In December 2013, the US Federal Reserve began to taper its quantitative easing (QE) programme and made a final $15 billion (Sh1.4 trillion) purchase in October 2014. Africa benefited from the QE—the purchase of securities from the market to lower interest rates and boost money supply—as cash was being pumped into the US and the global economy. And because yields in Europe and North America were not attractive, yield hunters with excess liquidity turned to countries such as Kenya. One can argue that is the reason behind Kenya’s Eurobond oversubscription.
By Anzetse Were
Although Kenya benefited from QE, we did not strategise on leveraging QE largely because it had never occurred before. As a result, Kenya could not plan how to optimally tap into American QE. This is not the case with the European Central Bank (ECB) QE, which launched its 60 billion euro-a-month ($66.3 billion) bond-buying QE programme in March this year.
It is important that Kenya learns from the experience of the American QE to effectively leverage (or not) the European QE. There are both pros and cons with the QE which is expected to seed inflationary pressure, weaken the euro and increase global liquidity. The pros include that excess liquidity will be looking for attractive yields again and since European markets are still depressed, emerging markets such as Kenya with relatively healthy yields will remain attractive. Analysts argue that Europe QE has brought a new round of fresh financial market liquidity to Africa.
However, the attractiveness of Africa and specifically Kenya will be hampered by the recovery of the US economy which will continue to become more attractive to investors. Kenya is still attractive, but the recovery of the US means Kenyan markets are not as attractive as they were when the momentum in the US economy was downward.
The cons, as some analysts argue, is that European yields are going to rise as a result of Europe QE. It has been noted that there had been an upward movement in US Treasury yields when QE started in the US, thus the same is expected in the euro zone. This means that countries such as Kenya will become even less attractive for yield hunters who will have both recovering US and European economies presenting better yields. We have to present significantly attractive yields to attract investment.
An ongoing issue we need be aware as Europe QE proceeds is that because Kenya was seen as an attractive investment target during American QE, the government was able to attract investment and as a result the country has higher than usual dollar denominated debt.This poses two problems for Kenya that may be mimicked with Europe QE. The first issue is that Kenya is an import economy and typically has to sell shillings to buy dollars in order to make payments. This would not be such a serious issue if the shilling was strong, and this leads to the second issue.
Recently, the shilling has depreciated against the dollar to the extent that the Central Bank of Kenya (CBK) raised interest rates to try and stem its free-fall. A weak shilling means repayments to dollar-denominated debt will be expensive for government. Thus, if more yield hunters come to Kenya as a result of Europe QE, Kenya may take on more foreign-denominated debt that will be expensive to repay due to a weak shilling.
Thus the combination of being an import economy coupled with a weak and depreciating shilling may halt taking on more foreign-denominated debt.
Europe QE is a mixed bag for Kenya and the strategy should reflect this. Already, the country is relying on robust economic growth (rather than raising exports, for example) to meet debt repayments. With robust growth Kenya can afford to tap into ECB QE liquidity. But without growth and with more debt, Kenya may find itself in a position where debt repayment is impossible.
Anzetse Were is a development economist based in Kenya. She is a weekly columnist for the Business Daily. Twitter:@anzetse, email: [email protected]
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