Given the increased attention paid to so-called ‘fat tail’ events stemming hitherto largely from developed market credit excess and threatening to impact liquidity as well as asset correlations and volatility across countries and classes, I’ve decided to attempt to quantify or at least shed light on certain factors which may tend to indicate which economies could be perceived as the most or least vulnerable in a comparative sense to contagion stemming from the weaker trade and portfolio flows associated with periods of contracting global growth (in this sense a country’s ‘openness’ to trade may become a liability).  The “contagion score” model output, which will debut in this week’s Alterio Research report (and whereby proposed contagion propensity is inverse) is thus a function of a given economy’s exposure to trade and commodity prices (expressed as the sum of exports and imports as a percentage of output), its exposure to portfolio flows (shown by either its current account surplus or deficit, the latter of which must be financed either by foreign direct investment or more fickle portfolio flows) and finally the diversity of the makeup of its commodity export basket (and by extension its sources of foreign exchange).

As will be seen, Kenya rates comparatively high per our metrics—a credit plus in light of the various fiscal and monetary headwinds it stands to face in the coming year (this week Finance Minister Uhuru Kenyatta revised real GDP growth down to an expected 5.3 percent in 2012 from the earlier 5.7 projection) including chronically high inflation which, policy rate normalization notwithstanding has perpetuated a marked deterioration in the country’s terms of trade (i.e. export against import value) amplifying a negative net contribution to GDP due to a higher import bill.  To this point, however, we indicated last month the possibility of “a cyclical peak in both rates and inflation” which last week the Central Bank of Kenya’s (CBK) MPC validated, at least for the near term, by keeping its policy rate unchanged at 18 percent while citing a decline in inflation in December (18.9 percent y/y from the previous month’s 19.7) on the back of falling food and fuel prices as well as a contraction in private sector credit demand in November.  Today this thesis was further supported when January’s year-on-year rate slowed to 18.31 percent, though it must be noted that with the smallest Reserves-to-GDP ratio among our SSA coverage, the central bank’s shilling-shoring policy of liquidity sterilization may be tempered enough in the coming months to keep it in a definite wait-and-see policy approach.

Moreover any perceived inflection point in inflation also may be a harbinger of stalling growth.  Hawkish monetary policy certainly played a central role in the shilling’s dramatic year-end turnaround; however as a report this month from HassConsult (which maintains and publishes the country’s sole property price index) demonstrates, higher policy rates concentrated in the final months of the year also influenced a corresponding rise in commercial lending costs, fueling in turn an ensuing glut of delinquent or non-performing loans  that are likely to dramatically impede bank balance sheets (from both an asset and loss reserve standpoint) going forward (Kenya’s mortgage industry grew from Sh19bn in 2006 to Sh61bn in 2010 per a joint CBK/World Bank report) and thereby temper a construction boom labeled last July by the Kenya National Bureau of Statistics (KNBS) as one of Kenya’s top performing sectors having grown by over 10 percent y/y.