NAIROBI, Kenya Sep 24 – The International Monetary Fund (IMF) has revised its forecast for Kenya’s Gross Domestic Product growth for 2015 from 6.9 percent to 6.5 percent, and trimmed 2016 numbers from 7.2 percent to 6.8 percent.
IMF also revised inflation upwards to 6.4 percent from the previous projection of 5.2 percent while the current account balance is expected at 9.9 percent up from 7.3 percent but will still be lower than that of 2014 level that was 10.4 percent.
While the recent lifting of the travel bans to popular tourist destinations could help reverse over time the sharp drop in tourist arrivals, the IMF noted that security risks remained a serious challenge.
It noted that a deterioration of economic and financial conditions in emerging markets or in Europe, the latter a major origination market for tourism in Kenya, could adversely affect growth.
Private investment could be further affected, particularly if FDI inflows for new oil exploration slow down significantly owing to depressed global oil prices.
“Additional external risks related to the timing and pace of exit from unconventional monetary policy in the U.S., which could lead to rapidly rising yields, further U.S. dollar appreciation, and knock-on effects on growth in emerging and frontier economies also exist. Such global shocks could lead to a re-pricing of Kenyan assets and the exchange rate, as well as spillover effects on exports,” IMF observed.
In the event of economic distress in East Africa, in particular South Sudan, the IMF noted that cross-border activities of Kenyan banks could be adversely affected.
With regards to Kenyan banks’ exposure to foreign exchange (FX) risk , the IMF highlighted Central Bank of Kenya stringent limit on net FX open position (10 percent of core capital, including off balance sheet exposures) that has encouraged banks operating in Kenya to restrict FX lending to companies and individuals that are naturally hedged against FX risk.
“Further, Kenyan banks’ exposure to FX risk remained limited. About 16 percent of total assets and 23 percent of total liabilities are denominated in foreign currency, resulting in a net FX open position of 2.9 percent relative to total banks’ capital, which compares well with peer countries,” IMF said.
However, there are signs that the corporate sector foreign currency exposure is increasing.
The share of foreign currency loans to firms relative to total loans to firms has increased to 32 percent in 2014 from 26 percent three years before, despite relatively low rates of export growth.