28 January 2013

East Africa: Regional Currencies Depreciating - Analysts

Forex experts say regional currencies have in the last couple of weeks been depreciating, driven by resurgent demand mostly from the import sector across the three markets of Uganda, Kenya and Tanzania

Stephen Kaboyo, the managing director for Alpha Capital Partners said in a Jan. 28 statement that the cross cutting issue that is fundamentally at the centre stage is the wide current account deficits that are running in the three countries.

He said Kenya current account deficit as a ratio to GDP is 10.5%, Tanzania running at 6.4% and Uganda at 10%. The large current account balances are a result of weak export earnings due to a slowdown in the export markets of Europe and US.

"While the above remains the primary risk, there are other domestic factors that are specific to each country that add to the mix," he said.

Kenya's shilling traded higher last week and touched 87.70. The central bank reportedly intervened on the sell side, an action that did not have a significant impact.

In our view the shilling is starting to feel the impact of the upcoming elections on the other hand, the aggressive easing by the Central Bank , the most recent being the100 bps CBR cut has undermined the shilling.

For Tanzania, TZS touched 1613 per dollar its weakest point in over 13 months. TZS remains vulnerable to strong foreign exchange demand from oil and energy sector. The country is faced with a severe power shortage that is affecting production.

The Ugandan shilling was volatile closing the week with a marginal gain at sh2660. The shilling is vulnerable to further weakness on account of negative sentiment in light of donor aid cuts and jitters from the anticipated events surrounding the Kenya national elections.

Kaboyo said the markets are projecting a more volatile period for EAC currencies in the next few months.

"There is no game changer in the short term," he said, adding in the medium term the oil and gas sector developments in Tanzania and Uganda will change the trend but this kind of relief could only come a few years down the road.

It is expected that the regional Central Banks will deploy their accumulated reserves in a cautious manner to tame volatility and while allowing currencies to gradually depreciate and adjust to the weak fundamentals.

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