Kenya Shilling under siege, hits 3-year low

Farmer Harvesting Tea

Farmer Harvesting Tea


NAIROBI-The Kenya Shilling Exchange Rate against the US Dollar has been trending at three-year lows for the past 2 weeks, in a situation that has gotten traders, Kenyans, and Monetary Policy makers concerned. To these players, the memory of the 2011 period is still fresh; a period when the KES depreciated 25% against the USD within 6 months triggering a shooting import bill, soaring inflation and a very high interest rate regime as the Central Bank and Monetary Policy tried to place a lid to cushion Kenyans against growing cost of goods and services.

The situation slowed down economic activity, and it took at least 2 years for interventions made to bear fruit, and necessitate businesses to pick up the slack and spur the target economic growth expected.

This year round, the high demand for the USD and subsequent depreciation comes in the wake of increased demand by companies prepared to buy dollars to make dividend payments to their foreign shareholders, the global USD rally against major currencies, while the main foreign currency earners, horticulture and tourism, continued to flounder. The KES was trading at 93.45/55 levels against the Dollar, levels last seen in 2011, as traders held their breath waiting for a CBK intervention whose communication only came during the week ended 17th April, for an exchange depreciation rally that has been running for at least 3 weeks.

Poor rains have hit the agriculture sector hard, leading to depressed tea and coffee earnings and a drop in maize production, which could trigger costly imports. A spate of terrorist attacks, including an assault on a northeastern university earlier this month where 148 people were killed, has scared off potential visitors to Kenya’s sandy beaches and game reserves, just as tourism players recorded poor numbers in 2014 due to lower tourist numbers in the country.

Rising Current Account Deficit – Gains in lower global oil prices set back by lower tea and coffee earnings

Kenya has run a wide current account deficit since 2011, but IMF and World Bank predictions indicate that this shortfall will narrow substantially; falling from 8.3% of GDP in 2014 to 5.9% of GDP in 2015. While several factors are at play, the most important is lower oil prices. Declining energy costs will help to counteract the effect of low tea prices and a poor performance from the tourism sector. Oil prices will remain low over the coming years due to a combination of rising supply and weak demand from key markets.

While this fall in prices has had a catastrophic effect on oil-exporting economies such as Russia and Venezuela, it is a significant boon for oil importers such as Kenya. Kenya imported approximately USD3.6bn worth of oil in 2014, a figure equivalent to 22.0% of imports and 6.1% of GDP. Lower oil prices will cut this bill by around USD1.6bn in 2015, saving the country over 3.5% of GDP. This will have a significant impact on Kenya’s current account balance by pushing down import costs. Predictions are that the share of Kenya’s import spending directed towards oil and oil products will plunge from 22.0% in 2014 to 12.4% in 2016.

While low oil prices depress import growth, export growth is picking up. Figures from the Central Bank of Kenya (CBK) show that goods exports rose by 6.3% in the first half of 2014 – the most recent period for which figures are available- when compared to the first six months of 2013. Goods exports had contracted over the previous year. The improved export figure came despite a poor performance from the vital tea sector, which saw foreign revenues fall by 17.4%. Kenya’s manufacturers also faced a difficult period; their export earnings fell by 11.7%.

Other sectors, however, posted strong growth. Raw material sales rose by 29.5%, while re-exports – mostly shipments to and from the East African Community – shot up by 115.5%. Kenya’s export basket is slowly becoming more diversified. A reduction in the importance of the tea sector, which is vulnerable to shifting weather patterns and fickle commodity prices, may make export earnings more stable in future. Despite strong export figures, Kenya’s trade balance remains deep in the red.

Kenya is estimated to run a trade deficit equivalent to 14.6% of GDP in 2015 and is thus highly reliant on its service balance to make bring the overall current account figure closer to the black, and a struggling tourism sector is weighing on this crucial source of foreign currency.

KESUSD Trends Oct 2014 to April 2015

KESUSD Trends Oct 2014 to April 2015


Full year figures for 2014 are not yet available, but data from the CBK shows that 16.0% fewer foreign citizens landed at Nairobi’s Jomo Kenyatta International Airport over the first six months of 2014 than the same period in 2013. Half as many arrivals landed in June, during the key summer tourism season. The fall was even sharper in Mombasa, which is the Centre of Kenya’s coastal tourist area. Arrivals there dropped by 22.1% following a series of bombings and militia attacks.

Kenya’s current account shortfall is easily covered by capital and financial flows as the country continues to attract significant investment. The launch of Kenya’s debut Eurobond also drew in substantial foreign currency; financial account inflows rose to USD2.9bn in the second quarter of 2014.

Central Bank of Kenya Intervention
The Central Bank of Kenya has in the past week moved to calm the market as the shilling continued its slide to a new three- year low of 93.40 units to the US dollar. A CBK statement to newsrooms said the shilling was being weakened by a combination of a stronger dollar and rising demand from local companies, even as it assured the market that it has enough reserves to support the local currency if need be.

The reassurance was welcomed by currency traders who reported cautious trading due to uncertainty over the CBK’s intervention once the shilling crossed the 93.50 mark. The shilling weakened further on Tuesday after opening at the rate of 93.20/30 and closing at 93.35/45 with an intraday average of 93.45/55 to the dollar.

The CBK’s mean indicative rate on Tuesday stood at 93.24, the lowest since mid-November 2011. The CBK also said it was closely monitoring developments in the foreign exchange market and would continue to use appropriate monetary policy instruments to minimize exchange rate volatility.

“The bank has adequate foreign exchange reserves in excess of 4.5 months of imports to cushion the exchange rate against these short-term shocks and volatility,” the statement said. The regulator has intervened in the market several times in recent months to minimize volatility through sale of dollars when the shilling depreciated to cross key psychological levels but has not sought to determine the direction of the exchange rate.

Analysts however are cognizant of the short term nature of measures taken by CBK in liquidity mop-ups, and are tipping the Monetary Policy Committee to change stance and consider adjusting the Bank’s reference rate to curb inflation which is set to increase buoyed by increasing imports and an appreciated Dollar. A rate change would be a major set-back to the Government’s target of over 5% growth in 2015, as economic growth is largely hinged on availability of credit to the Private Sector to stimulate business growth and expansion.