Firms bank on stable shilling to increase earnings in 2016

Last year was not an easy year for both traders and consumers. The weak shilling which drove up inflation was the main reason businesses faced a hard time.

The Kenya National Bureau of Statistics (KNBS) stated that by December, the overall inflation rate stood at 8.01 per cent. The general rate of commodity prices — food and non-alcoholic drinks — increased by 1.23 per cent as an increase in excise duty also impacted adversely on goods.

So how is the outlook in 2016? Traders and consumers are hoping for better days this year, banking on the expectation that the rate of inflation will ease and lead either to a reduction or stability in commodity prices.

Analysts too are seeing better times ahead despite the Excise Duty Act which came into effect on December 1.

“The cost of commodities such as maize flour and sugar may go down in the coming months because of very good harvest after the long rains. Prices of cooking oil, wheat and bread may however remain constant,” said economic analyst Mr Karithi Murimi.

The shilling is already on the recovery path having shown stability against the dollar beginning Tuesday last week. This, analysts say is a positive sign for traders and consumers since the local purchasing power will begin to strengthen.

INCREASED DEMAND

“On Tuesday last week, the Central Bank of Kenya showed the shilling at 102.15 to the dollar compared to Monday’s close of 102.20. With more influence, the shilling is likely to make a comeback,” stated Mr Eric Musau, senior research analyst at Standard Investment Bank. “Traders said they expect the shilling to trade at 102.20/102.35 range against the dollar in the coming days.”

Mr Musau noted that the strengthening of the shilling against the dollar is likely to lead to an increase in the demand for commodities, giving small traders and corporates a shot in the arm.
The brightness of the business prospects are however dampened by a slowdown in influential global economies. Kenya has great connections with China, which is currently experiencing a downturn.

“Commodity prices are generally declining globally, demand is not so strong, the global economy has been weak. China and Europe have weak markets. Countries that rely on these markets will also suffer demand setbacks even as internal systems show recovery,” Mr Musau added.

Wakulima Traders Association Chairman Cyrus Kaguta told Money that prices of basic commodities have been fluctuating in the past year. He however expects a better year for traders in 2016.

The association represents traders at Nairobi’s Wakulima, the biggest market for groceries in the country.

The always vibrant market is currently experiencing muted activity. This has been attributed to the festive season in which consumers spent heavily. Prices of commodities also shot up in December as traders cashed in on the high demand.

Mr Kaguta said the prices normally fluctuate depending on the availability of goods and the cost of transport.

The KNBS states that besides high food prices, Kenyans in December dug deeper into their pockets to pay more for health services as cost rose by five per cent. Furnishings, the prices of household equipment and routine domestic maintenance also recorded a five per cent rise last month.

Kenyan traders are also betting on lower global oil prices to keep the costs of imported manufactured goods stable or even drive them lower.

The World Bank has stated that the low global fuel prices are a factor to watch this year as they will play a big role in lowering inflation, hence supporting the shilling while cushioning consumers from a rise in commodity prices.

CUT IMPORT BILL

Statistics from the Ministry of Energy indicate that cheap oil helped cut Kenya’s import bill by 4.4 per cent to Sh1.2 trillion between January and October. Because Kenya is a net importer of oil, low fuel prices benefit the country because less money is spent on imports. This narrows the current account deficit.

In the past five years, Kenya’s current account deficit has risen to stand at 9.2 per cent of the gross domestic product (GDP) as at last year, from five per cent in 2010. This has raised concerns among the World Bank and International Monitory Fund.

“Forecasts show oil prices have not hit the bottom and could plunge some more or take several years to recover to mid-last year’s level of $115 (Sh11,730) per barrel,” said Mr Aly Khan Satchu, CEO of data management firm Rich Management.

Mr Satchu reckons that this will be a plus for Kenya’s economy as it will cushion the shilling against extreme volatility from import pressures and a stronger US dollar. 
Local businesses have also in the past benefited from a high number of tourists in the country.

Traders, especially those dealing with curios, were hard hit when travel advisories by the UK and US on Kenya, restricted visits to the country.

However, this year, the business environment looks promising to traders. To begin with, Kenya has been named one of the world’s top destinations to visit in 2016. A United Kingdom travel publication, Rough Guides, ranked Kenya ninth globally and first in Africa largely due to its world-famous national parks, white sand beaches and the rich culture.

Kenya has been on rigorous campaigns internationally to boost tourist numbers in the sector which has been performing dismally from 2013.

Foreign Affairs and International Trade Cabinet Secretary Amina Mohammed is confident tourism will pick up this year.

“International conferences held in Kenya that helped boost visitations have greatly impacted on the foreign direct inflows, this should reflect as the year progresses,” she said recently.
According to the KNBS, the inflation at 8.01 per cent in December 2015 was a huge increase from 6 per cent in December 2014.

ECONOMY SLUGISH

The excise duty introduced last month is highly to blame for the high cost of living experienced in December. Traders say it was wrong for the government to implement the law at a time when the economy was sluggish mainly due to a weak shilling.

The KNBS said that “between November and December 2015, Food and Non-Alcoholic Drinks’ Index increased by 1.23 per cent. This aggregate increase in the food index generally resulted from increases in prices of several food items which outweighed the decreases.”

Statistics by the KNBS also state that the rise in excise duty significantly pushed up prices of beer and cigarettes.

“Consequently, the Alcoholic Beverages, Tobacco & Narcotics index recorded an increase of 11.46 per cent compared to the previous month,” the statistics indicate.

Sectors such as housing, water, electricity, gas and other fuels’ index, increased by 0.55 per cent.
This was mainly due to upswing in house rents, charcoal and water costs in December compared to November 2015.

Analysts note that despite the weakening shilling last year, soft commodities like tea and coffee fared well in the global market. Prices of commodities priced in dollars remained quite robust and this was a plus for the country.

With a decline in global basic commodity prices, it is expected that the rate of inflation will further drop in 2016.