Kenyan Politics Limbo Hinders Central Bank on Currency Risk

NAIROBI (Capital Markets in Africa) – On Monday, Kenya’s central bank may have little choice but to do what the rest of the country is stuck with: waiting for a rerun of its presidential election.

With political limbo reigning since the Supreme Court’s annulment of the previous attempt at a national vote on Aug. 8, officials are left contemplating the effects of prolonged uncertainty on an economy that also faces slowing growth and persistent inflation. Economists say that quandary will force them to opt for no change in the benchmark interest rate at 10 percent, where it’s been for a year.

The Central Bank of Kenya’s options are hamstrung by the “re-emergence of political risk,” Jibran Qureishi, an economist for East Africa at Stanbic Holdings Ltd., said by phone from the capital, Nairobi. “When you have prolonged political uncertainty, one of the biggest concerns is whether there could be any risk to the exchange rate. Currently, there is no reason for them to do anything differently.”

Monday would mark the sixth consecutive meeting when the central bank’s rate-setting committee, led by Governor Patrick Njoroge, has left rates frozen in Kenya. The economy of the world’s largest shipper of black tea has been hit by the worst drought in three decades — a crisis that’s curbed output of the staple corn, pushing up consumer prices.

The Supreme Court’s decision to annul President Uhuru Kenyatta’s victory followed its finding that the election hadn’t been conducted in accordance with the constitution. The ruling marked the first time an African court overturned the results of a presidential election.

That watershed for its judges isn’t making it any easier for its monetary policy makers. They’re already contending with an inflation rate that accelerated to 8 percent in August, while gross domestic product expanded at the slowest pace since 2014 in the first quarter as farming output shrank.

A rerun of the election is due on Oct. 17. But while that vote could clear the political clouds hanging over the economy, it also carries with it the risk of instability and violence that hung over the last attempt — yet more for the central bank to worry about.

The impact of the rerun “won’t be significant,” Njoroge said at a conference on Sept. 13, adding that the outlook for the economy is favourable and that investors should take a “long-term” view.

New elections mean potential investments are delayed until a new government is in place and policy certainty is assured, compounding growth woes, said Razia Khan, chief economist for Africa at Standard Chartered Bank Plc in London.

The stasis delays amendments to a law that caps bank-loan rates and has choked off lending, worsening the economic slowdown, Khan said. Kenyatta’s legislation limited borrowing costs to 400 basis points above the benchmark rate a year ago as he sought to fulfil a 2013 election pledge to lower the cost of credit.

East Africa’s largest economy has struggled to gain any real momentum after the first quarter and will “move on a modest downward trajectory” this year, said David Cowan, an Africa economist at New York-based Citigroup Inc. While the government forecasts expansion of 5.5 percent in 2017, GDP may rise less than 5 percent, he said.

“The real question about where the economy goes into 2018 is unresolved, given that the new political uncertainty will now cast its shadow over much of the second half of 2017,” Cowan said.

Source: Bloomberg Business News