The pain of a weakening shilling

When the Kenya shilling slid against the dollar early this year, the drop was perceived as a minor slip up, from which the local currency would recover fast. After all, the last time the shilling had been battered hard was in 2011.

“Back then, the nose dive was attributed to increased borrowing, imports and high inflation,” says Benjamin Wasilwa, an importer. “Last year, it depreciated a bit, and we were hopeful that there would be some recovery this year. We did not expect the shilling to lose so much ground.”

Five months down the line, though, the shilling has hit levels last seen in 2011 before it touched a historic all-time low of Sh107 to the dollar on October 11. Back then, the Central Bank raised its key lending rate by 550 basis points to 16.5 per cent to stem volatility in the exchange rate and spiralling inflation.

Consequently, overnight rates shot up to 25.9 per cent, making funding of dollar positions costly while cutting demand.

Since January, though, the shilling has lost 6.3 per cent against the greenback. This has been more than the cumulative 4.3 per cent the shilling lost in 2014.

The magnitude of the drop came to the fore last week when the unit succumbed to a three-year low of Sh96.80/97 to the dollar.

Just a week ago, a market report by Commercial Bank of Africa warned that the shilling was likely to drop further.

“The shilling’s outlook remains poor. There’s a high likelihood that it may breach the Sh96 mark,” said the report.

WEAKENING MARKET

The survey was echoed by technical analysis of the 14-day and 50-day weighted moving averages that showed the short-term outlook of the shilling to be dim against the dollar.

According to National Treasury Cabinet Secretary Henry Rotich, weakening of the shilling is due to persistent poor performance of tourism and horticulture as well as insecurity.

The government is considering drawing from Sh64 billion borrowed from the International Monetary Fund (IMF) earlier in the year to shore up the shilling. “We’re keenly looking into the volatility of the shilling and what is fuelling it.

Once we find out, we shall be in a position to withdraw the IMF funds. This should be within a month or two,” said Mr Rotich recently.

Research analyst George Bodo says the shilling’s depreciation can be partly attributed to the “weakening in the foreign exchange earning capacity, the strengthening of the US dollar globally due to the improving domestic absorption rate in the US economy and seasonality in demand for foreign exchange.”

Financial analyst and Rich Management CEO Aly Khan Satchu says profit bookings by foreign investors is driving the shilling deeper into crisis.

“We’ve seen the market getting weaker by the day as foreign investors book their gains before the shilling weakens further,” says Mr Satchu.

The vacuum created at the Central Bank has resulted in a defensive mode against the weakening unit. “We see more nervous people unwilling to touch the shilling in fear and defence against further plummeting. This ends in a self-fulfilling prophesy,” adds Mr Satchu.

His sentiments are echoed by Nation economic affairs editor Jaindi Kisero, who notes that the CBK governor’s shoes must be filled to offer direction to the markets.

“Calm and confidence will only return once the markets understand the options that are available to the Central Bank. Failure to this, we must brace for games and tactics by dealers and Treasury managers.”

To cushion themselves from the effects of a weak shilling, some traders such as Mr Wasilwa have taken to operating their businesses using a dollar account. Take Nahashon Muema, an exporter of horticultural produce, for instance. “It is cheaper for me to operate from a dollar account than say to buy dollars at the current high rates,” says Mr Muema.

“The weaker the shilling gets, the more value I get from my produce. In any case, I’ll get good money once I convert my dollars into the local currency.”

LOW OIL PRICES

However, Mr Satchu notes that this plan could demolish the shilling further. “If people open dollar accounts as a hedge, the shilling will hit Sh100 against the dollar in no time,” says Mr Satchu.

Losing more

In given instances, local exporters will seem to be in for more gains as the shilling weakens further. This is due to the exchange gain they get once paid using dollars.

However, Mr Satchu dismisses such gains, noting that a weak shilling does not benefit the Kenyan economy. “The notion that a weak currency is beneficial is actually a fallacy. A weak currency is a double-edged sword to our economy, unless we were to be as big in exports as Germany. Currently, we are losing more because we are being forced to pay more,” he says.

Apparently, the import–export deficit relief that was to come from low oil prices in the global markets never came to fruition. “Where is this export that’s going to be the redeeming factor of the shilling? Are we selling more agricultural produce? No, we simply aren’t selling more,” observes Mr Satchu.

In 2013 and 2014, the shilling depreciated due to low tea prices. In February, the unit had firmed helped by dollar inflows from tea auctions and tight liquidity resulting from a bond sale.

Nevertheless, according to Mr Kisero, the shilling should stabilise in the medium-term. “Oil prices are expected to stay low, this coming at a time when we are seeing increased dollar demand. Similarly, we have seven billion dollars in foreign exchange reserves and an IMF cushion in case the volatility persists,” he says.

Mr Satchu adds that while the CBK needs to stem the slide, we have no deep pockets to firmly shore it up.

On Tuesday last week, the Central Bank sold dollars to the markets in a bid to float the sinking shilling. Effectively, the unit gained marginally to Sh96.50/96.60 range. On Friday, the Central Bank quoted the unit at Sh96.15 to the dollar.

In the long run, this trick of releasing dollars into the market hardly stops the downward trend of the shilling. “Aren’t we depleting our reserves when we do this? What is the end game to all this?” Asks Mr Kisero.

According to Mr Bodo, commercial banks should work out a kill switch that will stem speculation whenever the shilling depreciates by over one per cent intra-day in the interbank market.

“Commercial banks’ net open positions should be narrowed to five per cent of core capital from the current 10 per cent,” he adds. 

ANALYSIS

experts take on shilling

Releasing dollars into the market hardly stops the downward trend of the shilling: “Aren’t we depleting our reserves when we do this? What is the end game to all this?”

Nation economic affairs editor Jaindi Kisero

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A weak shilling doesn’t benefit the Kenyan economy: “A weak currency is a double-edged sword to our economy, unless we’re to be as big in exports as Germany. Currently, we’re losing more because we’re being forced to pay more.” 

Economic analyst Aly Khan Satchu