NAIROBI, Kenya, Jan 11 – The economy cannot sustain the current interest rate structure, especially with the penetration of borrowing at the highest it has ever been, a leading financial analyst has warned.
Rich Management Chief Executive Officer Aly Khan Satchu says such factors as a reducing inflation as witnessed in December should see the much anticipated Central Bank’s Monetary Policy Committee meeting take a pause in hiking rates.
“Last month we had the first reduction in the inflation rate. I’m expecting a further reduction because of what’s happening with the fuel prices, and I think that’s enough for the Central Bank to sit back this time around. It would be overkill if they pull the trigger again,” Satchu said.
Still, the challenge ahead for the Central Bank he adds, will be to bring down interest rates quickly and protect the value of the shilling; a task he said will require a lot of “finesse.”
The recent trend of the slipping shilling due to thin markets and big movements at the turn of the year is temporary, Satchu said.
“There’s a lot of anecdotal talk that the Treasury is about to pull down a $600 million loan. I think that will change the direction of the shilling and push it back higher towards the Sh84 mark,” he said.
A key wildcard for the shilling, however, will be the price of fuel should global oil prices shoot up again; taking into account the fragile situation in Iran.
Threats of US-led sanctions on Iran’s Central Bank have oil traders on edge over whether prices will spike to $200 per barrel.
“It’s unlikely that President Obama can make a settlement with Iran. There’s a really strong risk of a massive spike in oil if things spiral out of control,” Satchu explained.
Hedging the oil risk locally by the Central Bank and Treasury to protect the country from such a spike, he says will be a necessary measure to prevent the shilling and Current Account Deficit (CAD) from plummeting.
Kenya’s inability to pay for the fuel bill that accounts for 25 percent of the import bill, Satchu said, is what is responsible for the shilling taking a tailspin to a historic low of Sh107 to the dollar last year.
The widening CAD posting at above 10 percent now matches those of Swaziland and Greece.
Satchu says though the figure is frightening it is not beyond salvaging if the country maximizes on its assets.
“There are no quick fixes but there are fixes that can impact it (CAD) in the next three years. We have the seventh largest geothermal resource sitting in the Rift Valley. It could completely change our energy bill,” he said.
Yet the CAD is still worth keeping an eye on, as it runs the risk of reaching a tipping point if fuel prices increase.