12 June 2014

Tanzania Shilling Continues Losing Ground

THE shilling continued losing ground against the US dollar and other major currencies due to the fall of the country's exports.

The Confederation of Tanzania Industries (CTI), Director of Policy and Advocacy, Mr Hussein Kamote said in an interview with the 'Daily News' on Wednesday that the weakening of the shilling will persist until the harvest season begins.

The National Microfinance Bank (NMB) e-market report shows that the Shilling extended the losses on Tuesday with the USD/TZS pair closing at 1670/1721. The local currency is expected to be kept under pressure along the week.

According to the Bank of Tanzania (BoT) monthly economic report for April, the value of coffee, tobacco, cotton and cashew nut declined due to fall in both export volumes and unit prices, while that of tea was driven by a decline in export unit price alone. With the exception of travel and manufactured goods, all other major exports recorded declines.

The value of exports of goods and services declined by 1.7 per cent to 8,709.5 million US dollars in April. Mr Kamote said the inflows from gold exports were still providing support to the shilling, but the price instability in the world market coupled with the declining volumes was creating some uncertainties.

According to the BoT report, export value of gold declined by 11 per cent to 1,749.1 million US dollars compared to a fall of 17 per cent to 1,723.1 million US dollars recorded in the previous month.

However, he said, the inflows from the tourism sector starting this month will to some extent ease some pressure on the local currency for the situation to stabilise further during harvest seasons in next few months to come.

Mr Kamote cautioned over the uncontrolled illegal business in US dollars particularly in some bureaux de change, as it will continue hurting the local currency as well as the economy.

"This is very serious. If the illegal business in dollars is not arrested immediately, the shilling will continue falling," he noted. According to Standard Chartered Bank daily market commentary, the local unit further lost ground against the dollar yesterday, as demand continues to pressurise the shilling in the interbank market.

The same pressure was expected to continue yesterday with the pair expected to trade with medium price volatility.

Meanwhile, the Kenyan shilling weakened against the dollar today as excess liquidity and dollar demand across the board put pressure on the local currency.

At 0815 GMT, commercial banks posted the shilling at 87.90/88.00 per dollar, weaker from Tuesday's close of 87.70/80. "It seems the market is flush with Kenya shillings," said Mr Andlip Nazir, senior trader at I&M Bank.

The central bank has regularly intervened to mop up shilling liquidity via repurchase agreements and other instruments, and in recent weeks traders said it had also sold dollars.

Traders widely expect the bank to sell dollars again if the currency comes under more pressure. The bank sought to drain 5 billion shillings ($56.88 million) of excess liquidity from the money market today by using repurchase agreements.

Mr Nazir said the local currency has also been hurt by strong dollar demand from all sectors. He said both corporates and individuals were buying greenbacks.

Traders have said they are also waiting for the 2014/15 (July-June) fiscal budget, due to be presented to Parliament on Thursday, for a broader guide to the economy's direction.

In Uganda, the shilling firmed on Tuesday as corporate demand for dollars slowed, but investors were reluctant to make any sharp moves before budget announcement today.

At 0824 GMT on Tuesday, commercial banks quoted the shilling at 2,555/2,565, up from Friday's close of 2,560/2,570. Uganda's markets were closed for a holiday on Monday.

"When the shilling hit 2,570 levels last week most corporate buyers thought (the dollar) was getting a little expensive," said Faisal Bukenya, head of market making at Barclays Bank.

"We have seen demand come down ... but ahead of the budget I think we're likely to see a stable tone." Uganda's finance minister is due to present the budget today for the 2014/15 financial year that starts on July 1.

Traders said there was still some pressure on the shilling in the medium term, in part because the Bank of Uganda, the central bank, last week unexpectedly cut its key lending rate by 50 basis points to 11 per cent.

The shilling is down 1.4 per cent on the year to date and has been largely propped up by inflows from offshore investors buying Ugandan debt and by BoU mop-ups of excess liquidity. The rate cut may make that debt less attractive to investors.

"Due to the monetary policy easing and current account and budget deficits, the shilling will continue ... to depreciate mildly against the dollar, by 1.0 per cent on average in the medium and long term," Amsterdam-based frontier markets research firm Mantis said in a June report.

But it said lower interest rates would boost growth. On June 11, a total of 115 billion shillings ($55 million) worth of Treasury bills of all maturities will be auctioned.

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