The highlights of how the markets are responding to current economic challenges brought about by Covid-19 and how regional governments are planning for an eventual reopening.
The effects of Covid-19 have continued being felt in the East African region despite governments developing various interventions to counter them. Interventions have included the provision of healthcare remedies as well as stimulus plans to bail out communities who have been ravaged by the pandemic. The highlight of the inter-East African relations has been a diplomatic tiff between Kenya and Tanzania that had threatened the livelihoods of the region who depend on the two strongest economies.
The markets in the region have remained slow with the economies expected to get a hit for months to come. Various entities including the World Bank have revised their projections of the growth of the region’s economy. The triple effects of Covid-19, floods and locusts have made the economies of this region suffer greatly. Kenya has also received a negative rating by Moody based on her rising debt.
In this edition, we highlight how the markets are responding to current economic challenges brought about by Covid-19 and how regional governments are planning for an eventual reopening.
Kenya: Radical stimulus package to anchor growth
The country has been on the wrong path for a long time. Even before the onset of Covid-19, the country’s economy was already struggling with rising public debt, corruption and low consumer purchasing power. Economists had warned on the fluidity of the Kenyan economy and its resilience in the event of a major international or local disruption. Prior to the global shock, growth was expected to rise to 5.8 percent in 2020.
According to the International Monetary Fund (IMF), the pandemic is having a pronounced negative impact on the Kenyan economy, including sharp declines in the services sector and agricultural exports, as well as severe disruptions of supply chains. With international financial markets effectively closed to emerging market and frontier issuers such as Kenya, analysts expect an external financing gap of about $2.1 billion (2.1 percent of GDP) in 2020.
The real GDP growth is expected to drop to 0.8 percent in 2020, five percentage points below the pre-COVID baseline. The main channels of impact include a sharp slowdown in the traditionally resilient services sector concentrated in tourism, transport, and wholesale/retail trade. There have also been severe disruptions of supply chains and lower agricultural exports in particular, tea and flowers. Further, there have been challenges in the agro-processing sector due to transport disruptions and reduced global demand. On the demand side, domestic activity will slow owing to social distancing and lower remittances sizeable at about three percent of GDP in 2019 according to the IMF.
Despite efforts by the Central Bank to keep the shilling fixed around a hundred to the dollar, or thereabouts, the battle has been lost with the dollar strengthening globally and affecting the exchange rates. At the end of May, the Kenya Shilling was holding firm from further slide against the dollar trading at 106. Just five months ago, it was oscillating between 100 and 101.
Kenya relies heavily on its East African neighbours for food produce especially maize, vegetables and animal products. The country has worked hard to keep cargo still flowing despite the situation with Covid-19. With increasing levels of infections from Tanzania, the country was forced to close its border for commuter services leaving only cargo and developing a rigorous testing regime, a situation that has not pleased Tanzania. In retaliatory measures, Dar closed the border not even allowing truck drivers to offload cargo. This indeed has affected inflation in Kenya with commodities like onions, oranges, maize and rice increasing the day to day inflation. The inflation level has remained between mid-5 percent and slightly increasing to 6 percent during the worst period of the pandemic in mid-March.
The Kenyatta administration has come up with a raft of measures to ensure the gap caused by external financing is closed by an active local supply during and after Covid-19. President Kenyatta has unveiled an eight-point stimulus plan worth Ksh54 billion (US$504 million) that will ensure flow of cash among the citizens while still attracting foreign exchange. For example, the government has put effort in hiring more teachers and health workers, using local labour in rebuilding roads washed away during floods and employing youth to work on local projects like street clean-ups.
The 54 billion shillings is just part of a wider effort to increase local spending, ensure local shops have goods and the economy to be back on track. This is not the first time Kenyatta has run such a programme. As deputy prime minister and minister of finance in early 2010, Kenyatta steered a stimulus package that helped the country overcome the effects of the global financial crisis that happened 10 years ago.
Unique among these measures which are being rolled out now and after the Covid-19 is the empowerment of local farmers especially in the horticultural sector. This move has been hailed as genius as KSh1.5 billion has been set aside to assist flower and horticultural producers to access international markets, in a period where there is a shortage of flights into and out of the country. This investment is unique as it will help the country fetch the much-needed foreign exchange which has faced a major reduction from remittances and sale of major cash crops like tea and coffee.
Moody’s Investors Service, (“Moody’s”) has changed the outlook on the government of Kenya’s ratings to negative from stable. Concurrently, Moody’s has affirmed Kenya’s B2 issuer and senior unsecured ratings. The negative outlook reflects the rising financing risks posed by Kenya’s large gross borrowing requirements, which include amortization of external bilateral debt and the need to refinance a large stock of short-term domestic debt, at a time when the fiscal outlook is deteriorating due to the erosion of the revenue base and a debt structure that exposes Kenya’s fiscal metrics to exchange rate and interest rate shocks.
While Kenya does not face acute financing pressures, the severe tightening of financial conditions will challenge the government’s ability to meet larger gross financing needs without an increase in borrowing costs that would threaten medium-term fiscal consolidation efforts. The rapid and widening spread of the coronavirus outbreak is creating a severe and extensive credit shock across many regions and markets. Weaker growth and larger fiscal deficits will further aggravate Kenya’s already high debt and interest burdens.
