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Home / Health & Science

It’s a matter of time before bleeding economy goes into coma

HEALTH & SCIENCEBy DOMNIC OMONDI | Tue,Mar 17 2020 00:00:00 EAT
By DOMNIC OMONDI | Tue,Mar 17 2020 00:00:00 EAT

 

NSE Market watch board during ringing of the bell ceremony at Nairobi securities Exchange in Nairobi on Friday, Sept 4, 2019. [Jonah Onyango, Standard]

The flow of money in an economy is like the flow of blood into various organs of the human body.

Just as poor blood flow results in conditions such as blood clots and bleeding disorders, inadequate supply of money into various sectors of the economy results in stagnation, recession or even depression.

Critical components of Gross Domestic Product (GDP) - the standard measure of the economy - have started being anaemic as coronavirus denies them money.

Covid 19 Time Series

 

These components include private investment, private consumption, government spending and exports and imports.

The economic disruptions caused by the virus are far greater than its health risks, warn analysts. The outbreak has disrupted normal operations and now threatens to stop employees from going to work. This could force employers to cut costs, including redundancy, and push some companies into bankruptcy.

Rather than sink money into the economy, investors are at best just waiting to see how this situation pans out. At worst, they have liquidated their investments, particularly equity stocks and evacuated their money running into billions.

Increased cost of living

And with almost everything under lockdown, consumption has gone down.

Tourists, who pump money into the hospitality industry, have been restricted from coming into the country for the next two months. Airlines are stuck at hangars. Schools are not spending. 

There are no conferences and all corporate functions have been put off. People are instead engaging in panic-buying of essential consumer goods. The effect of this spike in demand is increasing the cost of living.

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Government spending, as critical as it is at this point, may also take a backseat as government raises fewer taxes. Fewer taxes means the government needs to cut back on expenditure.

However, because the government is expected to do the heavy-lifting to pump more money into the economy, it might have to borrow more from the local market. Borrowing more from the domestic market might mean less credit to the private sector. This will make an already bad situation worse.

Kenya’s export market gutted

Earnings from exports, another aspect of GDP, have dried up as the global economy goes into recession. The country’s key exports, including Europe and the Middle East, where the country sends its horticulture, tea and coffee, have been gutted by the virus.

Imports of critical raw materials from China has also nearly stopped, forcing traders to look for other source markets for such inputs as metals. Kenya will soon be importing from other markets to bridge supply shortfalls.

Although no coronavirus death has been reported in Kenya so far, the disease is slowly and surely draining money from critical sectors of the economy. It is only a matter of time before East Africa’s largest economy goes into a coma. By Sunday, only three cases had been confirmed in the country

Small businesses are struggling as supply chains dry up - many have been left without products or essential materials. China is the world’s largest exporter and accounts for close to a third of global manufacturing. So when China faces a problem it is everyone’s problem.

Hard cash is discouraged

President Uhuru Kenyatta has acted swiftly. All inbound flights from countries with coronavirus cases have been banned for 30 days; any gathering in churches or rallies are discouraged; and schools and colleges closed.

Also, use of paper money and handshakes are frowned upon.

“To avoid the risk of transmission through physical handling of money, we encourage the use of cashless transactions such as mobile money and credit cards. We appeal to mobile operators and banks to take into consideration the situation, and reduce the cost of transactions during this period,” said the head of state on Sunday while confirming two more cases of the coronavirus.

Restricting the use of cash in Kenya might take this crisis to another level. As much as the use of mobile money transfer services has gained currency in Kenya, a recent report by the Central Bank of Kenya (CBK) and Kenya National Bureau of Statistics (KNBS) found that cash is still widely used.

Even before the announcement of the stringent measures, very few airlines carrying tourists and investors were landing or leaving Kenya.

This means that flowers, tea and coffee and other exports were not being flown to Europe, the Middle East and other export destinations as every country sought to isolate itself.

Producers grapple with limited supply

This has seen the cost of inputs for some firms go up to a six-month high as producers grappled with delayed or limited supply, according to a Purchaser’s Managers Index (PMI) by Stanbic Bank.

It is just a matter of time before the Competition Authority of Kenya’s (CAK) exhortation for retailers not to raise the prices of goods becomes obsolete.

“It has come to the attention of the authority that following a pronouncement by the government of a confirmed coronavirus disease (Covid-19) case, some manufacturers and retailers are contemplating collusive increases of prices and/or hoarding with the intention of subsequently increasing prices of various consumer goods,” said the competition watchdog, warning that guilty parties would be slapped with a penalty of up to 10 per cent of their respective turnover.

