Kenya Warns ‘Trump Effect’ Poses Threat to Its Economy

NAIROBI (Capital Markets in Africa) – Uncertainty surrounding U.S. policies on trade and immigration poses a major external threat to East Africa’s biggest economy, Central Bank of Kenya Governor Patrick Njoroge said.

The lack of predictability on policy is stoking fears of abrupt changes that may affect trade between the U.S. and Kenya, some of which may end up eroding sources of foreign currency, Njoroge told reporters Tuesday in Nairobi, the capital.

While Kenya has sufficient buffers, including a $1.5 billion standby loan facility with the International Monetary Fund to cushion its economy in times of externally induced shocks, there isn’t adequate insurance against a “Trump effect,” Njoroge said, referring to U.S. President Donald Trump’s inclination towards protectionist trade policy and his stance on immigration.

“There could be some headwinds; the most significant ones still remain the external environment,” Njoroge said. “We don’t have adequate insurance for them.”

‘Bated Breath’
African economies are in an “age of uncertainties” in which most nations and investors targeting emerging markets are waiting with “bated breath” for U.S. policy, Njoroge said.

Kenya is worried that Trump may suddenly cancel a 16-year-old trade pact known as the African Growth and Opportunity Act, or AGOA. The treaty enacted in 2000 allows dozens of sub-Saharan African countries to export certain goods to the U.S. duty-free. It expires in 2025.

“What would happen if suddenly somebody blows out AGOA or there is a slowdown in remittances,” he said. “The concern is not for just Kenya alone, the concern is worldwide.”

Remittances are the biggest source of foreign currency for the $69.2 billion economy, followed by agricultural exports such as cut flowers and black tea.

Domestic threats include persistent dry weather conditions that could push inflation to the upper edge of the government’s 2.5 percent and 7.5 percent target corridor. Growth this year could slow to 5.7 percent from an estimated 5.9 percent in 2016, while the current-account deficit is seen widening to 6.2 percent of GDP in 2017 from about 5.5 percent, he said.

The central bank still has policy room to intervene and smooth volatility in the foreign-currency market and won’t raise rates “dramatically” as happened in 2011, Njoroge said. Policy makers increased interest rates that year by a total12.25 percentage points to 18 percent.

“If the external environment really becomes terrible, then all bets are off,” Njoroge said.