Kosta Kioleoglou
For every economy to be healthy and strong, several economic factors have to be performing well. If some sectors of the economy are doing well and others are underperforming then one has to be skeptical and analyze the available data in order to try to forecast the upcoming future.
It is key knowledge to understand that even economic data that look initially irrelevant with each other are actually connected and affect one the other. For example, the production of an agricultural product could affect the real estate sector. It might sound crazy but believe me it is not!
In the last years Kenya has positioned herself as one of the most promising countries in Africa. Several headlines have heralded Kenya as a leading economy in the region and a lot of people continue to invest in Kenya based on that basis.
In reality, Kenya’s economic data, although not bad, has neither looked that good over the previous years. While the economy was growing with a good ratio of 5+% per year, so did unemployment as well as external debt and the account balance deficit. A giant (for the size of an East African economy) was created in Kenya within the last decade, in the real estate sector, representing over 10% of the country’s GDP.
Kenyans, amazed from the outperforming traditional real estate market, focused on property and started investing as much as possible into this sector. So year after year, more money has been invested in real estate while less in the other vital sectors of the economy such as agriculture and manufacturing. That created a specific pattern for the economy, which had a very bad effect for the country.
Kenya is a net importer of goods and services. Its few major exports (like tea and coffee) have not performed well in the recent past. This means fewer dollars coming into the economy, increasing further the dollar scarcity created by poor performance in the tourism sector. While exports are declining whereas the country keeps importing more and more, the creation of a wide current account deficit (measured in terms of the cost of import against what is earned from exports) is inevitable.
In short, the demand for dollars by importers outweighs by far what is earned by exporters creating pressure on the shilling.
A weaker shilling is translated as an increase on costs (i.e. construction cost, energy etc) pushing the final product prices higher, (AKA inflation). The higher the inflation, the less the consumption power and affordability by the population. The fact that Kenya imports most of her goods means that companies and importers will tend to pass the higher cost to the consumer. The weak shilling makes importers incur more for the same quantity of goods. Already the Kenya National Bureau of Statistics has said that consumers paid more for power between February and May 2015 as Kenya Power Company factored a higher forex levy due to the weakening shilling.
The Energy Regulatory Commission on the other hand adjusted the fuel price upwards on account of among other things, the weakening of the shilling. So if people can spend less to buy more expensive products and services, the markets will eventually shrink and that will cause prices to go down, especially for services and property. At the same time this will reduce the disposable income among the ordinary consumers thus significantly affecting the quality of life.
The real estate fever around the country has created an urgent demand for major infrastructural projects like roads, bridges, ports or even the Standard Gauge Railway in which most of the material are imported thus increasing the demand for the dollar.
The last few months we have noticed the sliding of the shilling against all major currencies, breaking support levels while the authorities are trying to stop the inevitable by making hard decisions like the twice CBR increase in 30 days, knowing that the challenges the shilling and the country are facing are big and that more measures will be required in the near future. So far the monetary policy followed by the government and from Kenya’s Central Bank, which regularly mops up excess liquidity and has in the past few months periodically intervened in the market to support the currency by selling dollars, together with the increase of the CBR by over 25% (from 8.5% to 11.5%) were not enough to stop the currency losing more of its value.
By September the 4 2015 commercial banks quoted the shilling at 105.1 to the dollar, 160.26 against the British pound and at 117.02 against the Euro even as the Central Bank said that had planned to mop up 29 billion shillings ($279.1 million) in excess liquidity from the money market (Selling dollars).
On top of the Kenyan economic status, the global markets over the last few months have been under-performing whereas in some cases a few of them almost collapsed. Recently, the Chinese economy felt a strong hit. Around $5 trillion has been wiped off global equity markets since the Yuan devalued earlier this month. That shift, allied to a string of bad economic numbers and a botched official attempt to halt the slide in Chinese bourses, has fuelled fears that the world’s second-largest economy is heading for a hard landing. Exports have been falling. The stock market has lost more than 40% since peaking in June, a bigger drop than the dotcom bust. Yet the doomsters go too far. Fears over China are feeding the second worry—that emerging markets could be about to suffer a rerun of the Asian financial crisis of 1997-98. Similarities exist: notably an exodus of capital out of emerging markets because of the prospect of tighter monetary policy in America. But the lessons of the Asian crisis were well learned.
Many currencies are no longer tethered but float freely. Most countries in Asia sit on large foreign-exchange reserves and current-account surpluses. Their banking systems rely less on foreign creditors than they did. If that concern is exaggerated, others are not. Slowing China has dragged down emerging markets, like Brazil, Indonesia and Zambia as well as several other African emerging countries that came to depend on shoveling iron ore, coal and copper its way (agricultural exporters are in better shape). At the same time several countries having strategic partnerships with China depend a lot on the latter for financing their mega projects and big investments. That applies for Kenya as well: The dominant Chinese investment presence in Kenya is not a secret and the country has been counting a lot on the Chinese support over the last few years and for the near future.
From now on, more of the demand that China creates will come from services—and be satisfied at home, say the experts. The supply glut will weigh on commodity prices for other reasons, too. Oil’s descent, for instance, also reflects the extra output of Saudi Arabia and the resilience of American shale producers. Sliding currencies are adding to the burden on emerging-market firms with local-currency revenues and dollar-denominated debt.
The European crisis (with a possible Grexit amongst other several issues) is also not promising concerning investments in the East African region with analysts being rather skeptical about the future of the European Union. In a few words the current global economic instability coupled with markets’ high volatility have found Kenya in a fragile moment with the currency under pressure (from the dollar’s strength), Its current account deficit growing, tourism inflows worsening (after a spate of attacks by Somalia al Shabaab insurgents) leaving Kenyans overexposed to the real estate sector (amongst other not positive facts).
The continuous sliding of the shilling together with other challenges that the country has to face is creating a very critical moment when everyone should be under alert. Of course markets fluctuate and obviously a major crisis in one of the biggest economies in the world (China) is ringing a bell. As I am always suggesting, stay informed, alerted and follow the markets in order to minimize your exposure and possible losses in the current financial moment. Be aware to any global change because whatever happens in the financial markets around the world, shall inevitably affect Kenya too.
