Opinion & Analysis

Lower investor appetite, monetary stability to dictate Kenya’s growth

Sudden drops in the value of the shilling have made investors think twice about Kenya’s ability to handle international fluctuations. PHOTO | FILE
Sudden drops in the value of the shilling have made investors think twice about Kenya’s ability to handle international fluctuations. PHOTO | FILE 

The on-going collapse of world oil prices together with the drop in global growth projections means investors are mostly going to retreat from emerging markets.

Last December, the US Federal Reserve raised the base rate to between 0.25 and 0.5 per cent making it more attractive to keep money in America than send it elsewhere.

The Federal Reserve’s move was a mistake. It was based on expectations that the US economy was heating up, as evidenced by higher levels of employment.

But shortly after, global investor confidence took a hit when a glut in oil production brought about a 13-year low of $28 per barrel, leading many to question the long-term health of resource extraction companies.

The rapid turnover has shaken the confidence of Western investors who had, in the aftermath of the credit crunch, been prepared to pump money into emerging markets in the hope of better returns.

Now investors are concerned with the fiscal stability of oil-dependent African countries, such as Nigeria and Angola, as they expect low oil prices to remain over the long-term, ruining these countries’ revenue bases.

Expensive loans

Nigeria and Angola may have to take on expensive loans to finance their short-term spending, which could prove unsustainable and necessitate IMF intervention.

Kenya’s discovery of large oil reserves around 2010 allowed for the start of national infrastructural upgrades and tied private-public partnerships to the likelihood of revenue generation through oil.

However, investor confidence depended on the general sentiment that more money was to be made in emerging economies than in the West — and that eventual recovery in the West would in any case come hand-in-hand with normal inflationary over-heating.

With the collapse in world oil prices, however, international investors are increasingly concerned about the lack of returns to investment in natural resource extraction, with growth in America and Europe instead being provided by the retail and catering sectors.

In China, focus has been placed on services, with industrial production suffering large set-backs.

These shifts are likely to damage investment stability in Kenya through the country’s terms of trade. In this sense, it is a similar story to when over-reliance in Africa in the 1970s and 1980s on primary production led to recession in the face of shocks to world prices.

As Biodun Olamosu and Andy Wynne explain, ‘‘the economies of many African countries are heavily dependent on the export of one or two commodities. As a result they are more susceptible to the vagaries of world price changes and other external shocks than more diversified economies.’’

The best way to mitigate the effects of global changes in investor appetite is by ensuring fiscal responsibility and monetary stability.

Because the fiscal position of the Kenyan government is tied to confidence in developmental loans, even more does performance hinge on the state’s monetary stability.

Under the governorship of Dr Andrew Mullei between 2003 and 2007, the Central Bank of Kenya was able to deliver a stable currency even in the midst of high-level corruption scandals.

However, in late 2011 and the second half of 2015, sudden drops in the value of the shilling have made investors think twice about Kenya’s ability to handle international fluctuations.

While currency depreciation may be good in theory for helping lower the costs of labour and resource extraction, such extreme volatility in Kenya appears to an investor more of elite-level manipulation of macroeconomic trends.

Collapse of rand

Take, for example, the recent collapse of the South African Rand caused by the firing of Finance minister Nhlanhla Nene. Investors took this as indicative of fraught political meddling in South Africa’s economy, rather than as something that would benefit exports.

Olamosu and Wynne note how ‘‘China is now the largest destination for African exports’’, something that has become well known.

On that front, a further complication lies in the People’s Bank of China’s willingness to devalue the yuan to boost Chinese growth.

China’s August 2015 devaluations shocked world markets as investors realised the extent to which authorities are prepared to go to keep Chinese exports competitive vis-à-vis Japan and the United States.

Combined with devaluation of the Japanese Yen and quantitative easing in the Eurozone area, gone are the days when one could assume that natural economic imbalances would simply be sorted out through adaptations in countries’ terms of trade.

As economists Ansgar Belke and Gunther Schnabl explain, ‘‘emerging market economies and developing countries have de facto lost a degree of freedom in choosing between exchange rate stability and monetary policy independence.’’

Before one had to choose between one or the other; now it is hard to get either. Because Kenya’s economy is too small to influence global investment shocks, there is a need to instead out-compete other regional actors through a reputation for monetary stability.

Investors should look at Kenya as a place where long-term growth projections translate into meaningful profit margins by means of currency stability.

The writer is a lecturer at the University of Oxford and an external advisor to Strathmore Law School.