Experts fear credit for crunch in Kenya

July 19, 2010
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, NAIROBI, Kenya Jul 19 – As Kenya puts itself on the path towards economic recovery, financial analysts say the number of downward risks has increased, as the global economic recovery remains sluggish.

This creates a problem for the local economy looking to bring itself out of depression and occasioned by combined effects of post election violence, drought and the global economic meltdown.

CfC Financial Services said on Monday that economic stagnation with looming risk of double dip recession in Europe could lead to a renewed credit crunch.
CfC Head of Research Judd Murigi said this could force local banks to cut back on lending and possibly increase lending rates.

“The Kenyan banking sector has a very high degree of risk aversion. It is as though they appear to prefer not making money to taking a risk and potentially loosing money,” Mr Murigi said.

He however, stresses double dip recession remains a potential risk scenario as the European Central Bank conducts stress tests on 91 banks in Europe.
The result of the tests, due out on Friday, is expected to have a significant impact in the local banking sector.

Sectors dependent on the European market are expected to be impacted negatively as the demand for products slows down. With consumer demand still at low levels, Mr Murigi argues the government should maintain counter-cyclical measures in an effort of stabilizing the local economy.

“We need to see increased government spending in an effort of boosting the economy as the global economy recovers at a slow pace,” he said.
Economic recovery is further affected by prospects of an impending drought in the fourth quarter of the year. 

“We need more implementation of economic stimulus programs like irrigation schemes, jua kali sheds and aquaculture schemes and other projects in the real sectors,” he said.

The analyst expects the economy to grow by between four and five percent in 2010 driven by turnaround in the mining, electricity, manufacturing and agricultural sectors.

The growth is however also dependent on the current political activities with the analyst saying a successful conclusion of the referendum, could result in the decline of political risks with more foreign investors keen on in investing locally.

The country’s economy grew by 2.6 percent in 2009.

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