Why Kenya will be hit hard if Britain leaves Eurozone

A worker at the Maridadi flower company in Naivasha. FILE PHOTO | SIMON MAINA

What you need to know:

  • Dr Njoroge said that uncertainties in the global financial markets have increased due to risks posed by slower growth in China and the timing of the US Fed’s next increase in interest rates.
  • “The growth outlook for Kenya’s main trading partners in the region remains strong, suggesting better prospects for exports performance,” Dr Njoroge said.

If the British vote to quit the European Union on Thursday, the consequences would reverberate right into the doorstep of local horticultural farmers. The local financial markets would also shake from the tremors of the drastic move.

Institute of Economic Affairs (IEA) CEO Kwame Owino says Kenya cannot ignore the vote given how deeply integrated the global economy is.

Kenya is also the biggest trading partner with the British in East Africa earning Sh40.6 billion last year, according to Kenya National Bureau of Statistics data.

The 2015 Economic Survey shows that United Kingdom was the second biggest export market for Kenya in Europe behind the Netherlands.

Analysts warn that while trade will not be the biggest sector to be hit by British withdrawal, horticulture especially cut flowers, will bear the brunt.

“Kenya exports to Britain are more than Uganda and Tanzania so they will definitely feel the pinch in terms of delays and drop in the pound’s value if they vote to leave,” said Mr Jibran Qureishi, an economist at CfC Stanbic Bank.

Mr Owino said those opposed to Brexit have also warned that the move will plunge Britain into a recession. If this turns out to be true, then trade volumes between Kenya and the country will be badly affected.

If Britain votes to leave Europe, it is likely that there would also initially be a sharp fall in the pound, with analysts at HSBC forecasting that sterling could lose up to 20 per cent of its value against the dollar if the public votes for Brexit.

“The British pound has been weakening against the euro and the dollar but Kenya has not shown any strong movement, so maybe the effect here would be less,” Mr Owino said.

In the event of a Brexit, Britain would also have to develop new trade agreements with Kenya, Europe and the rest of the world.

IEA says that this will make exporting to the European markets difficult as farmers may face different sets of regulations and standards to meet.

“This will impose a burden on all countries who have traditionally depended on same standards and regulations under a common market,” Mr Owino said.

Economist Qureishi however said the biggest impact will be the global risk-averseness and a slowdown that could push the global economy to the brink of a recession.

“A risk-off environments will see global stocks market scaling off and the first markets to suffer will be emerging markets as witnessed in the better part of 2015,” he said.

Uncertainties

“The impact will be a stock market sell-off and panic around the world, that’s the last thing we need.”

The Central Bank of Kenya’s monetary policy team led by the Governor, Dr Patrick Njoroge said Britain’s exit from the Eurozone will add onto piling uncertainties in the global market that may spill into Kenya.

Dr Njoroge said that uncertainties in the global financial markets have increased due to risks posed by slower growth in China and the timing of the US Fed’s next increase in interest rates.

Emerging markets however got a reprieve last week after the US Federal Bank held back from increasing the benchmark lending rate over fears of the British exit.

The Central Bank’s policy team said that the outlook of global economy has deteriorated in recent months due to weak growth prospects in advanced and emerging market economies although Kenya was insulated by regional trade and diversified trade partners.

“The growth outlook for Kenya’s main trading partners in the region remains strong, suggesting better prospects for exports performance,” Dr Njoroge said.

With the vote coming in days, a poll found that a vote to exit Europe was a huge likelihood with supporters of Brexit leading by 7 per cent.

A TNS poll found that among those likely to vote, some 47 per cent backed Brexit with 40 per cent in favour of Remain and 13 per cent undecided.

Among all respondents, the split was 35 per cent for Leave, 33 per cent for Remain, 22 per cent undecided and 11 per cent saying they would not vote.

“There’s a seven per cent of what we see as the swing vote that will determine the final outcome, we are banking on a ‘remain’ vote although we think it will be a very close call,” Mr Qureishi said.

Mr Owino said that if the UK leaves, then Kenya and fellow African commonwealth nations will lose a diplomatic intercessor what will become a 27 member European club.