Behind Kenya's weakening shilling: the good, bad and ugly

by Elayne Wangalwa 0

The Kenyan shilling continues to come under pressure against the US dollar and has lost about 17 per cent of its value this year.

The local unit has edged closer to the 107.10 psychological mark against the strengthening dollar experienced in 2011.

Earlier in the week the shilling reached new four-year lows of 106.80, resulting in the Central Bank of Kenya (CBK) Governor Patrick Njoroge summoning chief executives of commercial banks to look at ways of preventing the further depreciation of the shilling.

Since then, the central bank continues to sell an undisclosed amount of dollars to prop up the currency. Moreover, CBK has implied on several occasions that it has adequate foreign exchange reserves to prevent any further weakening of the shilling.

Nonetheless, some analysts believe that the shilling could surpass the 107 mark and remains prone to enhanced currency volatility.

“The dollar has extended a further upward global rally against all major currencies, especially after the Chinese devaluation. Current-account deficit pressures may further weaken the pair, with increased importation of goods,” said Kevin Tuitoek, a Research Analyst at Genghis Capital.

The country’s current-account deficit has increased in the year to May by 22.7 per cent to 623 billion Kenyan shillings further draining the currency.

Furthermore, the widening of the deficit is perceived by many analysts as the key long-term contributor for the devaluation of the shilling.

“Exports of tea and coffee have declined over the past half year, with inflows from our traditional foreign exchange earners not being sufficient and long-term prospects remaining relatively low for the rest of the year,” Tuitoek noted.

Nevertheless, Kenya still has an emergency stand-by facility from the International Monetary Fund (IMF) of 688.3 million US dollars that could be used to stabilise any momentous aftershocks.

The East African country’s precautionary loaning arrangement is part of the measures the government is undertaking to avert a repetition of the shocks that hit its economy less than four years ago.

Speaking to CNBC Africa, Roy Daniels head of trading at Rand Marchant Bank (RMB) said that despite facing a strong and rampant US dollar, markets should not panic as it is less about economic fundamentals.

“The Kenyan shilling is down 17 per cent from January this year… I do not think it is out of line, I think it is in line with what is happening in all emerging markets not just African emerging markets,” Daniels said.

“All emerging markets are weaker, we are not out of line as to where we are actually going. Let us be patient and see how it plays out as the dollar will not remain strong forever.”

Additionally, Daniels believes that a weaker Kenyan shilling could be the answer for Kenya’s ailing agricultural sector in terms of commodity prices as well as the tourism sector

“We can worry about speculation, we can worry about how our currency is going to weaken but it will balance things out and you do get the benefit of a weaker currency,” Daniels explained.