The US Federal Reserve rate rise is likely to significantly affect Kenya’s economy according to ICAEW’s latest Economic Insight report, which ranks Kenya as the 6th most vulnerable economy in Africa.
ICAEW (the Institute of Chartered Accountants in England and Wales) has released the latest Economic Insight: Africa Q4 2015, which examines the impact of key economic events of 2015 on the future outlook of African development. In this report, ICAEW determines the risk levels of various economies within the continent in relation to the rise in US Federal Reserve rate.
The ‘vulnerability index’ focuses on three measures, namely; a country’s current account balance, its growth in private sector credit, as well as its ratio of foreign debt to reserves. These indicators are scaled, harmonised and added together to provide an overall vulnerability score for each economy. The higher the score, the more vulnerable the economy to the rise in the US Federal Reserve rate.
According to the results, Ghana emerges as the weakest economy with a score of 273 out of 300. This is due to a very high current account deficit as well as a history of rapid credit growth. Seychelles came in at a close second place followed by Guinea, Tanzania and DRC. Kenya ranked on a 6th position in terms of vulnerability scoring just under 250 points out of 300.
This can be attributed to the nation’s current account deficit, which stands at 10.4%. At the other end of the spectrum, Botswana, Gabon, Swaziland and Nigeria all have current account surpluses meaning their economies are at a lesser risk of suffering when imports become more expensive in the face of a stronger dollar.
Growth in private sector credit also presents a risk, as it indicates a dependence on debt to drive growth. Within the major African economies, Ghana tops the list, with a private sector credit growth rate of 18.4% followed closely by Kenya with a rate of 17.8% between 2013 and 2015. Botswana and Mauritius have seen a growth of under 10% while other economies such as Zimbabwe have seen credit decline by 24% over the same period.
While the index provides insights into the vulnerability of emerging markets in relation to a US Federal Reserve rate hike, it is not exhaustive.
Mr Michael Armstrong, Regional Director, ICAEW Middle East, Africa and South Asia, said: “Of course, there are many factors to consider, like financial openness and the level of integration into the world economy, which all affect the level of vulnerability to global economic shocks. Clearly, if policy conclusions are going to be drawn, they should be done following a country-by-country analysis. However, this index does show a snapshot of how resilient the various African economies are on some important metrics. Kenya would be well placed to anticipate the possible effects of US monetary policy when planning for economic growth.”
Despite Kenya’s ranking, the country continues to enjoy strong economic growth prospects estimated at close to 5.5% over the next three years. However, several risks remain such as tightening monetary policy and unfavourable weather conditions expected for the end of this year.