This post will just discuss a few issues that have been happening in Kenya; regards to economics of course.
- Exchange Rate - This week we have been treated to a strengthening shilling. The local unit actually closed the week at a three-month low of 92.00/40 to the dollar. It seems that the unit is regaining its strength and this should be good for inflation in the country. However, import bills usually come during the end of the month and we are likely to see the shilling lose some ground towards the end of the month and probably come in at the 95/97 mark. I think we are past the 100 level. Going forward, I expect the shilling to touch the 85 mark during the first quarter of next year. It is too expensive to take positions against the shilling when T-bill rates are at 16%.
- Interest Rates - This is the new issue for Kenyans. A month ago all the attention was on exchange rates and inflation and now the issue is solely on interest rates. It was insightful to see Equity Bank raise their rates to 25%. In my view Equity Bank's rate hike will have the biggest effect as they have the highest number of depositors. Higher interest rates are "required" in times of high inflation so as to deal with the inflation. It is based on the classical relationship between inflation and economic growth. Milton Friedman, the father of modern monetary economics commented that "inflation is everywhere a money supply issue". Therefore to deal with high inflation, the regulators have to reduce the money supply. Be that as it may, it is arguable as to whether our inflation was a money supply issue or purely an issue of our political economy. When we have artificial inflation due to poor food distribution and a weak energy infrastructure, all because of our political economy, then the argument for money driven inflation is non-existent. This has been my argument throughout. Nonetheless, we are likely to see growth stall and I cant wait for end year GDP growth figures. I optimistically expect them to come in at 3%- 3.5%. People will suffer.
- Euro-zone issues - Europeans are losing their "moral" authority over Africans. Interestingly, the politics that would prevail in Africa is taking centre stage in Europe. By this I mean, procrastination, blame games and nobody willing to take the bull by the horn. Italians and Greeks have decided to appoint technocrats to lead their respective countries to reform. The Financial Times had an interesting name for these technocrats; "vulcans"; referring to the creatures from Star Wars who were characterised by reason and a lack of emotion. Indeed, it could be useful to work with vulcans, but all over the world, politicians are the only people who can effect unpopular decisions. Europe is faced with huge debt and an unwillingness to pick up that tab. In my view, Germany, the surplus nation must pick up that tab for the future of Europe and the rest of the world. Note that 45% of our current account is financed by Europe and 33% of our exports are to Europe.
- Syokimau - We live in an interesting country. Technically, the KAA have a very strong argument for those demolitions, but why now?. KAA must have known all along that construction was being done on their land. Syokimau to many real estate dealers has been the place to be. While all this was going on, where was the KAA?. Kenya has to grow up. Interestingly, the NSE is talking up futures exchanges, EFT's and options. If you cant enforce property contracts, how on earth will you enforce promises?.
- Election Date - I was expecting our celebrity Chief Justice Mr. Mutunga to finally tell Kenyans when they are expected to vote. Unfortunately we got a purely legal argument suggesting that this decision lies within the remit of the High Court. I guess the buck has now been passed on to the high court. My advice to the High Court is simple, a lot of money is being held up from its efficient allocation due to uncertainty over the election date. Sort that out and let us all move on.
Enjoy your Sunday.
