China is sneezing and Kenya, like the rest of the world, is catching a flu. A number of experts have warned that a slowdown in the Asian country's economy is likely to hurt Kenya’s prospects, including financing of various critical projects as well as production and consumption of certain goods.
China has struggled to recover in the post-pandemic period, with property woes in the world's second-largest economy resulting in the fastest deflation in 15 years.
Deflation is the general decline of the price levels of goods and services.
Experts have warned that Kenya, like many other countries in sub Saharan Africa, is likely to be jolted by this slowdown in the Chinese economy.
“Kenya’s reliance on China for such a significant portion of its bilateral external debt and a key financing source to various infrastructure projects means that any disruption to China’s economic stability or shifts in Chinese appetite for funding infrastructure projects in emerging markets could have an adverse effect on Kenya’s ability to increase bilateral borrowings from the country in the future,” Kenyan authorities say in the prospectus for the new Eurobond.
Kenya is one of the five biggest debtors to China in the region. The Asian country financed and built the Standard Gauge Railway (SGR) at a cost of $5.1 billion (Sh815 billion at current exchange rates).
Phase one of the SGR runs for 609 kilometres from Mombasa to Nairobi, while Phase 2(A) runs from Nairobi to Naivasha. The prospectus disclosed that the government has already signed the commercial contract for construction of Phase 2(B) of the SGR –from Naivasha to Malaba— and is awaiting funding.
But with the slowdown in the Chinese economy, which comes at a time when the Chinese government has already started cutting back on financing the big ticket projects in sub-Saharan Africa, Kenya will have to find other financiers for its infrastructural needs.
An analytical note written by four officials of the International Monetary Fund (IMF) reckons that a lot of projects in sub-Saharan Africa are likely to be put on ice as China tries to re-orient its external financing amid accusations of saddling African countries with expensive loans.
"The ripple effects of China's slowing economy extend to sovereign lending to sub-Saharan Africa, which fell below $1 billion last year —the lowest level in nearly two decades. The cutback marks a shift away from big ticket infrastructure financing, as several African countries struggle with escalating public debt," said the IMF.
Although Kenya is yet to receive significant fresh funding from Beijing in the last five years, the administration of President William Ruto has been courting Chinese firms trying to interest them in various public private partnership (PPP) projects. The IMF analytical note estimates that one percentage point decline in China’s growth rate could reduce average growth in sub-Saharan Africa by about 0.25 percentage points within a year.
The decline is even steeper for oil-exporters to China such as Angola and Nigeria, with the IMF computing the possible loss at 0.5 percentage points on average.
A slowdown in the Chinese economy will also affect production and consumption of critical goods in the country.
Kenya does not only import finished manufactured goods such as smartphones and television sets from China, but it also buys inputs and raw materials such as fertilisers, iron from the Asian country.
China might not be a major source of tourists, but the number of visitors trooping to Kenya for business and leisure had been increasing until the Covid-19 pandemic and the numbers reduced to a trickle.
China is also the largest buyer of Kenya’s titanium paying close to $100 million (Sh16 billion) for this resource per year.
China has also turned into a lucrative export market for avocado. In the 11 months to November last year, Kenya exported avocado valued at Sh1.1 billion to China, a new market.