyptian imports sometime back brought a Kenyan manufacturer of resins (whose main raw material is unfortunately kerosene), Synresins, to it its knees. Interestingly, Egyptian exports to Kenya are not broken down in the official Economic Survey.
Other manufactured exports to East Africa are cement—an issue that has scared industries for years despite little evidence of the cheap commodity landing—cooking oil, ceramics and the washing powder Ariel.
“The situation is positive for manufacturers because Egypt has been negatively affecting virtually all industries. We are encouraging Kenya Association of Manufacturers to take a stand with the government on the issue,” said Pradeep Paunrana, CEO of listed building material and fertiliser firm ARM Cement.
Over the last decade, firms like Procter & Gamble have shifted production to Egypt after closing down their Kenyan plants chiefly on the account of cheap energy.
The only major exception to this rule is British American Tobacco Kenya, which has been manufacturing for a host of countries including Egypt from its Industrial Area plant in Nairobi.
“The recent unrest in Egypt has not unduly impacted upon our export business operation to that country at this stage. However, we continue to monitor the situation,” said Jerry Gilbert, head of corporate and regulatory affairs.
The Egyptian manufacturing juggernaut has been brought to its knees since the Arab Spring two years ago with electricity production stalling and a forex crisis closing down hundreds of factories.
All the same, the country is projected to have spent $17 billion or a fifth of its public expenditure on energy subsidies amidst persistent power outages that have prompted a bailout from Qatar.
Prof Munene says the Egyptian situation will remain dicey as lack of predictable leadership will pose a threat to the Middle East region as well as the region.
