Stronger Kenya shilling threatens profits from EA subsidiary

For importers, a stronger currency is not a bad thing as it becomes cheaper to transact business. FILE/TEA Graphic  Nation Media Group

By DAVID MUGWE The EastAfrican

In Summary

• For exporters, a significantly stronger local currency means their payments will be worth less.
• For imports such as oil and machinery, a strong currency is not a bad thing because it becomes cheaper to transact business.
• A strong Kenyan currency will also increase the ability of Kenyan companies to make investments in the region because those assets now look more attractive.

The contribution of regional subsidiaries to the profitability of their Kenyan parent companies could drop this year as the local currency strengthens against major world units.

The Kenyan shilling has been appreciating since March 4, when the country held its General Election, on the back of a positive outlook and increased foreign inflows for investment.

Over the past one month for example, the shilling has appreciated from Ksh86 to Ksh83 as at Wednesday April 17, against the dollar.

The Kenyan shilling has also strengthened against regional currencies settling at Tsh19.40 on April 17, compared with Tsh18.86 on March 5 and Rwf7.556 compared with Rwf7.351 respectively. Against the Burundi franc, the Kenya shilling exchanged for 18.78 units compared with 17.585 over the same period.

Uganda’s currency, however, appreciated against the Kenyan shilling and was trading at Ush30.31 last Wednesday, compared with Ush30.85 on the day after the election, buoyed by the tight monetary policy stance that the Bank of Uganda has maintained since December last year.

ALSO READ: Forex reserves up in Uganda, down in Kenya

But if the Kenyan shilling continues to appreciate through to the end of this year, the contribution subsidiaries make to the parent company’s profits will be less than expected, analysts argued.

“If the Kenyan firms were expecting subsidiaries to contribute say 10 per cent, they should expect a lower figure because of the exchange rate,” said Vimal Parmar, the head of equity research and trading at Burbidge Capital.

In 2012, for example, the contribution of regional subsidiaries to NIC Bank’s income dropped by 25.94 per cent to Ksh128.93 million ($1.49 million) from Ksh174.08 million ($2.04 million) the previous year, with the management partially attributing this to the depreciation of the Uganda and Tanzania currencies relative to the Kenyan shilling.

Joe Mutugu, director of finance and strategy, the NIC Bank said that the effect on Group profits in 2013 will depend on actual profits reported by the subsidiaries in local currency and exchange rate movements for the rest of the year.

Other listed banks which have regional operations such as Diamond Trust Bank, Equity Bank and KCB Group are also exposed to currency movements that could impact on their contributions towards the group’s net income.

ALSO READ: Regional subsidiaries return higher profits

Mr Mutugu said exchange rate movements for the rest of the year will depend on a number of factors among them the inflation rate, interest rate differentials between the different economies, monetary policies of the central banks, externalities such as drought, power rationing, commodity prices and the overall performance of the different economies.

For exporters, a significantly stronger local currency means their payments will be worth less.

“Flower producers have forward contracts so they can only feel the impact if the dollar loses significantly against the shilling,” Jane Ngigi, chief executive officer Kenya Flowers Council, told The EastAfrican in an interview.

For imports such as oil and machinery, a strong currency is not a bad thing because it becomes cheaper to transact business.

Equally, a strong Kenyan currency will also increase the ability of Kenyan companies to make investments in the region because those assets now look more attractive, according to Eric Musau, a research analyst at Standard Investment Bank.

Political landscape

Analysts say the movement of the Kenya currency will largely be determined by the political happenings in the country in coming months as the new government shapes up.

“I do not see the shilling appreciating substantially. It will depend on the Central Bank of Kenya’s actions, but I think it should be building up its reserves to around six months in anticipation of any eventualities,” said Mr Musau.

The foreign exchange reserves held by the CBK — also known as the import cover — fell below the target of four months through the months of February and March and stood at $5.352 billion, equivalent to exactly four months, at the end of the second week of April.

Last week, the International Monetary Fund said it had approved the disbursement of a Ksh8.5 billion ($100 million) foreign exchange support loan which is now expected to keep the Kenyan currency strong and boost the country’s reserves further.