Global financial crisis looms

The global banking and financial system has been on high alert for a looming financial crisis. Owing to prolonged monetary manipulations to control inflation, in most developed countries, investment risk has been on the rise.

The collapse of Silicon Valley Bank in the US and the troubles of Credit Swiss are largely the consequence of the monetary policy actions, which also triggered investor panic. But is the panic justified? And what is the likely impact on Kenya’s economy?

Most financial analysts and experts believe the global financial system is more resilient than during previous crises. But the financial system is greatly influenced by investor perceptions and fears, which act as self-fulfilling prophesies.

If people believe a bank is about collapse, they will stage a run on it. The panic alone can make even a healthy bank to actually collapse. A global financial crisis will, therefore, depend on the actions of investors, commercial banks and central banks.

When investors get spooked, they usually turn from pure financial investments to holding ‘stable’ currencies like the US dollar and Chinese yuan and metals such as gold to avoid losses. Consequently, the dollar is appreciating against other convertible currencies. That means if the panic continues the shilling will further depreciate, owing to the huge public debt and slower restructuring process.

Reduction of foreign direct investment (FDI) and foreign investments into local securities will make it harder for the government to borrow through Treasury bills and bonds, negatively affecting growth.

With Kenya actively engaging these same investors for debt restructuring, such a crisis will make the negotiations harder, leading to more delays with huge macroeconomic consequences.

- Mr Maranga is a supply chain management PhD candidate at JKUAT. [email protected].