Kenyan shilling firm this year as deficit shrinks, transfers rise

Thursday March 24 2016

Tourism Cabinet Secretary Najib Balala (right) receives tourists at the port of Mombasa. Tourism has been hit by a spate of militant Islamist attacks in the past two years and an Ebola scare in West Africa that even deterred visitors to other African regions. PHOTO | WACHIRA MWANGI  

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Kenya's shilling has held firm against the dollar this year, supported by a shrinking trade deficit, higher transfers from workers abroad and an economy that has escaped the beating taken by others in Africa from weak commodity prices.

The shilling has been a sturdy performer among the main traded currencies on the continent in 2016, and weakened less than many others in 2015 as well.

Kenya still attracts foreign investors who are increasingly wary of other African markets, even as concerns about security dog the economy and worries about next year's election dampen some enthusiasm.

Of the big three economies, Nigeria and Egypt have foreign exchange controls in place while South Africa has been roiled by plunging commodity prices.

South Africa's rand weakened 25 percent against the dollar in 2015 and has gained 0.8 percent this year. The shilling is also holding a 0.8 percent gain this year but only slid 11 percent in 2015.

Kenya, far smaller than its rivals but boasting a floating exchange rate and a relatively mixed economy, has drawn foreign investors. They accounted for 60 per cent of trade on the Nairobi bourse in the first two months of 2016, making net purchases worth 276 million shillings ($2.72 million).

Kenya and Morocco aside, there are few other places in Africa with liquid enough capital markets to register on the radar of foreigners interested in shares and government debt.

"That combination of good companies and a beneficiary of lower oil have encouraged investors to stay in Kenya at a time when they have left other countries, like Nigeria," said Charles Robertson, chief economist for Renaissance Capital.

While Nigeria grapples with falling oil revenues, Kenya has enjoyed lower fuel costs to prime its economy which relies on tourism, agricultural exports, regional finance and manufacturing for regional markets.


Tourism has been hit by a spate of militant Islamist attacks in the past two years and an Ebola scare in West Africa that even deterred visitors to other African regions. But experts say Kenya's mixed economy means it can fall back on other earners.

Kenya's annual import bill is projected to drop to 1.1 trillion shillings in 2016 from 1.4 trillion in 2015, which experts largely attribute to falling steel and oil prices.

"That creates a very suitable situation for the strengthening of our local currency," Equity Bank Chief Executive Officer James Mwangi told Reuters.

Kenya's current account deficit is expected to narrow to 6.8 percent of gross domestic product in 2016 from 8.5 percent last year, the central bank says. The government expects to cut the budget deficit to 8.1 percent from a projected 8.7 percent for the 2015/16 year to June, and then to 6.9 percent in 2016/17.

Kenyans abroad have sent more cash home. Remittances rose to $137.5 million in January from $114.6 million a year ago.

"Recent inflows into Kenya have been healthy," said Razia Khan of Standard Chartered.

The central bank's foreign exchange reserves are now $7.35 billion, equivalent to 4.7 months' worth of import cover, up from $7.07 billion at the end of 2015, contributing to confidence in an economy forecast to expand 6 percent in 2016.

Although a year away, elections in August 2017 have re-ignited Kenya's fractious politics, which could weigh on the shilling. Ethnic violence marred the aftermath of the 2007 race, although the 2013 vote went calmly.

"It is based on personalities, it is based on tribes. That is a hanging risk that Kenya as a nation needs to deal with," said Mwangi.