Shilling Expected to Remain Fairly Stable in 2016 –CFC Stanbic Bank

CFC Stanbic Bank forecasts Kenya’s currency to remain relatively stable throughout the year and the economy to grow by 5.7 percent in the year 2016 up from an estimated 5.3 percent in the year 2015 driven mainly by increased government investment in infrastructure projects.

CFC Stanbic Bank, Regional Economist, Jibran Qureshi says that the Kenyan shilling has been remarkably resilient and a beacon of strength in the region weathering the storm better than most other currencies in the year 2015 as the US Dollar strengthened across the board.

“Furthermore, the United States Federal reserve, in our view, may not increase rates as frequently as the market currently anticipates. In fact, rate increases by the Federal Reserve aren’t likely to surprise the market in terms of their magnitude; hence pressures on the Kenyan shilling from continued broad based dollar shouldn’t be that material this year,” Qureshi said.

In addition, Qureshi notes that the current account deficit that fell to 8.0 percent of GDP in then aided by the reduction in the oil import bill. However, in reality, if the machinery imported for Standard gauge railway is excluded, the current account deficit is much lower than that.

On infrastructure, Qureshi sees this as a necessary virtue for Kenya and it is clear that infrastructure spending will have short term vulnerabilities but certainly have long-term benefits. When assessing possible risks to Kenya’s economic outlook for 2016, fiscal slippage stands out.

“We are in a pre-election year and while spending on development will increase future productive capacity, the government ought to ensure that recurrent expenditure doesn’t get out of control. Arguably, it may be prudent to drastically cut on recurrent expenditure in a pre-election year, however, it may be prudent to just push forward some development projects, after all this isn’t that difficult as we already struggle with budget excursion.”

Qureshi also notes that the agricultural sector may experience some challenges in the first half of 2016 as most weather experts warn of a dry spell following the El Nino weather conditions, while similarly looser monetary policy in source markets like the Eurozone and the United Kingdom will diminish vegetable and flower farmers export earnings in the first half of 2016.

“We expect activity in the agriculture sector to recover after the onset of the long rain season from May 2016,” he added.

“A decent recovery in the tourism sector in the year 2016 and with oil prices likely to remain low, the current account deficit will probably continue to remain within the single digits as a percentage of GDP, in spite of the continuation in capital expenditure for infrastructural projects,” said Mr. Qureshi.

Article by Juma Fred.