GEOPOLITICAL JITTERS

Shilling, markets stable amid US-Iran spat

Kenya's crude oil import bill could rise if US-Iran standoff persists

In Summary

•If tensions between the two states were to escalate on a large scale, it would pose a serious risk, as investment decisions across the globe would be delayed resulting in a sharp decline in global growth rates

•While the shilling has remained resilient for quite some time, the Kenyan currency remains vulnerable as oil imports remain our biggest expense.

The shilling coins. Photo/Elkana Jacob
The shilling coins. Photo/Elkana Jacob

The ongoing spat between Iran and the US could lead to a slowdown in diaspora remittances and foreign investments to Kenya should the geopolitical jitters persist.

Mombasa-based economist Mihr Thakar said if tensions between the two states were to escalate on a large scale, it would pose a serious risk, as investment decisions across the globe would be delayed resulting in a sharp decline in global growth rates.

“The risks to Kenya thereof are a slowdown in remittances, which have been above $200 million (Sh20 billion) in most of the last 30 months, as well as a decrease in capital inflows,” he said.

As at November Kenyans in the diaspora had sent home $2.546 billion (Sh256.4 billion), a 3.8 per cent growth from $2.453 billion (Sh.247 billion) in the same period in 2018.

On the other hand, the EY Attractiveness Survey 2019 released in September shows Kenya’s capital inflows stood at Sh207.6 billion in 2018.

The shilling has remained relatively stable following the US airstrike that killed Iran’s top military commander Qassem Suleimani, averaging at Sh100.96 against the dollar on Friday, to rise marginally to Sh100.98 on Monday and yesterday.

“The Shilling has been ‘Teflon' for quite a while now, underpinned by inward remittances and market confidence in the Central Bank,” Financial analyst Aly Khan Satchu.

This, despite Sunday's attack on the Manda Bay Airfield in Lamu County that saw one US service member and two contractors killed.

Satchu told the Star that while the shilling has remained resilient for quite some time, the Kenyan currency remains vulnerable as oil imports remain our biggest expense.

On Monday, Brent oil prices hit a four-month high of $70.73, its highest level since Houthi rebels launched a drone attack on a major Saudi oil facility in September.

“There is a 4-6 week lag before we have to cut the cheque for our oil imports and therefore, increasing oil bills will place pressure on the shilling going forward,” he said.

He added that the current levels might turn out to be the highs for the shilling this year.

This was reiterated by Thakar, who added that a surge in oil prices would be well controlled due to high US oil output and increased global reserves.

“Iran’s oil exports have been waning as sanctions bite,” Thakar said.

According to the analysts, the securities market is expected to be largely driven by the banking counters moving forward as investors capitalize on the post rate cap regime.

“Last year’s returns will be difficult to reproduce and I expect the Stock market to eke a single digit percentage gain in 2020 at best,” Satchu said.