Kenya ranked 6th most vulnerable in Africa

The US Federal Reserve rate rise could hit Kenya’s economy, an accountants’ lobby has said in a new report, which ranks the country as the 6th most vulnerable in Africa.

The Institute of Chartered Accountants in England and Wales (ICAEW) said Kenya ranked 6th in terms of vulnerability scoring just under 250 points out of 300. “This can be attributed to the nation’s current account deficit, which stands at 10.4per cent,” the report said.

Score for vulnerability to US Federal Reserve rate increase (1-300, where 300 is most vulnerable)

According to the results, Ghana emerges as the weakest economy with a score of 273 out of 300. This is due to a very high current account deficit as well as a history of rapid credit growth. Seychelles came in a close second place followed by Guinea, Tanzania and DRC. At the other end of the spectrum, Botswana, Gabon, Swaziland and Nigeria all have current account surpluses meaning their economies are at a lesser risk of suffering when imports become more expensive in the face of a stronger dollar.

The latest ICAEW Economic Insight: Africa Q4 2015, examines the impact of key economic events of 2015 on the future outlook of African development. In the report, ICAEW determines the risk levels of various economies within the continent in relation to the rise in US Federal Reserve rate. A ‘vulnerability index’ was constructed, which focuses a country’s current account balance, its growth in private sector credit, and its ratio of foreign debt to reserves. These indicators provide an overall vulnerability score for each economy. The higher the score, the more vulnerable the economy to the rise in the US Federal Reserve rate.

Credit decline

Growth in private sector credit also presents a risk, as it indicates a dependence on debt to drive growth. Within the major African economies, Ghana tops the list, with a private sector credit growth rate of 18.4 per cent followed by Kenya with a rate of 17.8 per cent between 2013 and 2015. Botswana and Mauritius have seen a growth of under 10 per cent while Zimbabwe has seen a credit decline by 24 per cent over the same period.

While the index provides insights into the vulnerability of emerging markets in relation to a US Federal Reserve rate hike, it is not exhaustive.

Regional Director, ICAEW Middle East, Africa and South Asia Michael Armstrong, said: “Of course, there are many factors to consider, like financial openness and the level of integration into the world economy, which all affect the level of vulnerability to global economic shocks. Clearly, if policy conclusions are going to be drawn, they should be done following a country-by-country analysis.”

He said, however, this index does show a snapshot of how resilient the various African economies are in some important metrics. “Kenya would be well-placed to anticipate the possible effects of US monetary policy when planning for economic growth,” Mr Armstrong added.

He said despite Kenya’s ranking, the country continues to enjoy strong economic growth prospects estimated at close to 5.5 per cent over the next three years.