Limited export inflows and rising oil prices to weaken shilling

Money Markets

The shilling is projected to weaken to Sh89 to the dollar by end of the year and lose ground further next year. File 

By GEOFFREY IRUNGU

In Summary

• StanChart’s findings are less dramatic than those shown by international economic research organisation Trading Economics, which puts the currency in the third and fourth quarters of the year at an average of Sh90.09 and Sh94.61 to the dollar, respectively.

The shilling is projected to weaken to Sh89 to the dollar by end of the year and lose ground further next year because of limited inflows from exports and rising international oil prices.

 

Standard Chartered Plc says in a new report that the shilling will also be adversely affected by the persistently high current account deficit, expected to average 8.2 per cent this year, to trade at Sh91 to the dollar next year.

“Kenya’s current account deficit is more of a structural factor. It explains why, broadly, we should expect the Kenyan shilling to weaken over time,” said Razia Khan, head of research on Africa at StanChart Plc.

StanChart’s findings are less dramatic than those shown by international economic research organisation Trading Economics, which puts the currency in the third and fourth quarters of the year at an average of Sh90.09 and Sh94.61 to the dollar, respectively.

“The inflow from the Eurobond was expected to flood the market but with tourism and tea prices at 12-month lows, the inflow from the Eurobond is less of such a big net add,” said Aly-Khan Satchu, chief executive of financial advisory firm Rich Management.

Tipped the balance

Mr Satchu said rising oil prices were also another factor that would continue to influence the value of the shilling.

“The other big curveball is the price of oil which is at 2014 highs and expected to go higher. The price of oil is actually what has tipped the balance away from the shilling,” said Mr Satchu.

Though the Eurobond will be a near-term driver of support for the shilling, event risks such as terrorism attacks in recent times remain a major factor in the trend towards depreciation. “Near-term drivers of the shilling will be the Eurobond issuance — providing some support today — as well as the security situation, with event-risk a negative outlook,” said Ms Khan.

Kenya has floated up to Sh132 billion ($1.5 billion) which is expected to shore up the foreign exchange reserves that currently stand at slightly over four months of import cover. In a recent interview, however, Central Bank of Kenya Governor Njuguna Ndung’u said he expected the currency to fluctuate within, plus or minus, five per cent of its value as observed in empirical studies.

In the past one year, the shilling has traded mainly around Sh85 to the US dollar, indicating that a depreciation by five per cent would put the currency at Sh89.25 — within StanChart’s projection — while a five per cent appreciation would bring it to Sh80.75 to the dollar. The currency has been a major point of concern for markets in Kenya since it fell to an unprecedented low of Sh107 to the dollar in October 2011.

The unit has since appreciated after the CBK took drastic measures, including increasing interest rates and putting limits on forex trading.