Hormuz risks put Kenyan SMEs under fresh cost pressure

Continued disruptions in the Strait of Hormuz could pile undue pressure on smaller firms that account for 70 per cent of global employment, the UN Trade and Development has cautioned.

Small and medium-sized enterprises (SMEs) account for around 90 per cent of businesses globally, 70 per cent of employment and 50 per cent of GDP.

In Kenya, MSMEs account for approximately 98 per cent of all businesses, contribute around 24 to 34 per cent of the GDP, and employ over 14 to 15 million people.

This represents about 80 to 90 per cent of the total labor force, according to Kenya National Bureau of Statistics.

They are also crucial suppliers of goods and services across value chains, supporting entrepreneurship, innovation and economic diversification.

According to UNCTAD, a prolonged disruption could also increase the cost of moving cargo to and from Kenyan businesses as shipping lines seek alternative routes.

“When SMEs falter, growth becomes less inclusive and less resilient,” UNCTAD says in an analysis.

Kenyan small businesses are already facing higher fuel, freight, insurance and financing costs on the back of the disruptions in the Strait, adding pressure to firms already struggling with tight cash flows and rising input costs.

The exposure is significant because higher international energy and shipping costs can quickly feed into the domestic prices of fuel, imported raw materials, machinery, food products and other goods.

Shipping charter costs, for example, could rise from about $100,000 (Sh13 million) to $400,000 (Sh51.9 million) per vessel, based on an exchange rate of about Sh129.7 to the dollar on September 29.

War-risk insurance could also rise sharply, while vessels forced to avoid the Strait of Hormuz and take longer routes around the Cape of Good Hope could face additional fuel and operational costs and transit delays of up to two weeks.

These increases translate into higher landed costs and thinner profit margins for Kenyan manufacturers, wholesalers, retailers and transport operators.

The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 49.7 in August from 51.3 in July, slipping below the 50-point threshold that separates improving from deteriorating business conditions.

This was the first contraction in three months.

The survey found that output declined for the sixth consecutive month, while firms reduced purchasing and stocks of inputs.

However, new orders increased for a third consecutive month, pointing to a gap between demand and companies’ ability to produce.

Christopher Legilisho, economist at Stanbic Bank, said high raw-material costs and tight cash flows were preventing firms from converting stronger demand into higher production.

A Hormuz-related supply shock would therefore come as Kenyan firms are already dealing with elevated operating costs and liquidity constraints.

UNCTAD said smaller companies generally have fewer alternatives when energy, transport and financing costs rise, while larger firms can more easily diversify suppliers, markets and sources of finance.

The agency warned that the effects could last beyond the immediate disruption, with smaller businesses potentially being pushed out of international value chains even after headline trade volumes recover.

Maintaining access to trade finance, working capital, reliable logistics and market information are hence important if external supply shocks intensify, UNCTAD advices.

The experience of the August PMI also highlights the vulnerability where Kenyan firms recorded stronger sales but struggled to increase output because of input costs, shortages and limited liquidity, with experts noting a fresh rise in energy and freight costs could widen that gap further.

by MARTIN MWITA