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GLOBAL ECONOMIC CRISIS:
FUTURE PREPAREDNESS
Njuguna Ndung’u
Governor,
Central Bank of Kenya
July 30, 2009
Three Responses to the Main
Issue:
Continue the development path: defend and ring-fence
development spending to support capacity for future
growth
Build stronger and stronger banks – through re-
capitalizing, consolidation and mergers to cover the
EAC region
Regulators should talk and coordinate with each other:
have a coordinating platform, build supervisory
capacity in the region and more strongly build the
information capital to be used by credit reference
bureaus in the region
2
Economic Performance and Forecasts
for OECD and Emerging Economies
Country Growth of Gross Domestic Product
2009Q1-Actual 2009-forecast 2010-forecast
USA -2.5 -2.8 +1.6
Britain -4.1 -3.7 +0.6
Euro Area -4.8 -4.1 +0.5
India +5.8 +5.0 +6.4
China +6.1 +6.5 +7.3
Singapore -10.1 -8.8 +1.0
Malaysia -6.2 -3.0 +1.2
Chile -2.1 -1.0 +2.0
Egypt +4.3 +3.4 +3.1
South Africa -1.3 -1.8 +3.1
Source: The Economist June 13, 2009
3
Africa Not Spared: Growth Outlook
Revised Down Significantly
2007 2008 2009a 2009b 2010a 2010b
Botswana 4.4 2.9 5.3 -10.4 4.7 14.3
Ghana 6.1 7.2 5.8 4.5 5.8 4.7
Kenya 7.0 2.0 6.4 3.0 6.2 4.0
Nigeria 6.4 5.3 8.1 2.9 7.7 2.6
S. Africa 5.1 3.1 3.3 -0.3 4.2 1.9
Tanzania 7.1 7.5 7.98 5.0 8.04 5.7
Uganda 8.6 9.5 8.1 6.2 8.0 5.5
Africa 6.2 5.2 6.0 3.9 na 3.9
2009/10a IMF, WEO October 2008 estimates
2009/10b IMF WEO April 2009 estimates
2009-10 numbers are forecasts
4
Initial Phase of Economic Crisis
Through weakening of local currencies, declining
reserves and stock exchanges
Depreciation as a result of
Declining commodity prices and general deterioration of
terms of trade
Non-resident outflows from equity and bond markets
(“Flight to safety”). In addition the US dollar perceived by
investors as a safe haven. (The distorted US dollar relative price)
The market-determined or flexible exchange rate acted
as an automatic stabilizer during this crisis in most African
economies
5
Initial Phase of Economic Crisis…
Weakening of Stock Exchanges as a result of
Outflow of non-residents’ funds
Unfavorable investor sentiments: concerns about global
recession and negative impact on domestic economies
Drawdown of foreign exchange reserves
The law defines 4 months of import cover
Kenya went to as low as 2.7 months of import cover
But this is what forex reserves are for, accumulate in
good times and cushion against shocks and drawdown in
bad times
6
Economic Crisis
Commodity exports have been one of the main drivers of
growth in many African countries
The economic crisis has dampened the expectations on
commodity futures markets thereby inducing falling prices and
demand for most commodities
The crisis has taken a heavy toll on countries that are highly
dependent on natural resources (e.g. copper, oil, timber and
diamonds)
The fall in copper and diamond prices has resulted in a
significant drop of export receipts for Zambia and Botswana,
respectively
7
The Financial Sector Remains
Sound and Safe
Indicators of Financial Sector Soundness :
1. Capital adequacy: All the 45 banks meet the
criteria for minimum core capital requirements
(capital adequacy 18.1% June 09 vs required
12%)
2. Adequate liquidity to meet the payment needs of
the financial system. (Liquidity ratio average
42.4% vs required 20%)
3. Appropriate balance between loans and deposits
ratio (75%: Kshs712B against Kshs953B - June
2009)
8
Indicators of Financial Soundness…
4. The interbank cash market continues to be liquid
and stable, the rates are coming down consistent
with monetary policy projections
5. Lending to private sector increased by 19.2%
during the year to June 2009
6. The ratio of gross non-performing loans to gross
loans at 9.4% in June 2009 has declined from a
high of 10.60% in December 2007
7. Return on capital was on average Kshs25 for Kshs
100 invested
8. Return on shareholders funds 25.3%
9
Monetary Policy Stance
The Central Bank of Kenya is pursuing an accommodative monetary
policy stance to help cushion the economy from the negative effects of
the Global Financial Crisis
Measures taken so far
Reduction of Cash Reserve Ratio from 6% to 5% in December 08 -
thus releasing an equivalent of Kshs8bn for lending to the economy
and further to 4.5% in July 2009
Reduction of CBR from 8.0% to 7.75% to signal to banks to lower
lending rates
Allowing a reduction in foreign exchange reserves to less than 3
months to take pressure off the depreciation pressure of the Kenya
shilling vis-à-vis the hard currencies [Had the CBK not allowed this,
the inflationary effect of the shilling’s depreciation would have been
worse - in terms of intermediate imports, oil prices etc]
10
Monetary Policy Stance…
Monetary Policy stance adequate for now
Banking system not lending to private sector because of perceived risks
associated with global financial crisis. Once banks lending resumes the liquidity
of the system will be reviewed by MPC among other instruments.