When fear meets a fickle market, the result is almost a financial crisis. Kenya’s first case of coronavirus,which has since been declared a pandemic by the World Health Organisation (WHO), was enough to drive the stock market into a panic mode.

A bleeding stock market

Instead of money trickling into the economy, it was gushing out. The stock market bled over Sh240 billion as investors evacuated their money from the Nairobi Securities Exchange (NSE) on Friday alone. Overall, investors at the NSE lost Sh232 billion last week.

The management of the Nairobi bourse was forced to halt trading after the NSE-20 share index at some point nose-dived by 15 per cent.

Sadly, with the dominance of the NSE by foreigners, the money that left was most likely in the form of critical foreign exchange currencies, particularly the US dollars. And it left the country and was put into safer assets such as the US Treasury bonds.

By end of trading on Friday, the shilling’s exchange rate against the US dollar remained unchanged at 102.42 compared to 102.47, but it was far from an average of 101.1 in the first month of 2020.

Kenya is a net importer, a weak shilling means a high import bill which culminates into a high cost of living. National Treasury Cabinet Secretary Ukur Yatani has hinted that the shilling risks taking a hit from the pandemic. It is still too early to tell whether the coronavirus will infect the economy to the extent of shrinking or just stunting it.

But all the components used to compute the GDP have so far caught a cold from a single sneeze that started in Wuhan, an industrial city in China.

In volatile times, one of the components of GDP, private investment, behaves as though it has been possessed. Private investors, in the words of British economist John Maynard Keynes, take on the animal spirit.

Investor stops being rational

Animal spirit describes the psychological and emotional factors that drive investors to take action when faced with high levels of volatility. With uncertainty, an investor stops being rational.

Private investment, according to Dr XN Iraki, a business lecturer at the University of Nairobi, will reduce as Kenyans wait for the next cause of action.

“The uncertainty over how long the crisis will last makes it hard to make concrete investment decisions,” says Dr Iraki.

Instead, possessed investors will be looking for investments that are easy to liquidate and evacuate. One such soft spot is portfolio investments, such as equity stocks and debt securities, such as banknotes, bonds, and debentures. Unlike foreign direct investment (FDI) such as when an outsider sets up a manufacturing plant in the country, these can easily be sold and the money, normally in foreign currency, repatriated.

It is these assets that were being cashed out en masse on Friday with foreign investors buying foreign currencies on their way out.

Other components of GDP such as private consumption have also caught the coronavirus fever. There have been cases of panic buying of such items as sanitisers and masks. Pictures have also been doing rounds of shoppers crowding major retail stores, stockpiling in preparation for what they believe is an impending lockdown.

Panic-buying results in something akin to a blood clot, where most of the goods are concentrated in a few people, leaving the rest of the population without. Scholastica Odhiambo, an economics lecturer at Maseno University, says the country is likely to experience a sharp increase in prices of consumer products due to increased demand.

“With 89 per cent of the families in the informal jobs, if the trend escalates we are likely to see more vulnerable families,” says Odhiambo.

Foreigners have also been restricted from coming into the country. This will hit the hospitality industry hard. Soon, airlines, hotels and games parks and reserves might be forced to lay-off employees or worst declare bankrupt.

The tourism industry was on a recovery phase after a period of stagnation which due to intermittent terrorist attacks some five years ago.

A lot of efforts have been put in place to turn around the sector, one of the country’s top foreign exchange earner. As a result, the bed occupancy rate in hotels has surged from 29.1 per cent in 2015 to 32.5 per cent in 2018.

But now things are changing. Save for the tourists who the news of virus found here, no new tourists are coming into the country.

Kioko Musyoki, a general manager of the five-star Leopard Beach Resort in Kwale County, says his agency in Europe had to cancel 49 visitors. That is a big blow for a hotel that employs over 350 people and with massive overheads.

This period, up until Easter season, explains Mr Kioko, was supposed to be crunch time for the hotel industry. Not anymore.

Government spendings, another component of GDP, is also likely to be affected. With a poor investment environment and low consumption, tax revenues will be hampered.

Tax revenues from international trade will also dip with imports from China and other source countries declining. With poor tax revenues, the Government will be forced to reduce spending, thus reducing the flow of money into the economy.

Moratorium on foreign travel

Already, the government has put a moratorium on foreign travel by its officials. Government officials will also not be going for conferences, aggravating the already bad situation for the hotel industry.

Government expenditure on health, explains Dr Odhiambo, is likely to shoot up as more cases are being identified.

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