Will Kenya's oil price boost be lost to the coronavirus pandemic?

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By:
Kanika Saigal
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The fall in the oil price will benefit oil-importing countries such as Kenya, but the benefits may be lost because of the African continent's over-reliance on trade with China.

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Kenya's Energy and Petroleum Regulatory Authority (EPRA) reduced petrol prices at the pump by KSh2 ($0.019) per litre on Friday – the first reduction in Kenya this year – after the oil price crash slashed import costs on the commodity.

Diesel prices also fell around KSh3 and kerosene by approximately KSh7 a litre as authorities passed on price cuts to the consumer.

"Lower oil prices are certainly a net positive for the Kenyan economy and, with prices so low, we do expect to see an improvement in the trade deficit," says Murega Mungai, who manages the FX trading desk for AZA, a non-bank currency broker.

"We also expect the local currency to strengthen in the medium term from the current 103.50 levels as there will be less pressure on the shilling from oil purchases. We see inflation levels coming down from the current 6.37%, considering the importance of oil to major sectors of production," he says.

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Yvonne Mhango, Renaissance Capital

Kenya's trade deficit shrank by KSh15.55 billion to KSh1.05 trillion in the 11 months through to November 2019, according to data from the Kenya National Bureau of Statistics (KNBS) – the first drop since 2016.

"The lower oil price is positive for inflation, and for the current account," says Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital.

According to Kenya's central bank, the country's current account deficit fell from 5% to 4.6% of GDP in 2019. Kenya's GDP was $89 billion in 2018 and was projected to grow by 5.7% in 2019, according to the World Bank.

Reliance on China

The benefits may be short lived, however, given reduced bilateral trade with China and the hit to tourism following the coronavirus outbreak.

According to an economic survey published by KNBS in August 2019, tourism revenue increased by 31.3% to KSh157.4 billion in 2018. And while the impact of the coronavirus pandemic continues to play out, gains made by the tourism industry over the last two years may be wiped out, given border closures and flight cancellations. 

Kenya Airways estimates that it could lose up to KSh800 million a month.

“Lower oil prices will relieve pressure on the current account, but this could be more than offset by the hit to tourism, lower remittances and capital flows related to the coronavirus and global market sell-off," says Hasnain Malik, head of global equity strategy at research house Tellimer.

"Kenya – and the region – is overly reliant on China for a number of imports, which have more or less been cut off since the drastic measures to stem the spread of the virus have been put into place," says George Bodo, chief executive of Callstreet Research and Analytics, based in Nairobi. 

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George Bodo, Callstreet

A number of cargo ships from China are unable to dock in Mombasa, Kenya's main port, and have been forced to turn around. Although the precise reason for this has not been confirmed, the assumption is that Kenya is worried about virus transmission.

This may also have an impact on other east African countries, including Uganda, South Sudan and Rwanda, which also rely heavily on Kenya's port in Mombasa.

China is Kenya's biggest trading partner, accounting for  22.6% of all goods coming into the country, worth around KSh380 billion in 2018, according to the KNBS. In contrast, Kenya accounted for just KSh11 billion of imports to China.

China's main exports to Kenya include electronics, motorcycles, motor vehicles spare parts, furniture and clothes, according to TradeMark East Africa, a not-for-profit Aid for Trade organization. 

Exports from China to Kenya decreased slightly in 2018, from KSh390 billion in 2017, due in part to reduced need for machinery and parts following development of Kenya's standard gauge railway.

"While the trade imbalance might move in Kenya's favour, inflation will creep up and prices across the board will rise because of Kenya's over-reliance on Chinese imports," says Bodo.

Two large retailers in Kenya, Tuskys and Naivis, have already warned that prices for some of their goods – including clothing, furniture, mobile phones, TVs and fridges – will rise in March as the coronavirus pandemic impacts their supply chains. 

Local media reports also claim that these retailers are worried that they may even run out of certain goods from China in the next three weeks.

"Any benefits felt from the fall in the oil price will soon be lost – a concern not just for Kenya but for any oil importers in Africa with an over-reliance on trade with China," says Bodo.

Inflation

But the main industries and products that have the largest impact on inflation in Kenya are not imported from China, explains Mhango at Renaissance Capital.

"Food and transport have the most material impact on inflation in Kenya, and given that food is sourced locally and regionally, and transport costs are likely to fall due to changes in the oil price, I do not believe prices across the board will rise in Kenya," she says.

Moreover, Kenya is undergoing a period of fiscal consolidation, explains Mhango. Kenya's debt-to-GDP ratio is 62% – one of the highest in sub-Saharan Africa.

"It would be different if Kenya was actively looking to raise debt from the capital markets to fund its budget – as is the case in Nigeria – as then they would need to source debt from another channel," says Mhango.

"But this isn't the case for Kenya. Indeed, within this current context, Kenya may even be able to keep debt-to-GDP from rising."