How Fed Reserve tapering might affect Kenyan economy

Following the global financial crisis there has been more concern on risk management in the banking industry.

The Central Bank of Kenya has responded by issuing new prudential guidelines that require banks to hold more capital as a buffer to absorb any form of market turbulence.

The Business Daily talked to Bradley Ziff, a senior risk adviser with Misys Global on issues of risk within the sector, the country and the East African region.

Mr Ziff meets with Misys’ clients and prospects from across the globe to discuss developments in risk management, regulatory oversight, capital guidelines and business investments.

The Kenyan government intends to issue a sovereign bond, but there have been concerns that it has dragged its feet for too long. Do you think the start of quantitative easing in the US has locked Kenya out of cheap money?

No. I believe it will be at least a year before we see a rise in interest rates. Kenya can certainly have capital formation at a competitive price.

I think that most of the emerging economies have been well aware and as best as possible planning to deal with the stimulus tapering — the tapering I feel relatively confident will continue straight through to October given that signs of economic progress are stable in the US.

How will the tapering affect emerging economies like Kenya, and what should they do?

One of the things we have seen in South Africa, to use a comparison, is that the Rand has been enormously fragile, losing value against the dollar and as a consequence increased interest rates.

Kenya has not been in that position; the volatility of the shilling has been very limited. There are good signs in the Kenyan economy in terms of debt, deficit, production numbers, infrastructure investment and growth in the equities market — all of which point to a growing domestic market.

I think sometime in 2015 the Fed is likely to increase interest rates and when that happens we are likely to see another set of volatility.

The second issue, which we have not seen happen in Kenya but in many of the emerging economies, is that there has been a significant amount of capital withdrawal from those markets.

It is a reflection that investors are not comfortable in that environment and are willing to look to other places where they are not going to get trapped.

Kenyan banks are currently in a race to meet increased capital adequacy requirements introduced by the CBK. For a growing industry there are concerns that the requirements will hurt growth?

Obviously capital held against the balance sheet as a buffer does not produce any investment value. When you increase your capital buffer from eight to 10.5 per cent you have taken away capital that you could have reinvested and laid it aside.

That argument is more dangerous in Kenya than it is in the US. The requirements (of higher capital) are not unique to Kenya but are more damaging because emerging market banks need to have capital to plough back into their investment portfolio and to lend to their clients.

Everywhere in the world we are seeing the same situation. Here, banks are being asked to put up about 2.5 per cent more capital than they were doing before.

Those numbers are pretty consistent with what we see from regulators in other countries. While businesses are different, each regulator wants to make sure they don’t fall behind the rest of the world.

You can’t ignore that in Africa and the Middle East we have substantial political risk. The country risk goes with the political risk associated with that country.

For example, you will see a lot of money streaming into the United Arab Emirates. Why? Because it is coming from Syria, Lebanon, from where people are afraid and looking for stability.

The same case applies to Africa — capital will go where people feel the political risk is lowest.

How then does the regulator ensure a balance between covering for risk and growth? How far is too far?

I don’t think there is a magic number. What has happened is that a lot of banks have made a decision, the banking industry has moved from fighting the regulation to adopting it.

Banks are saying: “I need to get there faster so that I can start thinking on how to make money. The longer I fight the harder it is going to be for me to get a return for my shareholders.”

Regulators in emerging markets are also getting feedback from regulators in established markets who are moving aggressively to put the Basel standards in place.

We are not seeing regulators give local banks some slack and the banks don’t want to piss off the regulators.

What is your assessment of Kenya’s political risk?

Right now Kenya is seen as quite stable. In the discussions that I had coming into these meetings the three countries that large global banks told me to look at were Kenya, Nigeria and Ghana. These are what they felt provided the best opportunity for investment.

What attracts them to Kenya?

One of the things that drive investment in Kenya is high technological advancement, telephonic mobility and good technological banking capabilities.

So it is going to increase the confidence of people looking at affecting banking in this country.

Plans by the East African Community to have a single monetary unit have attracted diverse opinions. What are your thoughts on this?

The desire to come up with a common currency is a very challenging issue.

We have had some awkward lessons from the Euro — we had a multiple of countries bailed out and those were “very developed countries”.

The Middle East and Asia have rejected it. In Africa, it is looked at with some level of scepticism. When you want to adopt something like that you must be confident that you can make it work.

If you show volatility and fragility with the core of the currencies then you have difficulties bringing others on board.