Poll jitters, huge govt spending a threat to currencies

Uncertainty surrounding elections and runaway government spending are seen as the two main factors that will exert pressure on East African currencies despite the previously low oil prices. TEA GRAPHIC | FILE 

By ALLAN OLINGO

In Summary

• Citi Bank forecasts that the Kenyan unit will close the year at 107.5, the Ugandan unit at 3,615 and the Tanzanian unit at 2,315 to the dollar.
• Focus Economics analysts (includes analysis from Standard Chartered, Oxford Economics and the Economic Intelligence Unit) predicted that the Kenyan unit will close at 108.6 units to the dollar, the Ugandan unit at 3,586, and the Tanzanian currency at 2,265 units to the dollar.
• Uganda and Tanzania, which recently held elections, saw their currencies lose further ground against the greenback in the run-up to the polls.

Uncertainty surrounding elections and runaway government spending are seen as the two main factors that will exert pressure on East African currencies despite the previously low oil prices.

According to projections from seven analysts, the Kenya shilling could slip below the low of 107 units to the dollar reached in 2011 to the 108 mark by the end of the year — a sharp variance from the Central Bank of Kenya’s expectation of the currency strengthening to 98.

Citi Bank forecasts that the Kenyan unit will close the year at 107.5, the Ugandan unit at 3,615 and the Tanzanian unit at 2,315 to the dollar.

Focus Economics analysts (includes analysis from Standard Chartered, Oxford Economics and the Economic Intelligence Unit) predicted that the Kenyan unit will close at 108.6 units to the dollar, the Ugandan unit at 3,586, and the Tanzanian currency at 2,265 units to the dollar.

Uganda and Tanzania, which recently held elections, saw their currencies lose further ground against the greenback in the run-up to the polls.

During the official campaigns and election period, data from Bloomberg Index shows, the Tanzanian currency fell by 9.4 per cent from a high of 1,980 units in July, when the campaigns were starting, to a low of 2,200 units to the dollar during the election period in October last year.

In Uganda, the shilling lost 4.4 per cent from a high of 3,300 units to the dollar at the start of campaigns in November last year to a low of 3,440 units in early February, days before the elections.

READ: EA currencies to fall further against dollar

Britam Asset Managers project that the Kenya shilling will remain stable over the first half of the year, gradually weakening to Ksh108 to the dollar, as the current account remains in deficit despite recent improvement.

Exposure

Kenneth Kaniu, the firm’s chief executive officer, said increased foreign borrowing — which rose from 23.5 per cent of GDP to last year’s 28.5 per cent — left Kenya badly exposed to external shocks associated with global interest and currency volatility.

“We expect the shilling to exhibit more gradual depreciation in 2016 as global dollar strengthening ease and the current account deficit narrows. It should trade between 102 units and 108 units in 2016,” said Mr Kaniu.

Citi Bank head of research David Cowan also said that investors are interested in exchange rate predictability and not nominal stability adding that the weaker Kenyan shilling, the rise in inflation and the tight monetary policy had probably suppressed consumer demand in 2015, even if there was some benefit from lower oil prices.

“An easing of inflation in 2016 should allow some recovery, especially if the benefits of the lower oil price start to feed into consumption behaviour. The borrowing costs have changed significantly, notably Eurobond interest rates, and if there is no change in fiscal policy, the Kenyan shilling may well continue to come under pressure,” said Mr Cowan.

Mid last month, Kenya’s Central Bank Governor Patrick Njoroge said the shilling was closer to reflecting the economy’s fundamentals. Insiders said the regulator expects the shilling to settle below 100, at 98.