Treasury bets on foreign investors to bridge balance of trade gap
The Treasury sees a gradual decline in the current account deficit with less spending by the government (which implies it will import less), but more export receipts through value addition and exploitation of the regional market. PHOTO | FILE
What you need to know:
Treasury expects to continue relying on the capital and financial account to counteract possible adverse effects of the yawning gap between exports and imports
The capital and financial account records the portfolio (flows into stock market investment including equities and bonds) and FDI. Portfolio investment is, however, more volatile, moving quickly between jurisdictions due to changes in investor sentiment.
The Treasury is betting on portfolio inflows and foreign direct investment (FDI) to offset the widening gap between exports and imports.
According to preliminary Budget estimates, the stability in interest rates and investor confidence should attract inflows to Kenya that in turn will support the shilling.
While the Central Bank of Kenya (CBK) has maintained the policy rate at 8.5 per cent since April 2013, the Treasury and corporate bond coupon rates have remained at between 10 and 13 per cent, thereby, keeping investors, including foreign, attracted to government paper.
“Stability in interest rates and improved investor confidence should enable the capital and financial account to be in surplus, offsetting the current account deficit,” said the Treasury.
The capital and financial account records the portfolio (flows into stock market investment including equities and bonds) and FDI. Portfolio investment is, however, more volatile, moving quickly between jurisdictions due to changes in investor sentiment.
As at the end of October, the capital and financial account was in surplus to the tune of Sh169 billion ($1.88 billion) compared to the deficit in the overall current account amounting to Sh66.7 billion ($741 million).
However, the current account deficit has grown at a faster pace of 64.5 per cent since the beginning of the year when it stood at Sh40.6 billion ($450 million).
Thanks to the surplus in the capital and financial account, the overall balance of payment is in the positive territory to the tune of Sh135.6 billion ($1.5 billion).
“The overall balance of payments surplus improved to $1.507 billion in the year to October 2014 from a surplus of $607 million in the year to October 2013. The improvement reflects in $1.28 billion accumulation of the capital and financial account surplus,” says the CBK in its October 2014 report.
The Treasury expects to continue relying on the capital and financial account to counteract possible adverse effects of the yawning gap between exports and imports (the current account deficit).
The Treasury sees a gradual decline in the current account deficit with less spending by the government (which implies it will import less), but more export receipts through value addition and exploitation of the regional market.
On the side of trade, the services sector saw a surplus but this was offset by the larger deficit on the merchandise or goods side.
“The current account balance worsened by 7.6 per cent …. The deterioration reflects 8.7 per cent worsening of the merchandise account deficit which more than offset the 9.6 per cent improvement in the services account surplus,” said the CBK.
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