Kenyan economy braces for impact after first coronavirus case


Kenyan economy braces for impact after first coronavirus case

In Summary

  • Economic risks had until now been more profound from an external position making the first domestic case a game changer in the assessment of the extent of damage to local industries.
  • Unlike advanced economies such as the US and the United Kingdom, Kenya’s headroom to react to the crisis is limited to its relative small size and fiscal constrains to rule out a case for stimulus.
  • Banks are on the other hand cognizant of the trials and tribulations on local business are as such ready to step in with their own intervention measures to support growth even as their assessment of the epidemic’s reach remains primary at the moment.

The local economy is bracing for an unprecedented impact with the first case of the novel coronavirus that was reported on Friday.

Economic risks had until now been more profound from an external position making the first domestic case a game changer in the assessment of the extent of damage to local industries.

Earlier this month, businesses through their representation in the Kenya Private Sector Alliance (KEPSA) told of adverse effects.

They cited stock outs and delayed deliveries, the cancellation of business-related travels and a high cost of operations and reduced competitiveness as the price of imported inputs go up.

Private sector players have further warned of a slowed investment interest by external investors as the foreign market participants de-risk from emerging markets.

In their recommendations to containing the now global pandemic, KEPSA has recommended supportive measures to aid businesses.

These include tax breaks to domestic companies seeking to enhance their companies, release of tax refunds to assist businesses manage cash-flows and consideration for a slash in the cooperate tax for the hard-hit travel industry.

In his response, National Treasury CS Ukur Yatani has announced the forming of a multi-agency team to evaluate the impact of the Coronavirus on the economy with plans on fiscal support to local businesses.

On Friday, the announcement on the first coronavirus triggered a substantial shopping spree as Kenyans moved to stock up on essential commodities in fear of near-term price hikes and product hoarding.

Nevertheless the Competition Authority of Kenya (CAK) has warned retailers and manufacturers against instigating unreasonable action to instigate panic buying.

On its part, the Kenya Association of Manufacturers (KAM) says it will provide a live database of locally manufactured goods with the aim of addressing gaps that may stem from potential shortages.

We cannot print money

However, unlike advanced economies such as the US and the United Kingdom, Kenya’s headroom to react to the crisis is limited to its relative small size and fiscal constrains to rule out a case for stimulus.

As such macroeconomic experts reckon the injection of shillings into the economy would pose an even more dire distress to the economy than the present peril.

This to include a massive devaluation in the local unit and higher inflation to deplete the already low customer purchasing power.

ABC Capital global markets analyst Johnson Nderi warns of pressures associated with fiscal stimulus on economies even as institutions such as the US Federal reserve move to inject more dollars and slash interest rates to support demand.

“You could see a surge in the number of companies which remain afloat on cheap debt. This leaves the economy vulnerable. Once you get more companies of that nature, it becomes tough politically to withdrawal that support giving rise to zombie institutions,” he said.

While a stimulus program is out of question, institutions such as the Central Bank of Kenya (CBK) are seen playing a role in supporting local business through their role in policing financial institutions.

“We could see a regulator come in and encourage banks to be slightly lenient on loan repayments where could even see some freeze to repayments,” said Genghis Capital Senior Research Analyst Churchill Ogutu said.

Obligations with lenders

Already countries like Italy have suspended mortgage payments as part of measures to soften the economic blow on households.

Banks are on the other hand cognizant of the trials and tribulations on local business are as such ready to step in with their own intervention measures to support growth even as their assessment of the epidemic’s reach remains primary at the moment.

“We will have to look at our customers; our small enterprises, large manufacturers and customers in the travel and hospitality sectors. If customers don’t travel, these businesses still have obligations with lenders. Remember the hotel has done nothing wrong,” KCB Group Chief Executive Officer Joshua Oigara told Citizen Digital in a March 12 interview.

The CBK is expected to stage its bi-monthly Monetary Policy Committee (MPC) meeting on March 23 when the reserve bank is expected to share its own assessment of the situation to include potential intervention measures.

Nevertheless, researchers at AIB Capital propose the imperative may lie in trading economic growth for public health to back the adoption of interventions seen in other jurisdictions including school closures, travel bans and even the shutdown of towns.

The National Treasury still has its annual growth projections at six percent but the prediction is now subject to an almost certain tweak.

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Story By Kepha Muiruri
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