EA currencies to fall further against dollar

Kenya, Uganda, Tanzania and Rwanda will see their currencies pressured by the US Fed hike. TEA GRAPHIC | FILE 

By SCOLA KAMAU

In Summary

• Kenya, Uganda, Tanzania and Rwanda will see their currencies pressured by the US Fed hike, falling commodity prices and strained international relations.

A slowdown in dollar inflows into the East African economies will see currencies depreciate further in 2016, says a report by StartLink.

According to the global financial advisory company, Kenya, Uganda, Tanzania and Rwanda will see their currencies pressured by the US Fed hike, falling commodity prices and strained international relations.

The Kenyan shilling will remain weak, to trading at above Ksh102 against the dollar in 2016 as the country’s Central Bank grapples with ways to shore up the shilling, the advisory company said in its new Africa Markets report.

“In Q1, 2016, we expect the local unit to be range-bound in the 101.0 — 103.0 band of exchange to the greenback supported by the dissipation of disturbance from US Fed rate hike expectation,” reads the report.

The foreign exchange reserves are expected to rise steadily but with no major effect to warrant a stronger shilling performance.

The Kenya shilling closed the year at an average of Ksh102 against the dollar, losing 11.9 per cent against the greenback.

High expenditure on infrastructure projects such as the standard gauge railway will remain key driver of the deteriorating fiscal position as international investors prefer investing in the US to benefit from rising interest rates as opposed to investing in emerging markets.

The US last year increased its Fed rate by 0.25 per cent from zero. This coupled with a fading confidence due to rising corruption cases in 2015, could see foreign investments diverted to other countries.

In Uganda, declining growth in private sector credit in the last quarter of 2015 will be a key factor, prompting the central bank to opt for a cautious monetary policy stance as it risks slowing down the economic growth. 

The Uganda shilling depreciated 17.5 per cent against the dollar in 2015, with fears that withdrawal of donors could weaken the country’s financial position.

“The relative stability of the shilling against major currencies and moderation of rise in inflation between October and December 2015 is likely to see the Bank of Uganda hold back on its monetary tightening efforts in the near term,” the report states.

Uganda’s Monetary Policy Committee meeting is scheduled for February.

In Tanzania, foreign exchange risks will be key in the near term ahead of the planned debut Eurobond, expected to raise $700 million. The local currency will continue to depreciate under the pressure of a weakening current account deficit. Last year, the shilling lost 25.1 per cent against the dollar.

For Tanzania, the report says, completion of constitutional review process, which was suspened to pave the way for the general election, will boost confidence of investors.

“Investors and observers are looking to Tanzania’s President John Magufuli to reopen debate on the constitutional review process to unlock the stalemate and foster national cohesion,” reads the report.

“How the administration manages the Zanzibar question will be a key factor in determining Tanzania’s risk outlook going forward, given the island’s quest for greater autonomy,” added the report.

The Rwanda franc will not be spared in 2016 either, despite a better performance compared with other countries in the region in 2015, losing 7.7 per cent to the dollar. The effects of Rwanda’s poor export earnings and a stronger greenback last year are expected to spillover into 2016.

According to Finance Minister Claver Gatete, for every single dollar that Rwanda earns from its traditional exports, the country has to spend three more dollars in paying for its import bill.

“We expect the overhang of this trend to spillover into Q1 2016 as the price of key commodities in the global market remain depressed,” reads the report.