Counting the cost of the oil price crash

January is always a tough month for the wallet. The Christmas revelry is over and the unexpected extra bills only deepen the sense of financial gloom. The first week of 2015 has also been expensive for the Central Bank of Kenya (CBK), which like the rest of the international financial community, has had to contend with its own hangover from 2014.

Last Wednesday, agencies reported that the CBK had dipped into its foreign currency reserves, selling off an undisclosed dollars to prop up the shilling, which has hit its lowest rate against the greenback since 2011 - a rate of Sh91 to the dollar. CBK has also spent a tidy sum mopping up excess liquidity from the money markets, making it more expensive to hold on dollars, as a way of protecting the shilling. Not a great start to the year.

The introduction of the five per cent capital gains tax has been a small factor in dampening economic confidence. Meanwhile, a decline in receipts from tourism and weak performance of the country’s main exports such as tea and flowers are also a source of pressure and contributor factors to a weak shilling.

The concern is that the CBK only holds around $600 million (Sh5.6 billion) in reserves -which could see the shilling get into difficulties due to speculative attacks. However, although market analysts fear that the exchange rate will weaken further to Sh92 this month, there is little cause for major concern on this score.

But the reality is that while the start of this year may have perturbed traders at the Nairobi’s Securities Exchange, Kenya is far from being alone in having had to prop up its currency against a resurgent dollar. A number of emerging and developing countries, including Mexico, South Africa and Turkey, have been forced to into increasing their foreign currency auctions in response to pressure on their currencies.

Meanwhile, the Russian rouble has tumbled by 50 per cent, and appears to be in the midst of a sustained capital flight and recession not seen since it defaulted on its debts in the late 1990s. The Euro and Sterling Pound s have also hit new lows against the dollar in recent days. The Euro has fallen to its lowest level against the dollar in nine years. In contrast, the shilling is almost 10 per cent stronger against the Euro and Pound compared with six months ago.

Most of the currency volatility is the result of oil economics. At a meeting in late November, the Organisation of Petroleum Exporting Countries (OPEC), which controls nearly 40 per cent of the world market, failed to reach agreement on production curbs, and prices have tumbled ever since.

In assessing the winners and losers from the oil slump it is clear that oil exporting countries are the biggest losers, particularly the Russians. But Europe is the other big loser because the oil glut has also highlighted the weakness of demand in the European economy. The collapse in oil prices has already pushed the Eurozone into deflation for the first time in five years, according to data published by Eurostat earlier this week.

Oil prices have slumped in recent months falling from $100 (Sh,9000) a barrel last July to below $50 (Sh4,500) a barrel for the first time since May 2009. And $50 per barrel isn’t likely to be the oil price floor. Since Russia, with its plentiful supplies of oil and gas, is a major competitor, not to mention a foreign policy enemy, Saudi Arabia and the other OPEC countries have little incentive to cut back supply which would lead to an increase in prices. Market analysts suggest that prices are likely to go down to $20 per barrel in the coming months.

Despite its recent discoveries of substantial oil reserves, the good news for Kenya is that, as a large oil importer, lower oil prices should lead to limited headwinds and could help drive economic growth to a stronger rate than the 5.6 per cent forecast by the Jubilee government. Drivers should face lower costs at the petrol pumps when the lower oil price is passed down to them. Households should also benefit from a fall in energy prices.

However, the World Bank has warned that Kenya and Uganda, which are prospecting large oil reserves, are likely to lose out on foreign investment in oil prospecting if prices remain low for long. Can Kenya learn from the oil price crash? Russia is losing around $2 billion (Sh180 billion) for every dollar fall in the oil price