Crunch a wake up call for Kenya

September 22, 2008

, NAIROBI, September 22 – The aftermath of the September 11, 2001 terrorist attacks in America (thousands of miles from Kenya) has had a huge impact on our country.  The recent financial crunch affecting property markets, banks and insurance firms mainly in the US now elicits the same concerns – would this affect Kenyan business?

No business operates in isolation and any negative impact on one business is likely to cause a corresponding effect on other businesses in the cluster. When American International Group (AIG) experiences financial woes at the parent company in the US, the local franchise will have a problem, and trickle down further to the entire industry.

AIG is touted as the best fund manager and has recorded relatively high returns for a while now, but in the wake of this global event, pension schemes and insurance firms that have invested with AIG are likely to reconsider their options. The repercussions would be enormous!

The most obvious fact is that the effects will not be instantaneous, but spread out over a period and this is where government involvement comes into play.

The United States government had to intervene to cushion companies with a possible trickle-down effect in the event of collapse. Such a mechanism allows the troubled companies to be reinstated to the market after a period of time. Can the Kenyan government rescue a company that is folding up? What would compel a government to make such interventions and with what modalities?

Despite good governance and proper risk evaluation, good companies are still likely to tumble if other factors of production in the economy are on recess and it is in the interest of any government to ensure that employers, the public and other clusters do not crumble as a result of a company winding up. If history was to be our reference, the 50 great companies in the 80’s in the US are not the greatest companies today; more that half have gone bankrupt and this is a developed economy.

It is imperative that officials at the treasury re-look at their internal operations to ensure that no company crumbles at these tough times.

Only earlier this year, Safaricom shares were oversubscribed by a whooping Sh80 billion! So where has this money gone to all over sudden?  Can investors be encouraged to use it at least for now? The recent KCB rights issue was also over bought yet the share prices for the two companies are going down.

Unpublished and unsupported data about passengers’ ship sinking suggests that if there is a tilt in a passenger ferry on one side, all the passengers run to the opposite direction, thereby making the vessel to actually sink. This is the same situation when everyone panics, the button they press is “sell! Sell! Sell!” , pushing supply, causing saturation which in turn mutilates the price as a result of skewed information. At such a time as this, when one sells they hold the cash, (as the dollar rate rises due to inflation in the economy) thus making the individual poorer at the end of the day.

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