Fuel Prices-Kenya - Fund managers Pine Bridge Investments yesterday warned that the Kenya Shilling could slide to a historic all-time low of Sh90 to the dollar if the Kenyan economy continues to be exposed to rising global oil prices and political altercations. Pine Bridge, formerly AIG Investments added that it had revised its outlook for Kenya's economic growth in 2011 downward to below the 5.0 per cent projected for year 2010 as rising inflation; a weakening shilling and political squabbles dampen investor sentiment.'As a result of these three sizeable challenges, most of last year's optimism appears to be waning due to a number of headwinds in the horizon as mentioned,' David Achungo, an investment manager with Pine Bridge said.

The firm was presenting its quarterly briefing on the economy and financial markets in Nairobi yesterday. 'Inflationary pressures are increasing; local currency weakening and interest rates are on the rise while the political environment has dampened.'

Achungo painted a worsening outlook for inflation which rose to 9.19 per cent in the month of March, the highest it has been in over a year.As a result of expected poor rains, food and energy prices are likely to be hit both because of lower farm output and an over reliance on thermal power as hydro power reduces.

Transport which also relies on fuel is also expected to see higher prices, while a weak shilling means the country risks importing inflation.'That makes all the more important for policymakers to bring inflation under control as quickly as possible,' Achungo said adding that tighter policies on lending could be needed.

More ominously, the fund manager said the Kenya Shilling has fallen 5.5 per cent against the green back this year and could depreciate still further as demand for hard currency to purchase fuel and other goods increases.'Going forward, the shilling does not appear well supported due to the widening current account deficit, low interest rates, rising oil prices and possible food deficit in view of the expected drought,' Achungo said.'Despite strong Diaspora remittances, should the oil price move higher and political outlook deteriorates, the Shilling could slide beyond the lowest levels already traded in the last three months to the US Dollar.'

Edward Gitahi, a senior investment manager with the firm added that interest rates may rise as government scrambles to raise Sh40billion of the Sh125billion it has budgeted to raise this financial year to fund its deficit. This coupled with rising inflation is likely to see investors demand higher returns from government securities.

James Mbugua

Nairobi Star/07/04/2011