16 November 2012

Kenya: Local Shilling Slides to Six-Month Low

Nairobi — Kenya's shilling is sliding towards its lowest level in more than six months as it comes under pressure from increased dollar demand and rising imports at the end of the year.

The Head of Trading at Commercial Bank of Africa Duncan Kinuthia projected that the currency could trade within the Sh86.50 to Sh87 range by the end of the year because businesses are importing more products as they prepare for increased sales during the holiday season.

"The Central Bank's change in the monetary policy stance is partly one of the contributors to the lower shilling because the country was coming from a period of high interest rates to a period of relatively lower interest rates, which means that the currency will be on the losing end," he explained.

Citing declining inflation and slowing economic growth, the Central Bank's Monetary Policy Committee, led by Governor Njuguna Ndung'u, lowered the benchmark interest rate by two percentage points to 11 percent on November 7.

He noted that inflation has also come down significantly from double digit levels to a low of 4.7 percent, adding that there's gradual build up in corporate demand ahead of the year end.

A trader at Nairobi-based African Banking Corp Julius Kiriinya said that there is increased demand for dollars driven by panic buying on expectation that it will weaken in the coming days as businesses look to increase their imports.

"Kenya's economy expanded 3.3 percent in the second quarter, the slowest pace since the final three months of 2009, as tea and flower exports slumped and tourism declined, eroding foreign-exchange income from the country's two biggest sources," he added.

"Since inflation is not a factor that the regulator is worried about at the moment, Kenyans will be affected most at the pump where the cost of fuel will most likely rise," CBA's Kinuthia explained.

He added that if the currency continues losing then higher fuel prices will result in higher prices for everything else, like food and transport and that also could affect the inflation figures going forward.

He said that the political "noise" leading up to next year's elections will play a major role on how the currency behaves.

"If there's any conflicts in the build up to the elections, investors may choose to hold out on any new investments and tourism may slow down significantly, which will tamper with dollar inflows," he emphasised.

"However, the shilling will not drop to the levels seen last year because the Central Bank has the adequate reserves to intervene in a case of excessive volatility and they've been using the open monetary operation to mop up any excessive liquidity that could affect the local currency," Kinuthia confirmed.

This year, the Central Bank has regularly mopped up excess shillings from the market via repurchase agreements to stabilise the currency, which is down 0.5 percent year-to-date.

On Wednesday, the bank absorbed Sh17.65 billion for the Sh15 billion it intended to mop up via repurchase agreements and it received bids worth Sh24.55 billion.

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