Trump’s protectionist policies pose biggest risk to Kenya

US President Donald Trump’s protectionist economic policies pose the biggest risk to Kenya’s economy in the coming year, Central Bank of Kenya governor Patrick Njoroge has said.

Dr Njoroge said the Kenyan economy was facing more serious threats externally than locally, adding that the country would struggle to cover the export hole should the Trump administration roll back the African Growth Opportunities Act (Agoa) that has more recently given Kenya billions of shillings in export earnings.

Mr Trump’s new immigration policy that has exposed millions of undocumented immigrants — among them over 30,000 Kenyans — to the risk of deportation is seen to pose a major threat to the flow of diaspora remittances, which at $1.7 billion were the biggest source of foreign inflows into Kenya last year - ahead of tea and tourism.

“The most significant risk first relates to the new development in US political landscape, where we are very uncertain as to what is going on in terms of economic policy due to the Trump effect. If somebody tore up this agreement, a significant part our export income would vanish, not to mention the effect on the people working to produce for these exports,” said Dr Njoroge.

The US is Kenya’s third largest export market with a share of 7.1 per cent of exports, after Uganda (10.7 per cent) and the Netherlands (7.8 per cent).

Last year, Kenya exported Sh42.6 billion worth of goods to the world’s largest economy, 93 per cent of which was apparel traded under Agoa terms.

Kenya has taken out a $1.5 billion precautionary facility from the IMF in the event that the economy is beset by such shocks but the governor said this would not be sufficient to cover the magnitude of potential losses that would arise from policy changes.

“When that happens we have no recourse. This is a risk we cannot insure against, and it is why we think it is much more fundamental. The concern is not just by Kenyans, it is a genuine worldwide concern,” Dr Njoroge said adding that domestic threats to the economy such as drought can be mitigated, for example by buying more food.

READ: Trump’s administration unlikely to give African exports priority, say experts

He dismissed the threat posed by the upcoming general election, saying that it remains a cyclical event that will be outlasted by longer term economic fundamentals.

The CBK has projected that the economy will grow by 5.7 per cent this year, slowing down from 5.9 per cent in 2016. Dr Njoroge said the proposed US deregulation of its financial sector posed yet another threat to global financial markets.

The US had put in place tougher regulations in the wake of the 2008 financial crisis, which the CBK governor said are likely to be dismantled with wide-ranging consequences to economies around the world, including Kenya’s.

Mr Trump won the November 8 election on the promise of kick-starting the US economy, which he said would be through renegotiation of key trade treaties in a bid to take back manufacturing jobs that had left the US for overseas markets.

The US leader has so far offered no sign of what his policies towards Africa might be, although he has shown a willingness to back out of global trade deals, including the 12-country Trans-Pacific Partnership (TPP) trade agreement that would have covered 40 per cent of the world’s economy.

READ: Trump hands lifeline to Kenya’s US exports

UK-based Exotix Partners’ director for frontier markets equity research Hasnain Malik said Kenya has aggregate inflows from the US equivalent to 2.6 per cent of its GDP, enough to cause worry if the US turns off the trade tap.

“The impact of the Trump administration could be significantly negative for a number of frontier and small emerging markets….countries where the sum of exports to and remittances, FDI and aid from the US is above 2.5 per cent of GDP,” said Mr Malik.

Such negative US policies would worsen Kenya’s current account, which by September stood at a deficit of 5.5 per cent of GDP.

Dr Njoroge said that while the CBK expects the current account deficit to only deteriorate slightly to 5.8 per cent this year, a combination of the US policy, higher military imports and the effects of drought could push it to 6.2 per cent.

Kenya’s deficit narrowed last year due to low price of oil and lower machinery imports, combined with rising diaspora remittances and improved earnings from agricultural exports.