When the Kenya shilling slid against the dollar early this year, the
drop was perceived as a minor slip up, from which the local currency
would recover fast. After all, the last time the shilling had been
battered hard was in 2011. PHOTO | FILE
When the Kenya shilling slid against the dollar early this year,
the drop was perceived as a minor slip up, from which the local
currency would recover fast. After all, the last time the shilling had
been battered hard was in 2011.
“Back
then, the nose dive was attributed to increased borrowing, imports and
high inflation,” says Benjamin Wasilwa, an importer. “Last year, it
depreciated a bit, and we were hopeful that there would be some recovery
this year. We did not expect the shilling to lose so much ground.”
Five
months down the line, though, the shilling has hit levels last seen in
2011 before it touched a historic all-time low of Sh107 to the dollar on
October 11. Back then, the Central Bank raised its key lending rate by
550 basis points to 16.5 per cent to stem volatility in the exchange
rate and spiralling inflation.
Consequently, overnight rates shot up to 25.9 per cent, making funding of dollar positions costly while cutting demand.
Since
January, though, the shilling has lost 6.3 per cent against the
greenback. This has been more than the cumulative 4.3 per cent the
shilling lost in 2014.
The magnitude of the drop came to the fore last week when the unit succumbed to a three-year low of Sh96.80/97 to the dollar.
Just a week ago, a market report by Commercial Bank of Africa warned that the shilling was likely to drop further.
“The shilling’s outlook remains poor. There’s a high likelihood that it may breach the Sh96 mark,” said the report.
WEAKENING MARKET
The
survey was echoed by technical analysis of the 14-day and 50-day
weighted moving averages that showed the short-term outlook of the
shilling to be dim against the dollar.
According
to National Treasury Cabinet Secretary Henry Rotich, weakening of the
shilling is due to persistent poor performance of tourism and
horticulture as well as insecurity.
The
government is considering drawing from Sh64 billion borrowed from the
International Monetary Fund (IMF) earlier in the year to shore up the
shilling. “We’re keenly looking into the volatility of the shilling and
what is fuelling it.
Once we find
out, we shall be in a position to withdraw the IMF funds. This should be
within a month or two,” said Mr Rotich recently.
Research
analyst George Bodo says the shilling’s depreciation can be partly
attributed to the “weakening in the foreign exchange earning capacity,
the strengthening of the US dollar globally due to the improving
domestic absorption rate in the US economy and seasonality in demand for
foreign exchange.”
Financial analyst
and Rich Management CEO Aly Khan Satchu says profit bookings by foreign
investors is driving the shilling deeper into crisis.
“We’ve
seen the market getting weaker by the day as foreign investors book
their gains before the shilling weakens further,” says Mr Satchu.
The
vacuum created at the Central Bank has resulted in a defensive mode
against the weakening unit. “We see more nervous people unwilling to
touch the shilling in fear and defence against further plummeting. This
ends in a self-fulfilling prophesy,” adds Mr Satchu.
His sentiments are echoed by Nation economic
affairs editor Jaindi Kisero, who notes that the CBK governor’s shoes
must be filled to offer direction to the markets.
“Calm
and confidence will only return once the markets understand the options
that are available to the Central Bank. Failure to this, we must brace
for games and tactics by dealers and Treasury managers.”
To
cushion themselves from the effects of a weak shilling, some traders
such as Mr Wasilwa have taken to operating their businesses using a
dollar account. Take Nahashon Muema, an exporter of horticultural
produce, for instance. “It is cheaper for me to operate from a dollar
account than say to buy dollars at the current high rates,” says Mr
Muema.
“The weaker the shilling gets,
the more value I get from my produce. In any case, I’ll get good money
once I convert my dollars into the local currency.”
LOW OIL PRICES
However,
Mr Satchu notes that this plan could demolish the shilling further. “If
people open dollar accounts as a hedge, the shilling will hit Sh100
against the dollar in no time,” says Mr Satchu.
Losing more
In
given instances, local exporters will seem to be in for more gains as
the shilling weakens further. This is due to the exchange gain they get
once paid using dollars.
However, Mr
Satchu dismisses such gains, noting that a weak shilling does not
benefit the Kenyan economy. “The notion that a weak currency is
beneficial is actually a fallacy. A weak currency is a double-edged
sword to our economy, unless we were to be as big in exports as Germany.
Currently, we are losing more because we are being forced to pay more,”
he says.
Apparently, the
import–export deficit relief that was to come from low oil prices in the
global markets never came to fruition. “Where is this export that’s
going to be the redeeming factor of the shilling? Are we selling more
agricultural produce? No, we simply aren’t selling more,” observes Mr
Satchu.
In 2013 and 2014, the
shilling depreciated due to low tea prices. In February, the unit had
firmed helped by dollar inflows from tea auctions and tight liquidity
resulting from a bond sale.
Nevertheless,
according to Mr Kisero, the shilling should stabilise in the
medium-term. “Oil prices are expected to stay low, this coming at a time
when we are seeing increased dollar demand. Similarly, we have seven
billion dollars in foreign exchange reserves and an IMF cushion in case
the volatility persists,” he says.
Mr Satchu adds that while the CBK needs to stem the slide, we have no deep pockets to firmly shore it up.
On
Tuesday last week, the Central Bank sold dollars to the markets in a
bid to float the sinking shilling. Effectively, the unit gained
marginally to Sh96.50/96.60 range. On Friday, the Central Bank quoted
the unit at Sh96.15 to the dollar.
In
the long run, this trick of releasing dollars into the market hardly
stops the downward trend of the shilling. “Aren’t we depleting our
reserves when we do this? What is the end game to all this?” Asks Mr
Kisero.
According to Mr Bodo,
commercial banks should work out a kill switch that will stem
speculation whenever the shilling depreciates by over one per cent
intra-day in the interbank market.
“Commercial
banks’ net open positions should be narrowed to five per cent of core
capital from the current 10 per cent,” he adds.
ANALYSIS
experts take on shilling
Releasing
dollars into the market hardly stops the downward trend of the
shilling: “Aren’t we depleting our reserves when we do this? What is the
end game to all this?”
Nation economic affairs editor Jaindi Kisero
*******
A
weak shilling doesn’t benefit the Kenyan economy: “A weak currency is a
double-edged sword to our economy, unless we’re to be as big in exports
as Germany. Currently, we’re losing more because we’re being forced to
pay more.”
Economic analyst Aly Khan Satchu
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