Expert: Africa likely to avert recession

April 22, 2009
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, NAIROBI, Kenya, Apr 22 – Sub-Saharan African economies are likely to avert a recession as many countries have put in place pre-emptive measures to counter the negative effects of the ongoing global credit crunch, financial analysts have forecasted.

AIG Investments Senior Investment Manager Edward Gitahi said on Wednesday that despite the expectation of a slow down in growth, many African governments have taken immediate measures to try and safeguard their economies through for instance increased infrastructure spending to keep production high and boost confidence and the stimulation of their financial markets.

“By reducing the policy rates, these governments have made credit more available to the productive sectors of the economy. The political stability has also been good such as the successful and peaceful elections in Ghana, which served to boost investor confidence,” he remarked.

Uganda and Kenya have also moved to ensure that the financial markets are liquid by for example cutting the Cash Reserve ratio and reducing the minimum threshold for investment in government securities.

Mr Gitahi also pointed to the West African nation’s decision to reduce its expenditures when it recently decided to cut the number of ministries from 27 to 23.

He observed that many African countries had also attracted investment in their resource sectors, a move which is likely to boost economic growth, while the multilateral development agencies have been keen to support ‘success’ stories on the continent.

This follows plans to inject more than $1 trillion into the International Monetary Fund and Multilateral Development Banks to enable them to provide much needed support to emerging and developing economies.

“These external factors have boosted economic growth in these countries and also over the years there has been a pile up on internal demand, so the economies are much more robust because of consumer demands,” he explained.

On the Kenyan front, the fund manager said the Sh18.5 billion raised from the recently floated infrastructure bond would have a multiplier effect in shielding the economy from a decline.

“As money is spent on infrastructure, more people at the grass roots are employed and those people tend to spend money in the economy,” he emphasised.

However, he took issue with the political grumbling and bickering that is currently being witnessed in the country saying these disruptions are eroding investor confidence, which could derail efforts to salvage the already weak economy.

“The biggest contribution that the government could do is by ensuring that there is political stability because people invest where there is confidence. If they think that the future is uncertain they will not put their money in the economy,” Mr Gitahi said, adding that when this happens businesses tend to relocate.

Relocation and closing down of businesses are developments that the country’s economy can ill afford particularly at a time when it is still under siege and reeling from the effects of the post election violence on many sectors, the impact of the second wave of the global financial crisis and the adverse weather conditions.

All these factors had prompted the fund management firm to revise downwards the projections for Kenya’s economic growth rates for 2009, from 3.3 percent to between 1.5 percent and two percent.

The government’s own provisional estimates for GDP growth are about 2.2 percent but AIG sees it as growing by under two percent as the agricultural sector remains depressed due to poor rains.

The African Development Bank however sees the country recording a 5.5 percent growth rate, supported by export trade of agricultural goods and the growth of the manufacturing sector.

“We are a bit more bearish because we see the consumer spending remaining relatively weak and with inflation at high levels. People are cutting back on non-essential expenditure and focusing more on necessary expenditure. Thus there is a decline in the portion going to investment,” Mr Gitahi said as he defended AIG’s position.

Inflationary pressures, he noted would also continue to bite in the remainder of the year and would remain above 20 percent, particularly if the current food crisis that is affecting a third of the country’s population was not urgently resolved.

The local currency is also expected to depreciate further and trade within Sh80 to Sh83 to the US Dollar in the second quarter of the year.

His colleague, the Vice President and Senior Investment Manager, Peter Wachira, however predicted that interest rates would be stable going forward bolstered by the high liquidity in the market.

The rates have been on a downward trend during the first quarter of 2009, following the Central Bank of Kenya’s (CBK) keenness to maintain a low and stable interest rate environment.

This followed CBK’s move to reduce the cash ratio from six percent to five percent in December 2008, as commercial banks became more cautious in their lending. Its Monetary Policy Committee also cut the Central Bank Rate by 25 basis points to 8.25 percent.

It remains to be seen if low interest rates would translate into more borrowing as this will depend on whether investors can identify profitable ventures on which to back the loans on.

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