The decision to affirm the B2 rating balances those pressures against fundamental economic strengths including a relatively large and diversified economy with high growth potential, and quite deep domestic financial markets. It reflects Moody’s expectation that Kenya will not participate in any debt relief initiative that requires the participation of private sector creditors, which could carry further negative implications for the country’s rating, and more generally that Kenya will meet all its debt service commitments to private sector creditors.
Kenya’s long-term foreign-currency bond ceiling and long-term foreign-currency deposit ceilings remain unchanged at Ba3 and B3, respectively. The Ba2 long-term local-currency bond and deposit ceilings remain unchanged as well.
Tanzania: Economy-first approach attracting praise and critics in equal measures
When Covid-19 descended on the East African economies, many governments rushed to introduce measures to hamper the spread. While Kenya introduced partial lockdown, Uganda full closure of capital city Kampala, and Rwanda even tough measures, Tanzania opted to remain open and explore economic growth. This has attracted international condemnation with the US embassy in Tanzania warning that the reported cases are not a true reflection. Tanzania has remained adamant that the progress of its economy remains a priority and even going to call for local remedies to cure the virus rather than relying on western medicine.
Tanzanian President John Magufuli has remained steadfast urging citizens to go about their business as the disease was not affecting many as earlier projected. He has called for the resumption of schools and trade, and removed the mandatory 14-day quarantine required for tourists entering the country. Effective May 18, 2020, authorities lifted the suspension of international flights into and out of Tanzania.
Tourism is a critical sector of Tanzania’s economy, contributing about 17 per cent to the annual Gross Domestic Product and employing an estimated 623,000 workers. About 1.9 million tourists visited the country’s parks and beaches last year, injecting $2.5 billion into the economy according to data from the Ministry of Natural Resources. The country estimates that a continued shutdown of its borders would have drastically reduced earnings from tourism by 75 per cent. Majority of the tourists who booked their travel prior to the pandemic postponed their trips to next year.
The IMF predicts that growth is set to slow from 6.3% in 2019 to 2% in 2020. However, the government is upbeat that it can use the existing global situation and especially in competing markets to attract tourists tired of restrictions.
The government released US$302 million for health spending. To support the private sector the government has indicated that it expedited the payment of verified expenditure arrears with priority given to the affected SMEs, paying US$376 million as of March 2020.
Uganda: Mitigating effects of closure through bank interventions
Uganda has cautiously tackled Covid-19 with President Museveni receiving accolades for not registering a single death in the country. There has been a forward-looking approach to life after Covid-19 with the authorities using part of their Contingency Fund in the FY2019/20 budget to finance approximately $1.3million from the Ministry of Health Preparedness and Response Plan from January to June 2020.
The government has passed a supplementary budget of about US$80 million to support critical sectors such as health and security as well as the vulnerable population. The government has increased health spending and announced a package of measures to mitigate the social impact of the pandemic.
The Bank of Uganda (BoU) has committed more efforts to ensure the monetary sector remains active and sound. The bank has renewed the commitment to provide liquidity assistance for a period of up to one year to financial institutions that might need it. It has also announced plans to ensuring that mechanisms to minimize the likelihood of sound businesses going into insolvency due to lack of credit are in place.
The BoU is also waiving limitations on restructuring of credit facilities at financial institutions that may be at risk of going into distress. Other measures include working with mobile money providers and commercial banks to ensure they reduce charges on mobile money transactions and other digital payment charges.
Bank of Uganda has announced that it stands ready to intervene in the foreign exchange market to smooth out excess volatility of the exchange rate. Uganda secured US$491.5 million in emergency financing from the IMF on May 6, 2020 under the Rapid Credit Facility.
With the exception of Ethiopian Airlines, all African carriers have suspended their flights to various destinations in Europe and Asia, a step that has hampered the export of Uganda’s horticultural products.
Rwanda: cautious reopening
President Paul Kagame has been quoted as saying the Rwandese economy will thrive once the Covid-19 is successfully contained. A gradual easing of lockdown measures was introduced on May 4, with selected businesses allowed to resume operations while adhering to health guidelines. Domestic movement restrictions were partially relaxed but strict physical distancing measures mandated in public buses. Borders, schools, places of worship, recreation centers and bars remain closed, and travel across provinces will continue to be prohibited through June. The pandemic is expected to cause a revenue shortfall of 4 percent of GDP. The government’s Economic Recovery Plan in response to the pandemic is estimated at about 3.3 percent of GDP.
Rwanda has secured $109.4 million credit from the International Monetary Fund and some $11 million debt relief from the same institution.
The central bank of Rwanda announced liquidity support measures to support local industries for a further period of Covid-19. Some of these measures have included the extension of lending facility worth RWF50 billion (0.5 percent of GDP) available to liquidity-constrained banks for the next six months. Under this facility, banks can borrow at the policy rate and benefit from longer maturity periods.
Source: The Exchange