Africa Private Equity Insider: A Look Inside Kenya’s IMF Deal
The International Monetary Fund (IMF) authorized a loan of about $700 million to the Kenyan government recently. Now, when one hears “IMF” and “loan” in the same sentence, the natural reaction is to wonder whether the country in question is under duress.
So, should investors worry that Kenya is under pressure? Quite the opposite.
“It’s not a bailout,” John Foster, Africa editor of Debtwire, which is part of the Mergermarket group, told AFKInsider.
“It’s insurance for shocks, and it’s the only African country that’s managed to get that.” Foster added that Kenya’s neighbors have yet to qualify for this kind of insurance. It’s the first such package for a “frontier” market in Sub-Saharan Africa.
“The arrangement is purely precautionary,” Angus Downie, head of economic research at Ecobank, told AFKInsider. “The Kenyan authorities will only draw down funds if needed, [for example] if the economy starts to show signs of stress.”
“It’s a really prudent move by the government”
Foster’s description of the package as prudent is apt, given that the country does face risk factors on a few different fronts — all of which impact the nation’s current and trade accounts with the outside world.
There is first of all the matter of inflation and currency risk, an issue Kenya has recent experience with. Indeed, World Bank economist Wolfgang Fengler wrote in a 2011 World Bank blog that Kenya’s reliance on imports had made the economy highly sensitive to shocks — and a perfect storm had brought several at once. The result?
“There was a big inflation spike in 2011 and 2012, which spooked the markets,” said Foster.
With the region’s worst drought in 60 years and high oil prices, Kenya’s trade imbalance rose to almost 10 percent of GDP in 2011. Food prices surged, the shilling fell, and thus inflation surged. Though Kenya weathered the storm, the memory of the episode is likely still fresh on the minds of policymakers, who had to scramble to get the situation in hand.
Kenya still carries a trade deficit. With its reliance on agricultural exports, which comprise 60 percent of exports, it remains sensitive to further trade account shocks.
A major part of the issue comes down to rainfall. With a lack of broad irrigation, “Weather related shocks can have an adverse effect on the trade account,” Craig Parker, senior economic consultant at Frost & Sullivan, told AFKInsider.
Like much of Africa, Kenya’s agricultural sector is at the mercy of both the weather — amply demonstrated in 2011 — and on world commodity prices. In recent months a slump in the price of tea, a key source of export earnings, has not helped the Kenyan shilling.
The other major risk that Kenya faces comes in human form: al-Shabaab, the militant islamist group, has continued its attacks on Kenya in retaliation for the country’s involvement in efforts to quash the Somalia-based group. Recent attacks have discouraged tourism and “may also have an impact on capital inflow,” said Parker.
Al-Shabaab has been blamed, in part, for the shilling’s current decline, and has also affected Kenya’s ability to issue debt in the past.
The Westgate Attack
“There was a eurobond they were supposed to issue at the end of 2013, but because of the al-Shabaab attack [on Nairobi’s Westgate Shopping Mall] they had to wait,” Foster said. “And because the sovereign wasn’t entering the market everyone else had difficulty pricing their own issues.”
In other words, Kenya’s ability to issue bonds was impacted by investor nervousness in response to the Westgate Mall attack, a situation the filtered through to other issuers of debt, namely Kenyan companies.
In light of all of that, it only makes sense that Kenya would want to protect itself from the various risks it might encounter.
“Kenya only plans to utilize the funds if their current account comes under pressure,” Parker said. For now, the country is “economically stable, with strong GDP growth and significant infrastructure development in the rail and energy sector.”
In other words, there are bright sides despite the risks.
With major infrastructure projects underway and brisk growth, one could see the future looking even brighter — especially with the safety net that the IMF loan provides.
“The approval of the arrangement underlines the willingness of the IMF to help emerging economies such as Kenya weather the current global headwinds and strengthen the resilience of the economy,” as Downie described it.
The combination of opportunity, risk, and safety nets could thus present an attractive opportunity to foreign investors. Will we see a surge in investment interest in Kenya as a result? Only time will tell.