AIG predicts below 10pc inflation in 2009

October 9, 2008

, NAIROBI, October 9 – Financial experts have predicted that the skyrocketing inflation will ease to a single digit level in 2009.

AIG Investments Senior Investment Manager Peter Wachira told reporters on Thursday that they expect a drastic decline to below 10 percent in the second quarter of 2009, owing to the receding international crude oil prices and a stabilising food situation in the country.

“With the government now resettling the internally displaced people who could assist the faster recovery of the agriculture sector and the expected short rains, this should also help lower the inflationary pressures,” he said of the positive outlook for 2009.

Since the beginning of 2008, inflation has averaged above 25 percent, posing a risk to sustainable economic growth. In September for example, the overall cost of living rose to 28.2 percent compared to 11.7 percent posted in the same period last year.
At a media briefing, Wachira said the fund managers also forecasted that the economy would grow by 5.2 percent in 2009 up from the projected 4.3 percent for this year.

The effects of the post poll chaos have had a spill-over effect on many sectors of the economy including tourism, transport and manufacturing which would take a while to recover.

Tourist arrival dropped by 40 percent for the first seven months of 2008 to 347,339 visitors but cement and electricity consumption went up by 16 percent and four percent respectively.

“Political stability resulting from the establishment of a grand coalition government, a recovery in agricultural productivity and the restoration of investor confidence will add impetus to accelerating economic growth going forward,” Mr Wachira observed.

The manager however cautioned that the seven percent GDP growth rate for 2009 would not be realised.

He explained that the local currency and the equity market would remain volatile in the short term due to the declining levels of remittances, reduced tourism inflows and a deteriorating current account balance, resulting from heavy dollar demand and unmatched inflows.

“The value of Kenya’s exports at $4.6 billion is approximately half of the import value at $9.8 billion which means that we continue to import more than we export,” he stressed.

The Kenyan shilling has in the last three months weakened by 12.1 percent, 4.1 percent and 0.4 percent against the US Dollar, the Sterling Pound and against the Euro respectively.

Remittances on the other hand dropped by 37 percent in August to $37 million from $59 million recorded in 2007 with the situation expected to deteriorate further due to the current global financial meltdown and the likelihood of major economies falling into a recession.

This, coupled with an anticipated revenue shortfall raises concerns on the ability of the government to fully finance its budget raising fears that it is likely to resort to additional domestic borrowing beyond the projected Sh36billion. This situation, the experts forecasted could trigger higher interest rates.

The firm’s Head of Research Edward Gitahi recommended that the government should ensure that the financial sector remains vibrant and that liquidity is available to mitigate high loans default rates.
The fund managers also cautioned the government against issuing the $500 million sovereign bond and floating the additional shares in several state corporations such as KenGen and National Bank saying the environment is not favourable.

They maintained that although Africa is less integrated into the global economy, declining consumer spending and shaky investor confidence in the developed economies would have a knock-on effect on the continent.

“An overall reduction in global economic growth is not positive for commodity prices, including oil. It could also result in less funds being available for Foreign Direct Investment into Africa,” they concluded.

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