Markets & Finance
Kenya to feel the pain of Britain’s possible EU exitTuesday June 21 2016
Kenya is one of the countries at a high risk of being hit by economic shocks associated with Britain’s plebiscite tomorrow on whether to dump or keep its membership in the European Union, economists said.
The Central Bank of Kenya governor Patrick Njoroge, who is a former IMF economist, said East Africa’s largest economy would “feel the shock wave” alongside other global economies should Britain vote to leave the EU.
Dr Njoroge’s pronouncement was seen as expressing concerns that Kenya’s economic policy makers have over the outcome of Thursday’s vote, whose impact some economists have said could equal that of the 2008 global financial crisis.
Kenya is particularly seen as vulnerable to possible loss of trade, exchange rate pressure and capital outflows should Britons vote to leave the bloc.
Nairobi is seen as being at risk of massive capital outflows arising from the strong wave of anxiety in global markets, which is expected to follow an exit vote.
Increased capital outflows would, for instance, hurt trading at the Nairobi Securities Exchange, whose activity has more recently been anchored on strong foreign participation.
Listed companies that export goods and services to the UK also face the risk of a prolonged slowdown or even decline should Britain exit the EU and its economy suffers a downturn as a result.
Standard Chartered head of research for Africa Razia Khan said the shilling was likely to come under pressure if Britain exits and subsequent investor capital flight to relative safe havens such as US treasuries – ultimately triggering a stronger dollar.
“Any vote in favour of ‘leave’ is widely acknowledged as being a negative for global risk appetite. In this case, should it come about – the polls are extremely close at the moment – it would be a negative for all emerging and frontier markets, Kenya included,” Ms Khan said, adding that Kenya will not be spared the resulting risk selloff under such a scenario.
“Outside of the very considerable financial market risks, Kenya’s real economy would also be impacted by an exit vote. Any eventual need to renegotiate trade agreements outside of the EU would create more uncertainty for Kenyan exports,” she said.
A possible strengthening of the dollar against the Kenyan shilling in the wake of an exit vote is also expected to pile upward pressure on inflation or cost of living for a net importer like Kenya.
That would ultimately force the Central Bank of Kenya to react with a tightening of monetary policy and a rise in interest rates.
Trade is, however, the more immediate of the concerns, analysts said while issues around capital flows would take root over time as markets adjust to a new reality of a reformed Europe. The Netherlands and the UK are two of Kenya’s biggest export destinations.
Trading statistics for the first quarter of this year show that the two EU states together accounted for 18.3 per cent or Sh22.7 billion of Kenya’s total exports worth Sh123.9 billion.
Kenya mainly exports horticulture products to Europe, with the Netherlands and the UK as the main landing points.
READ: UK seeks to revive Kenya exports with Sh74bn kitty
Standard Investment Bank head of research Francis Mwangi said that although Britons were less likely to vote against the EU, an exit would make Kenyan products going through the UK to Europe more expensive thus reducing the competitiveness they currently enjoy under the duty-and-quota-free terms.
“If Britain exits, any Kenyan company exporting to Europe through the UK will have to contend with extra duty charges. Agriculture firms stick out as the ones who would take the brunt of the downturn in demand,” Mr Mwangi said, adding that the EU could move towards protecting its market by demanding wider access to African markets in return for any access offered to African states.
“An exit of Britain is likely to push them further towards a protectionist stance,” he said.
In the capital markets, nervous investors in European and US markets are expected to look for safety in secure government bonds in the event of a Brexit, pushing yields in countries such as Germany, the UK and Japan to all-time lows and in some cases to the negative.
Although Kenya’s stock exchange and fixed income market would feel the effect alongside other frontier markets, Mr Mwangi reckons that the equities market may be spared the worst because primary foreign inflows come in from the US and South Africa — mainly from long- term investing pension funds — and not London.
In the first five months of the year, foreign investors pumped in a net of Sh1.2 billion into the Kenyan stock market alone.