Kenya shilling 'in trouble' as tourism earnings decline

A lone tourists walk in an almost empty hotel at the Bamburi Beach Hotel after many tourists were evacuated back to their country after they issued advisories in fear of terrorist attacks.

NAIROBI: Kenyans are likely to spend more on the importation of refined petroleum, packaged medicament and vehicles as the shilling weakens against world’s major currencies.

In the past week, the local currency has come under intense pressure, mainly against the dollar, following the decline in tourist arrivals. On Thursday, the shilling traded 88.30/40 against the green-back down from Wednesday’s 88.20/30. However, as at yesterday morning, the pressure mounted further as the exchange rate stood at 88.30/35 against the US Dollar.

 “The shilling is in trouble,” said Chris Muiga, a trader at National Bank, citing its weakening past the 88.20 resistance level on Monday, which signalled more losses for the currency. “The supply-demand dynamics are actually pointing towards a weaker shilling,” he said.

Kenya’s tourism business, a top three foreign exchange earner, slid into crisis this year because of frequent deadly attacks blamed on Al Shabaab from the neighbouring Somalia. Some western nations, particularly the United Stated and the United Kingdom, warned its citizens against travel to some parts of the country, including coastal resorts, prompting multiple cancellations. Worries over the industry’s performance have grown in recent weeks due to the Ebola outbreak in West Africa that has caused at least one airline, Korean Airlines, to suspend its flights to Kenya.

Analysts say it is unlikely that the shilling will weaken further beyond what is seen as a guarded level of 88.50 next week following intermittent interventions by the Central Bank of Kenya. “As at now, the shilling is comfortably at the mid-point. We are unlikely to witness any material decline in the coming week,” said a foreign exchange dealer from a local bank who spoke to The Standard on Saturday in confidence. According to the bank dealer, CBK yesterday erected a new system that seems to be tracking individual commercial banks’ lending and borrowing pattern in the market.

“Initially, what we would see is just the amount, rates and fraction of total lending or borrowing on that day in the market. But from yesterday, we could actually see the names of individual commercial banks. This is probably some form of intimidation from CBK,” said the source.

Efforts to reach CBK for comment were unsuccessful. Economists say if the local currency continues weakening against the world’s major currencies, it could ultimately affect capital flows. Conventionally, a country needs to have a fairly stable currency to attract investment capital from foreign investors. Otherwise, the prospect of exchange losses inflicted by currency depreciation may deter overseas investors. —Additional reporting by Reuters