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Economy starts on a wrong footing in 2017 as most indicators blink red

By Dominic Omondi | Updated Wed, January 4th 2017 at 00:00 GMT +3
Bloomberg tracking performance of the shilling. As per the graph, the shilling weakened to 102.91 against the US dollar.(Photo: Courtesy)

As Kenyans celebrated their safe entry into the New Year, the economy slunk into 2017 with little fanfare as most micro-economic indicators blinked red.

All the major macro-economic indicators were not looking good with the Shilling weakening against the US Dollar, raising questions as to whether 2017 will be any better. As at December 30, 2016, the Shilling traded at 102.4. The Shilling generally suffered sustained loss against the greenback throughout the festive period starting from a high of 101.9 against the dollar on December 2, 2016 to finish the year at 102.4.

Yesterday, the shilling weakened as importers sought to fill their dollar requirements after the holidays with commercial banks posting the shilling at 102.75/85, down from 102.55/65 at the close of trade on Friday.

Tuesday was the first trading session of the year. Reuters news agency quoted traders saying an increase in the price of oil in global markets was also having an impact since Kenya is a net importer. Brent crude prices rose more than 2 percent to $58 on Tuesday after a deal among major producers to limit oversupply came into effect on Sunday.

Analysts have attributed this to the strengthening of the US Dollar after the Federal Reserve, the United States equivalent of Central Bank , raised its benchmark interest rate for the second time in a decade.

With the President-elect of the United States of America Donald Trump promising to increase public expenditure especially on infrastructure and cutting taxes as soon as he is sworn in, the greenback is expected to rally up against major currencies around the world. It is going to get tough for importers who have to acquire US dollars to make their purchases in the global market. A strong dollar is bad for Kenya, a net importer.

“Dollar strengthening globally is still an issue. Trump is getting sworn on January 20, and people’s expectation is that he will implement his policies which are mostly pro-growth,” said Maurice Oduor, an investment manager at Cytonn Investments. He added that eventual exit of Britain from the European Union will also exert pressure on emerging countries’ currencies.

And with elections around the corner, it is not going to be any better in 2017 with some analysts predicting a further slide of the Shilling to as high as 106. This means that the Central Bank of Kenya might be forced to deep into the country’s Foreign Exchange Reserves of $7,305 million to cushion importers.

The story is not any different in the stock market. The Nairobi Securities Exchange (NSE) closed the year in a low with the bench mark index, the NSE 20 share index losing 21 per cent to settle at 3186.21.

And on the first day of trading yesterday, NSE 20 Share Index gained 20.03 points to stand at 3206.24.

Trickle down

Throughout much of 2016, trading at the NSE remained subdued as investors got panicky about the upcoming elections. Another macro-economic indicator, inflation, slowed from a nine-month high of 6.68 per cent to finish the year at 6.35 per cent. It was an improvement, but not good enough to ease the cost of living as prices of food commodities continued to go up in the month of December.

Although Parliament passed law capping interest rates, the expected benefits have not trickled down to the public and businesses. “Private sector credit growth has retreated about 1,500 basis points over a 12 month period and this is going to be one of the negative spill-over effects of the Interest rate capping Bill. I am afraid it increasingly looks like the Executive will have to reverse this and that the speed of reversal is key,” said Investment analyst Aly Khan Satchu.

Mr Khan, however, maintained that the GDP remains “firm,” shilling is “Well-behaved” and inflation is “within bounds”.

Oduor said that the decision by the Government to cancel Treasury Bill last week “is a signal that people have started demanding higher premium.”

On the other end, he sees 2017 as a “complex year” for Kenya as the economy comes under pressure from both internal factors such as elections and external factors such as the Trump presidency and the eventual exit of Britain from the Eurozone get actualised.

“We are going to be affected by very strong internal negative factors, and again external factors are also going to affect us,” said Mr Oduor. “To me it is going to be a difficult 2017, it is not an easy,” added Oduor.