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November 17, 2018

Brexit will affect Kenya as UK is key foreign investor

The EU and Britain's flags.Photo/Courtesy
The EU and Britain's flags.Photo/Courtesy

The credit rating of United Kingdom is facing a downgrade following the referendum vote to exit the European Union.

While Fitch has lowered the rating from AA+ to AA, Moody’s has retained the rating of AA+ but downgraded the outlook to negative.

The most optimistic agency on the UK economy, S&P has also cut the rating by two notches from AAA to AA.

A rating downgrade means that it will cost more for the government to borrow from the international financial markets going forward.

The economic cost of Brexit is such that the UK government may need to raise taxes and cut on expenditure budget to maintain financial stability.

The consequence of this is a slowdown in the country's economy, at least in the medium term.

The depreciation of the pound and the fall in share prices of UK companies is a clear signal the exit is an economic shock for which the possibility of a recession may not be too far-fetched.

That there is a 'new-UK' post Brexit is not in doubt and whether it will be better for it in the long term is a wait-and-see situation.

The shock will no doubt be felt locally, in view of the particularly strong economic and historical links that Kenya has with the UK.

Kenya is a favourite destination for UK investors. The UK is perhaps the largest foreign investor in Kenya with more than 100 investment companies based in Kenya, valued at more than £2 billion.

British firms dominate the listings at the Nairobi Securities Exchange and more than 10 FTSE 100 companies have a presence in Kenya.

They are also some of the most profitable, and make up five of the top taxpayers, including Safaricom.

It is also the largest source market for Kenya’s tourism, with more than 200,000 Britons visiting Kenya yearly. Tourism and foreign direct investment are therefore two key growth areas for Kenya’s economy that are vulnerable to Brexit.

The UK is in the top five largest exports destination for Kenyan goods consuming almost 8.5 per cent of the total exports.

It has perhaps the most balanced trade with Kenya because trade between the two countries is not heavily balanced in favour of either party.

That said, the long economic and historical ties between Kenya and the UK will cushion Kenya against any severe adverse effects.

Nonetheless, the immediate and medium term effects need close monitoring as the UK prioritises its internal affairs.

Karen Kandie is a financial and risk consultant at First Trident. [email protected]

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