CRR is used sparingly [like a water valve – once water is out, no control] (it
reduces the monetary base and increases the money multiplier, it is not a tool for
liquidity management)
Price signals are good shock absorbers for supply shocks.
In an economy buffeted by supply shocks such as food, using CBR rather than
CRR was a more appropriate response in the crisis period.
price effect (CBR) is superior and efficient to quantity effect (CRR)
Too much liquidity in a sluggish economy might choke the economy
generating inflationary pressure. Providing liquidity only when it is needed is
prudent monetary policy and good economics
the barometer for liquidity [Interbank rates at less than 3%].
11
Overall the Global Financial Crisis
Presents Three Challenges
1. Financial Sector Contraction – due to confidence–risk
averseness
Less resources mobilised yet banks are awash with liquidity
But we can ring-fence domestic confidence and solve the resource
constraints
2. Real Sector Economic Decline: Poses Significant Risks
But also Slow Adjustment
Production processes must be supported through public investment -
Protect wage goods
3. Public Sector Resource Constraints:
Buffeted by several shocks
Flexibility of adjustment - ODA/BoP support has come via ESF
12
Going Forward
To support Government policy as envisaged in Vision
2030 - strong, stable and efficient banks that offer
services to a wider public are required.
To realise this objective, the Law was amended
requiring banks to gradually increase their minimum
core capital to Kshs1bn by 2012.
Consolidation of banks expected – but more
importantly, they should be strong in their market
niche.
13
Going Forward...
National Survey on Financial Access conducted
Access to financial services by majority of Kenyans still
limited
Microfinance Act enacted and Regulations gazetted
(One Microfinance Institution licensed)
Regulations on Credit Reference Bureaus Gazetted
Expansion of branch network
Proposal to allow banks to use agents incorporated in
2009 Finance Bill – Principal/Agent model of financial
service delivery
14
Going Forward...
Six Incremental Solutions – The Bank Advises:
1. Partnership: make resources available to ride over shocks
– BoP support and quick disbursements from AfDB, IMF, and WB
2. Domestic resource mobilization strategies
– Target to support production and open up production potential
– Avenue for investment & savings – (see the Kenya Infrastructure Bond
Model, see also Diaspora Bonds)
– Protect the wage good – consumption (Kazi Kwa Vijana)
3. Strengthen institutions and capacity in those institutions to
focus on:
Provision of a coordinating framework across regulators (formation of
Financial Sector Committee)
Innovative policy strategies
15
Going Forward...
4. Stay the path of reforms – do not sacrifice long-run
growth
Development budgets should not be cut – should be increased
Remain within attainable targets
In the 1980s and 1990s – short-run shocks were used as an excuse to cut
Development Budgets – sacrificed long-term growth
5. Aid Delivery Modalities in Times of Crisis: Quick
disbursements to allow countries ride over shock quickly to
protect economic erosion
But also DSA frameworks should signal changes in the policy paradigm
6. Look at the global financial architecture
- see G20 Proposals from London coming from diverse groups and C10
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