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AIG predicts rising interest rates

NAIROBI, Kenya, Jul 22 – Financial services company AIG has predicted a rise in interest rates over the coming months as the government and the private sector compete for the available cash in the market.

AIG East Africa Senior Investment Manager, Edward Gitahi says recently declared intentions by at least five companies to raise capital through Corporate Bonds could fuel stiff competition for available funds in the economy.

“Maybe in mitigation what we would say is that Central Bank has a number of tools that it could use; we have seen those tools being used in the last quarter through issuing what we term as ‘reverse ripple’. That is they buy securities from the market and in turn they inject cash in the financial system so they could meet the requirements for cash by injecting more money into the market,” the expert explained.

In the past two years Central Bank of Kenya (CBK) has been able to maintain low interest rates by rejecting high priced bids for government credit papers, which are normally used as a benchmark for market rates.

Among the corporates seeking to raise funds from the debt market include Safaricom, KenGen, Stanbic and Shelter Afrique.

Mr Gitahi further pointed out that expected high inflation, as food prices rise due to poor weather and high fuel prices are also expected to apply pressure on lending rates.

Meanwhile AIG is predicting that the overall economy could grow by between two and 2.5 percent in 2009 but double to four percent in 2010 on account of stimulus spending by government.

AIG Investments Vice President and Senior Investment Manager Peter Wachira explained that the forecast for 2009 – though modest – reflect the resilience of the economy that has weathered severe shocks of the post election crisis, adverse weather and the global financial meltdown that happened in the latter part of 2008.

Mr Wachira observed that the economy is still reeling from the effects of high inflation that has suppressed personal spending, depressed global demand translating into weaker export growth, lower tourism receipts, remittances and private capital flows.

“Although during the budget the government came up with a lot of measures in terms of stimulus packages, we don’t think we are going to feel the positive impact within the third quarter of this year, and possibly the benefits will start being felt in the fourth quarter of the year,” said Mr Wachira adding: “We think the impact of the stimulus will be felt more next year and that’s why we are predicting increased growth next year.”

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The investment experts are predicting an overall inflation projection of 20 percent for 2009 as food prices remain high, electricity costs rise due to the possible shift to the more expensive thermal generation.

Earlier forecasts were that inflation could recede to a single digit level.

AIG’s growth forecast is the most pessimistic so far, with its counterpart Old Mutual Asset Managers forecasting a 3.2 percent growth, the International Monetary Fund (IMF), predicting a three percent rate while government estimates stand at between two and three percent.

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