Effects of Israel-Hamas war to Kenya

As oil prices rise due to worries about an unstable Middle East and a potential strengthening of the dollar against the shilling as investors flee to the safe haven of the US economy, the conflict between Israel and the Palestinian organization Hamas is expected to cause Kenya new economic suffering.
The Middle East, which is Kenya’s main supplier of gasoline and a major market for it’s exports of food and livestock products, is threatening to send more participants to the battle, which started 2 weeks ago.
Thus, the repercussions of the war are likely to be similar to those of the Russia-Ukraine War, which began in February 2022 and led to an increase in the price of food and fuel on a worldwide scale as well as capital flight to the West.
“The Israel-Hamas conflict will raise the price of oil just as the Russia-Ukraine war did. The players in this conflict, directly or indirectly, are oil producers and could use oil as a bargaining chip. Watch fuel prices next month,” said XN Iraki, a lecturer in economics at the University of Nairobi.
Since the start of hostilities on 7 October, the price of Brent crude oil (the global benchmark) has jumped by 10.4% or $8.75 to $93.18 a barrel. Murban oil, from which Kenya’s petroleum imports are drawn, has in the period appreciated in price by 8.1% or $6.97 to $93.11 a barrel.
A rise in crude prices is set to pile upward pressure on pump prices in Kenya, which after the most recent review last week rose to an all-time high of KSh217.36 per litre of petrol and KSh205.47 for diesel in Nairobi. The cost of fuel impacts heavily on inflation due to the movement of goods and services.
Due to the transportation of products and services, the cost of fuel has a significant impact on inflation.
Since the dollar is viewed as a safe haven against inflation alongside precious commodities like gold on the currency market, it tends to gain value versus other currencies during times of crisis.
Due to the nation’s status as a net importer, a further decline in the value of the shilling relative to the dollar carries a significant danger of inflation locally. According to the Central Bank of Kenya’s official exchange rate published on its website, the shilling has lost 19% of its value versus the US dollar during the last year, and now exchanges for 149.78 units.
“Such turmoil also leads to investors seeking ‘safety’ in the dollar leading to its appreciation; and depreciation of our currency. A further rise in inflation is expected, given we are net importers and need dollars,” said Prof Iraki.
The crisis also runs the potential of interfering with trade with the wider Middle East, which in 2022 took in KSh84.96 billion worth of Kenyan exports.
Petroleum purchases, which made up a sizable portion of Kenya’s KSh612 billion in imports from the Middle East in 2022, are the primary cause of the region’s trade balance being heavily skewed against Kenya.
For instance, Israel sent items worth KSh6.84 billion to Kenya last year, while Kenya imported KSh978 million from Israel.
Therefore, any trade disruption would require Kenya to pay more or suffer the extra cost and effort of seeking for alternative source markets, which would likely be accompanied by higher costs.
When there is a worldwide crisis, capital has a tendency to migrate faster out of frontier markets like Kenya, according to the financial markets.
Major central banks in the US and EU have raised interest rates to between 4.0% and 5.25% as a result of inflationary pressure, which intensified when the Russia-Ukraine war began. This has made these economies more appealing to investors than riskier, smaller markets.
The result has been a prolonged exodus of foreign investors from markets like the Nairobi Securities Exchange, which has lowered share prices for blue-chip companies and caused a KSh530.4 billion drop in investor wealth at the exchange this year.
“Higher global oil prospects would invite some inflationary pressures, which should prolong the tighter monetary cycle. That’s the context [under which] investors may sieve off the most vulnerable frontier economies from the resilient ones,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).
Due to the increased cost of borrowing, this also has an impact on the government when it looks to borrow money from external commercial lenders.
To retire the ten year Eurobond floated in June 2024, the Treasury will need to raise $2 billion over the next eight months.
Normally, the State would refinance the debt by issuing a new Eurobond, but because the interest rates began to rise in early 2022 as a result of the Russia-Ukraine war, it has been unable to do so since June 2021.