Kenyans brace for tougher times as shilling touches Sh106 against dollar

Bloomberg graph tracking performance of the shilling against US dollar.

NAIROBI: Prepare for further weakening of the Kenyan shilling in the next two-three months despite Central Bank of Kenya’s tight monetary stance, latest confidential banking industry insight report on foreign exchange and interest rates trends warns.

The report released at the end of last month states that while extreme volatility in the forex market appears to have been tamed by the recent CBK efforts, the general strengthening of the dollar globally, weak returns from tourism and agricultural exports and a net capital outflow will continue to exert pressure on the shilling in the short to medium term.

“(The shilling depreciation) is mostly due to appreciation of the US Dollar against the world currencies on the back of America’s strong economic performance,” reads the report. “Other local factors that have exacerbated these effects include increased dollar requirements from large corporate deals, portfolio outflows from international investors as well as reduced dollar inflows from the traditional sectors of tourism and agriculture.”

The revelations come at a time when the Kenyan shilling lost ground in early trading on Monday, hit by global dollar strength and demand for foreign currency from telecommunications and energy firms, traders said.

Commercial banks quoted the shilling at 105.95/106.15 to the dollar, compared to Friday’s close of 105.60/70 as the shilling edges closer to its all-time low of about 107 to the dollar, in October 2011.

In total, the dollar has depreciated by 16 per cent so far this year. Traders say that the depreciation of the shilling is a real worry as no one seems to know exactly ‘where or when the shilling slide will stop.’ “We have a mismatch of supply and demand,” said a trader at a Nairobi-based commercial bank. “Based on market fundamentals and market play, the shilling looks weaker. The local currency could reach 107.50 in the short to medium term, “maybe in a month’s time,” the trader said.

The depreciation of the shilling has been a prickly issue within financial institutions and investors cycles. A volatile forex makes international trade expensive, reduces net exports by a country, deters international investors, can result in ‘imported’ inflation and leads to a spike in interest rates, which generally dampens economic growth.

Those who have studied the trend over the last one year say that the linking of the shilling depreciation to the current account are missing the point as the volatility is almost exclusively an issue of net capital outflow, strengthening of the dollar and weak returns from agriculture and tourism. “There are very weak linkages between the weakening of the shilling to the current account. The shilling weakening is due to a shortfall, or even reversal, in portfolio inflows rather than a worsening of the trade or current account deficit,” said Maurice Opiyo, Managing Director at NIC Capital Ltd.

“With Foreign exchange reserves having declined by about $883 million between early March 2015 and early August 2015, we are of the opinion that there is a balance of payment shock that has already materialised.”

Portfolio outflows would most likely lead to a drop in asset prices in addition to lower foreign exchange reserves as noticeable as the NSE 20 index has dropped by more than 20 per cent since early March 2015.

BALLOONING EXPENDITURE

This coupled with the current level of usable foreign exchange reserves which settled at 4.07 months of import cover as at July 31, 2015, which is above the target of four months of import cover together with the precautionary facility with the International Monetary Fund (IMF) will continue to cushion and support the Kenya Shilling against any increased temporary shocks.

ABC Capital Corporate Banking Manager, Johnson Nderi, opines: “As long as the Government continues to spend what it doesn’t generate or what it borrows, the upheavals in the market will continue.” “It is really quite simple, as long as the Government continues to borrow to fund a ballooning expenditure bill, pressure will be on the shilling and the exchange rate.”