Treasury, analysts downplay US rate rise impact on economy

The 0.25 percentage points rise of US Federal Reserve rates is unlikely to be pronounced on the Kenyan economy, the Treasury and financial analysts say.

Kenya is among the emerging economies which have benefited from inflows of capital from the US over the past six years, due to both the near-zero interest rates and quantitative easing instituted to help the US economy recover from the global financial crisis of 2008.

Treasury secretary Henry Rotich said the short-term inflows into Kenya from abroad are not large enough to shock the economy if the Fed action were to spark a reverse flow to the US.

Some financial analysts also said the markets have probably factored in the long anticipated event.

“We don’t expect much impact from the Fed action. Our economy doesn’t get a lot of short-term foreign cash inflows, so we expect any impact to be limited. The inflows we receive are not large enough to cause a major swing after a Fed action,” said Mr Rotich, while addressing the media during the International Monetary Fund (IMF) delegation visit to Nairobi this week.

A report released last week by the Institute of Chartered Accountants in England and Wales (ICAEW) however indicated that Kenya’s widening current account deficit and private sector dependence on debt have left the economy vulnerable to shock after the US rate increase.

READ: Moody’s says Fed rate raise poses threat to Kenya

A stronger dollar would make payment of Kenya’s foreign debt and import bill more expensive.

Analysts are now keeping an eye on the shilling exchange rate to the dollar as well as the yields in the fixed income market.

The shilling has only recently stabilised at the 102 level after experiencing volatility in the middle of the year.

“The shilling may weaken, as investors put their money in the US markets creating demand for US dollars and raising its value. Luckily the shilling has already had its worst, I do not see it reacting drastically. Furthermore, the Fed rate rise by 0.25 per cent was long anticipated and the markets may have already factored that,” said University of Nairobi economics lecturer XN Iraki.

Come under pressure

Forex traders yesterday said there was some downward pressure on the shilling in early trading, which saw the currency weaken to the dollar by 10 cents to exchange at 102.50.

Central banks especially in emerging markets are now likely to come under pressure to raise their own rates to retain the competitiveness of their markets following the Fed action.

The Central Bank of Kenya has held the base lending rate steady at 11.5 per cent since September.

In the intervening period, Treasury bill rates climbed as high as 22.5 per cent in October before coming back down to the 9.5 to 12.5 per cent range. Analysts say that the US action is however likely to push investors to demand higher rates for new lending to government.

“Yields are also likely to face upward pressure particularly in the first quarters as emerging market peers compete to remain competitive despite the rate rise in the US,” said Genghis Capital fixed income analyst Vinita Kotedia.

The equities market is a major beneficiary of foreign inflows, which helped fuel a three-year bull run at the Nairobi Securities Exchange between 2012 and 2014.

Recent months have seen more foreign outflows than inflows, with foreign investors holding a net outflow position of Sh1.14 billion for the 11 months to November.

Analysts say that the current bearish run in the market combined with the prospect of higher returns in the safer haven of the US market might push more investors to the exit.