How looming recession will hurt Kenya

Treasury Cs Henry Rotich addressing press conference after reading the 2018-2019 Budget at Parliament on Thursday. [File, Standard]

The looming global recession will hit Kenya where it hurts the most.

With a new International Monetary (IMF) report adding its voice to the grim prediction on the world economy, analysts expect Kenya’s external earnings running into trillions of shillings annually to be affected by the slowdown in the global economy.

America and Europe, the two regions expected to be hit the most by the slump, are Kenya’s major trading partners in terms of export earnings, diaspora remittances and financial inflows.

Besides the impasse on Brexit negotiations, other global problems that could spill over to Kenya’s economy include trade tension between China and the United States, escalating political and geopolitical strains in sub-Saharan Africa and the Middle East as well as tightening financial conditions in the global financial system.

Jibran Qureishi, the Regional East Africa Economist at Stanbic Bank, said Kenya might lose out if things go bad in the protracted Brexit negotiations.

“Kenya should negotiate an affordable deal with the United Kingdom,” he said.

He added that exports to tea to Middle East countries of Pakistan, Iran and Egypt might be affected by the geopolitics in the region. In Iran, said Qureishi, the impending sanctions might affect its ability to buy Kenyan tea.

A recent staff report by the IMF on Kenya noted that some of the potential external risks to Kenya’s economy include policy uncertainty due to US growth and uncertainty associated with negotiating post-Brexit arrangements and the North American Free Trade Agreement (NAFTA).

It also cited evolving political processes, including elections in several large economies, as some of the potential risks to the economy in the next three years.

The global lender warned that this would adversely impact the country’s external position by reducing tourism and exports. It would also affect the financial inflows by reducing foreign direct investment and portfolio inflows such as debt and equity.

Kenya gets more than 80 per cent of its diaspora remittances - which stood about Sh270 billion last year - from Kenyans working in these two regions. America and Europe also buy goods worth Sh139 billion from Kenya, shoring up its reserve of foreign currencies.

“The global expansion has weakened. The global economy is projected to grow at 3.5 per cent in 2019 and 3.6 per cent in 2020, 0.2 and 0.1 percentage point below last October’s projections,” said IMF in its latest projection in the World Economic Outlook.

The IMF blamed the slowdown in the global economic growth on a weakening financial market sentiment, trade policy uncertainty and concerns about China’s outlook.

The IMF has also revised downwards the growth of sub-Saharan Africa, Kenya’s biggest export market, by 0.3 percentage points to 3.5 per cent this year and 3.6 per cent in 2020.

Analysts have already warned that unlike in the 2007 crisis when frontier markets were not solidly welded to the global economy, they have since been integrated into the global financial system, especially the capital markets.

According to the IMF, the tightening financial conditions amid high levels of public and private debt will have adverse effects. Should Kenya issue another Eurobond, it will be charged more.