Tuesday, November 3, 2009

High tea, coffee prices offer hope for Kenya’s recovery

By BD Team - Business Daily Africa - Tuesday, November 3 2009 at 00:00

A strong rally in commodity prices could help put Kenya’s economy back on the growth path, analysts said even as they warned of persistent risk of imported inflation from the steady surge in the prices of key imports such as oil.

Kenya’s fortunes in the commodities market is particularly tied to the continued strengthening of coffee and tea price that is helping the shilling claw back part of the ground it has ceded to major world currencies in recent months.

That should reduce the country’s external debt burden and bring down the cost of imported intermediate goods that are critical to growth of industrial output.

Analysts are however concerned that the continuing surge in crude oil prices may exert a negative impact on the green shoots of growth as the rise in prices of key food imports such as wheat and rice pile upward pressure on headline inflation.

“Oil prices should be particularly watched because it is a key input into the economy and has exhibited a sticky price structure — quicker to track prices higher and slow to track them lower leaving it with a heavy skew,” said Aly Khan Sachu, an investment advisor who runs Rich Management.

Last week, an IMF mission that visited Nairobi to assess the state of the economy said it expected gradual improvement but warned of persistent risks.

“In the light of the risks facing the economy, macroeconomic management should remain geared towards achieving the inflation objective and promoting fiscal sustainability,” Michel Atingi-Ego, a senior advisor in the African Department of the International Monetary Fund (IMF) said.

The IMF put its best case scenario for Kenya’s growth at 2.7 per cent in 2009 with the possibility of rising to four per cent in 2010.

Expectation of improved performance is pegged on recent reports of recovery in Kenya’s trading partners such as US, Germany and Japan while the caution is hinged on the continued economic contraction in key markets such as UK.

In recent months, the crude oil price has risen steadily to a 13-month high of between $75 and $80 as demand has risen with signals of global economic recovery.

That price is important because oil accounts for 22 per cent of the value of Kenya’s annual imports.

Some analysts have warned that the ongoing economic recovery will pile pressure on the cost of imported goods as demand for freight surges piling pressure on the cost of shipping that dropped nearly to a 20-year low in the wake of global economic recession late last year.

Prices of key food imports such as wheat and rice are also expected to rise steeply in the coming months as consumers claw back part of the purchasing power they lost with the onset of recession adding to the imports bill burden that peaked in the third quarter of last year as commodity prices peaked to 30-year highs and oil rose to an all-time high of $147 per barrel.

Wheat futures for next month’s delivery have been priced at $500 per bushel at the Chicago Board of Trade but the December 2010 deliveries have been priced at about $599 a bushel indicating a 20-per cent rise in just 12 months.

These pricing trends should be particularly critical to Kenya, which is a net importer of wheat and rice – that are only second to maize as the country’s staple foods.

Though demand for these commodities is expected to rise only marginally, a severe drought and more recently heavy flooding in key rice producing states such as China, India and Thailand has significantly cut back on the output piling upward pressure on prices.

A recent rallying in coffee prices is however expected to help Kenya smoothen out part of the new cost burden in the commodities market.

Coffee ‘C’ future is currently trading at higher than January prices and acute supply shortage in the tea markets has caused a price rally that has yielded record bonuses for farmers this year.

The US, the world’s largest economy, grew at the rate of 3.5 per cent in the third quarter – emerging from a 12-month recession that began late last year.

Analysts are still not convinced that the US economy has gained any traction (entered a sustained growth path) and therefore cannot be relied upon to offer the necessary impetus to the global economy.

Economist Nouriel Roubini, who became prominent for predicting the global credit crisis, has recently argued that even with the initial signs of growth, the US economy would remain weak and vulnerable to high commodity prices as well as high interest rates.

Mr Roubini reckons that the US economy still risks a “double-dip” recession -- a situation in which an economy slightly expands only to begin declining again.

“I am uncertain of the US economy’s ability to gain real traction. The risks of a double dip remain once stimulus spending ebbs,” said Mr Khan.

In a double-dip recession, a downturn technically comes to an end and is followed by a temporary session of growth that only gives way to another period of economic decline.

The US economy went through such a trend nearly 30 years ago as it came out of a shallow dip in early 1980 only to go into a serious decline that lasted for another one and a half years.

The US government has pumped a $787 billion stimulus into its economy that most economists say explains the current growth in output.

Analysts have however warned that a decline in the stimulus spending could see the economy fall back into a recession.

Mr Khan said that although Kenya’s and sub-Saharan Africa’s stock markets could return to a recovery mode by mid next year, he does not expect the US economy to play a role in it.

Besides, Mr Khan said that Kenyan flowers, which are mainly exported to Europe, will lag in terms of prices.

“Flowers are a luxury and – like Botswana to a degree with their diamonds – will lag and be a laggard. Tea prices I believe will remain in a higher price structure for the foreseeable future and help offset flowers.”

The UK– the third largest single market for Kenyan exports after Uganda and Tanzania – was still in recession and shrank by a margin of 0.4 per cent in the third quarter and is only expected to emerge from recession in the fourth quarter.

The decline in UK’s gross domestic product for the sixth consecutive quarter amounts to a total contraction of 5.9 per cent and is the country’s longest continuous period of output loss since 1955 when the Statistics Office began keeping records.

The eurozone – which is Kenya second largest market as a bloc after the East African Community – recorded a marginal -0.1 per cent decline in the third quarter.

Major stock markets however are seesawing as investors position themselves for the expected recovery.

Even with all the optimism, some analysts and deal makers are not convinced that a global recovery is underway and have warned investors not to take unnecessary bets in the stock market.

“Wall Street tells you it’s the beginning of a new bull market and stocks look great. Don’t believe it. The next shockwave is about to hit,” warned Doug Fabian, a US market analyst in his regular e-mailed commentary on the surge in stocks.

Mr Vincent Ntalami, an investment manager at AIG Investments, was however more optimistic in his analysis last week.

“The global economic recovery finally seems to be taking root following a number of measures that various governments have taken to support their economies.”

The International Monetary Fund (IMF) has recently said that the US is expected to grow 1.5 per cent in the year to October 2010 while Eurozone and Japan will grow 0.3 and 1.7 per cent respectively.