Business Daily (Nairobi)
Morris Aron
26 May 2008
Nairobi — Investors should brace themselves for another round of rising commodity prices, increased wage demands and reduced profits in 2008, a mid-year investment review by ICEA Asset Managers has reported.
The report says inflation will be harder to tame than previously thought. The gloomy outlook, according to the review, places monetary policy makers in a catch-22 situation, with no clear cut measures to address inflation not backed by growth, a concept known as stagflation.
"Inflation is rising sharply as interest rates remain substantially negative in real terms. CBK has decided not to change the key Central Bank Rate and has maintained it at 8.75 per cent, thus signalling that it believes, despite runaway inflation, a rise in interest rates is not appropriate in a rapidly slowing economy," ICEA says.
The report is authored by the ICEA Asset Managers managing director, Paul Sigsworth, and four other analysts with the company.
In such circumstances policies usually used to stimulate economic growth, such as cutting interest rates, would further increase inflation. On the other hand policies usually employed to arrest inflation, such as tightening monetary policy and increasing interest rates, would shrink further an already declining economy.
Stagflation is a term used to describe a period of general rise in commodity prices combined with a general slow down in economic growth of a country.
Inflation rose to 26.6 per cent while money supply grew to a 23 per cent year-on-year record in February.
Food prices have also risen substantially in the last couple of months with the cost of basic commodities such as maize and wheat floor soaring, pushing many individuals into the poverty bracket.
The half- year review of the economy echoes sentiments by the Planning ministry which recently downgraded economic growth to 4 per cent up from a projected 6 to 7 per cent earlier predicted.
Rising global fuel prices, the after effects of the post electoral chaos and the decision by Central Bank of Kenya not to raise the central bank rate to cut the rising prices of goods and services are some of the key areas that need to be tackled.
"We expect the next six months to be a challenging period, set against a backdrop of a slowing global economy, sharply higher oil prices, a fragile political accord at home and sub-standard rains. We think that the lag effect of all of this will be felt in the months ahead as consumer spending contracts and inflation rises towards a peak later in the year."
The asset managers are now calling on the Government to address supply side constraints by ensuring that food is more readily available. It is also advocating a set of incentives to allow for importation of agricultural goods.
The investment review also proposes medium term strategies such as providing farmers with affordable inputs, adequate finance and viable price structures.
"A national policy of reducing reliance on rainfall by increasing water storage and irrigation capacity will help to moderate the huge volatility in food prices arising from seasonal factors."
On stock trading, the report indicates that the Nairobi Stock Exchange may rebound once refunds from Safaricom IPO filter back to the market but 'subdued fundamentals will not support a sustained rally. Following the development, long term investors will have to be patient and wait for a recovery in 2009 before anticipating real growth in portfolios.
In the meantime, offshore investment remain one of the viable investment options as individuals take advantage of the strong Shilling to take position in underpriced global markets.
According to the report, prospects for the Shilling look good in the short term but some downward pressure may emerge later in the year as the economy sheds off the effects of stagflation.
'The CBK has sufficient foreign exchange reserves to maintain a relatively stable market and the influx of foreign portfolio funds into Safaricom should ensure continuing currency support in the short term,' the review notes.
In these hard economic times, the only combat strategy is to take a defensive stance and also use the opportunity to accumulate quality assets in anticipation of a recovery in 2009, the review report states.
The report proposes locking in yield on bonds and minimizing exposure to the money market as the best way to preserve portfolio yields as investors wait for the economy to pick up in 2009.
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