COVID-19: Is this Kenya’s perfect storm?

The Coronavirus is bludgeoning the global economy with a sledge hammer ─ currencies are buckling under the pressure of subdued exports; equity markets are sputtering and governments are falling over themselves hard pressed to throw lifelines at investors who are, by now, either hanging onto modest gains or bleeding losses in an increasingly uncertain environment (perhaps with the exception of hedge funds…pun intended).

Across the globe, Central Banks are aggressively unwinding into a more dovish stance in a bid to turbo charge economies whose growth momentum is fast waning in the face of lock downs and disrupted supply chains. In Africa, the Reserve Bank of South Africa slashed its benchmark rate by 100.0 basis points on March 19th; the Central Bank of Egypt slashed its benchmark rate by 300.0 basis points; the Bank of Ghana cut its benchmark rate to an eight year low in its March 2020 meeting. The last time we witnessed such a seemingly coordinated action from Central Banks was during the 2014 – 2016 commodity price rout which precipitated a dreadful mess of things. The Central Bank of Kenya is set to have its second monetary policy committee meeting of 2020 next week on March 23rd, a meeting which I’d imagine is bound to present a head scratcher as the situation at hand defies any quick fixes. Two reasons explain my thinking.

First, the Wednesday 18th, 2020 briefing at State House Nairobi was, at its best, a thinly detailed moral suasion from the state to have banks to go back to the negotiating table with borrowers and extend more favourable loan servicing terms. For an economy that was pregnant with expectation of a blockbuster fiscal adjustment announcement and for citizens who are reading every day of a barrage of stimulus packages being deployed elsewhere across the globe, this felt like an attempt to arrest the COVID-19 flood with paper dykes, it was an anti-climax. You, however, have to understand where the government is coming from. Kenya’s fiscal space is already tight and leaves minimal, if any, room for doling out pro-enterprise cushions such as tax breaks and pro-poor safety nets such as increased cash transfers and nudged up subsidies. Supplementary Budget I of FY2019/20 revised revenue targets downwards by Kes 100.0 billion (about US$ 948.9 million) in an attempt by the state to tighten its belt and scrape through all corners for every dime it can save. What’s more, in its report tabled before the National Assembly on March 4th, 2020, the Budget and Appropriations Committee proposed that any pending bill that is in excess of Kes 500.0 million (about US$ 4.73 million) be settled through establishment of long-term debt instruments including debt swaps for inter-government bills. It is a proposal which hides in plain sight the degree to which the government is at pains to manage its cash-flow position in the face of a heap of arrears towering at Kes 4.77 billion (about US$ 45.15 million) as at the close of 2019. So if Kenyans were hoping that the fiscal policy could be used to put foam on the runway in the face of elevated risks, there is little to suggest the economy has such ammunition.

Now to my second reason why next week’s monetary policy committee meeting will be interesting. For many, a rate cut would be a no brainer at this point. There’s enough reason to suggest the economy needs a shot in the arm at this point. Two things make this potentially complicated. One, there is no doubt that the risk environment has deteriorated and, by default, credit pricing (especially in a post-rate cap environment) is bound to be a lot more pegged on an abundance of caution stance than it has been in the recent past. So even if the Central Bank furthered its dovish adjustments in the next meeting, the question of transmission to the real economy is where the rubber will meet the road. Banks, at this point, must be recalibrating their appetite for risk given the implications COVID-19 portends as far as asset quality is concerned. An interesting metric to look at when this overcast clears will be how credit growth to the private sector will have evolved. Two, banks have already undertaken to extend an ‘olive branch’ to debtors and revisit existing terms in light of the COVID-19 shock. The State House briefing between the Presidency, the Central Bank of Kenya and the Kenya Bankers Association, however, was audibly mum about how new borrowers would be handled in the present state of affairs. With the likelihood that banks’ antennae is now high up regarding risky investments, would it then be feasible to set up a fund to extend ‘patient capital’ to these high risk businesses? In its absence, would the state be ready to provide a guarantee facility which enhances the investibility of high risk businesses during this period? Of course this then ties back to the question of the available fiscal space and how much bandwidth public coffers can allow.

Finally, and depending on the dent the economy suffers from COVID-19, is this an opportunity for Kenya to engage bilateral and multi-lateral lenders on debt servicing terms. National Treasury data shows that in FY2018/19, the country part with Kes 266.2 billion (about US$ 2.51 billion) in external principal debt repayment alone. Of this amount, Kes 49.0 billion (about US$ 462.68 million) was attributable to bilateral and multilateral sources. Perhaps engaging this two would be a matter to consider depending on the scale of impact COVID-19 inflicts on the economy. No offence meant, the saying goes there are no atheists in fox holes...Maybe we are now in a foxhole and there are no options off the table.