Shilling rises to three-month high on peaceful polls

A customer looks at the rates at a forex bureau in Nairobi. The Kenyan shilling strengthened against the dollar to 86.25 March 5, 2013, following peaceful elections. Photo/FILE   Nation Media Group

By GEOFFREY IRUNGU

In Summary

• The shilling was trading at between 85.30 units and 85.55 units against the dollar.
• The exchange rate reflected expectations of a peaceful poll outcome.
• The shilling remains vulnerable to external shocks given the high level of the current account deficit.

The shilling strengthened to a three-month high against the dollar Tuesday, as currency markets opened for the first time since Monday’s General Election.

Dealers at KCB and Bank of Africa said the shilling was trading at between 85.30 units and 85.55 units against the dollar.

The currency last traded at these levels on November 21, 2012, when it exchanged at an average of 85.35 units to the dollar.

Tuesday’s rate was a gain from 86.25 units recorded on Friday.

“The shilling has strengthened because of the peaceful poll,” said Jeremiah Kendagor, head of trading at KCB, the country’s largest bank by assets and profitability.

Mr Kendagor said the exchange rate reflected expectations of a peaceful poll outcome.

“We expect the same trend to continue in the coming days. The stronger shilling shows it is good time for those who want dollars because they are cheaper,” said Mr Kendagor.

Data stream by Thomson Reuters showed that the bid and ask rates were trending at 85.25 units and 85.45 to the dollar. At its lowest, data showed it was trading at 86.10 units as at mid-day Tuesday.

“Business is not yet back completely as many people are still waiting to resume work. We expect demand will rise once business resumes,” said Peter Mutuku, head of trading at Bank of Africa Kenya.

Mr Mutuku said he expected the that reaction to the results of the presidential poll would determine the exchange rate going forward.

READ: Kenyan economy hangs on outcome of General Election

“If we have a calm and peaceful reaction to the poll results, I see the shilling continuing to strengthen even if we have higher demand for dollars,” said Mr Mutuku.

Other analysts said the shilling remains vulnerable to external shocks given the high level of the current account deficit. The deficit, now standing at nine to 10 per cent of the gross domestic product (GDP), has been brought about by the huge import value relative to exports.

According to Citi Global Markets, the shilling is likely to experience modest weakness on account of current account weakness and the budget deficit.

“Once the election is past, it should then continue to weaken modestly given the large current account deficit and the slowness in bringing the fiscal deficit under control,” said the Citi report dated February 28, 2013.

Last December, Kenya exported only Sh40.15 billion worth of goods and imported Sh117.06 billion —showing the wide gap that is putting pressure on the local unit.

The budget deficit has hovered between 6.5 and 7.5 per cent of GDP in the last two years as the country struggled to finance the large government spending in infrastructure, free primary and secondary education. This has happened against revenue shortfall as the Kenya Revenue Authority has not managed to raise targeted tax collections.

In the first six months of the financial year, tax revenues fell below target by more than Sh30 billion. As a result the government raised domestic borrowing by Sh32 billion to bridge the deficit by last December.

Citi Global Markets had predicted that the Kenyan shilling would wobble against the background of rising political tensions as the country got close to the date of the poll, and more so with the easing of monetary policy by the Central Bank of Kenya.

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