Borrowers likely to be hit again as CBK saves ailing shilling

The Central Bank could raise its policy rate at a meeting Wednesday to salvage the shilling from weakening further against the dollar.

Despite admitting that the shilling’s weakening was out of it’s control, CBK may raise its benchmark rate by a further 1.5 percentage point to stop the local currency from shedding its value further, analysts at Standard Chartered Bank have said.

In its two previous meetings, the regulator raised the Central Bank Rate (CBR) by a cumulative 3 percentage points to 11.5 per cent. However, even with the absorption of excess liquidity from the market, the shilling has kept depreciating.

“Previously we had forecast a further 50 basis points (0.5 per cent) hike in the CBR in Q4 2015. Now, anything up to a further 150 bps (1.5 per cent) rate hike to 13 per cent is plausible,” said Ms Razia Khan, chief economist at Standard Chartered Bank.

About two weeks after the regulator raised the CBR, it followed up with a directive to banks to limit their daily forex transactions to 10 per cent of their core capital. This has, however, not supported the shilling.

Analysts had expected that reduced transaction volumes would lead to less speculative trading and lessen volatility of the shilling. However, this has not been the case. Rising interbank rate, which stood at 19.21 per cent at the end of last week, has also not helped much in squeezing liquidity from the market.

The CBK has continued to tighten stance over the past three months by mopping up excess liquidity in the market. This was followed up with a tightening of the monetary policy, a trend that is likely to continue after tomorrow’s meeting. But it remains to be seen whether a further rate increase will provide the support needed for the local currency.

DESPITE THE MEASURES

“Despite these measures to support the local currency, we note key fundamental areas such as the worsening of the current account deficit due to increased imports, especially on capital-intensive projects, and deteriorating performance on the tourism sector could place further pressure on the shilling,” says Ms Maureen Kirigua, an analyst at Sterling Capital.

At the end of trading last Friday, the shilling closed at 102.35/102.45 to the dollar, weaker than 102.20/102.30 at which it closed a day earlier. Being the last day of the month, the shilling had come under pressure from importers seeking dollars.

To salvage themselves from accumulating huge forex losses, foreign investors continued exiting the Nairobi Securities Exchange (NSE), which hit a two-and-a-half-year low at the end of last week. The main NSE 20 Share Index declined by 82.65 points at the end of last week to close at 4,404.72 points, its lowest point since January 2013.

Coupled with the weakening shilling that has sparked foreign investor exit, the decline is also attributable to disappointing financial performance by a number of listed firms such as Kenya Airways, which made a record full-year loss of Sh26 billion, Athi River Mining (half-year loss of Sh355 million) and TPS Serena (half-year loss of Sh97 million).

The banking sector has also been highly affected as the rising interest rates may dampen borrowing. This may not only lead to reduced bank earnings but also slow down economic growth.

The poor run in the stock market is expected to continue with sustained depreciation of the shilling. This year, the shilling has depreciated by about 12 per cent to the dollar.

A widening current account deficit, strengthening dollar in the international market, declining earnings from key sectors such as tea, tourism and coffee have seen the shilling suffer immensely.

Last week, CBK governor, Dr Patrick Njoroge, indicated that the regulator would tighten its policy rate further if necessary to support the local currency.

According to analysts at Cytonn Investments, the CBK’s actions will offer support to the shilling in the short-term.

“For longer term stability, the government and market players need to address the underlying structural problems, which include; allowing time for the Central Bank Rate increases to be transmitted into the market, reducing the rate of budget growth, manufacturing locally to reduce importation, and diversifying the economy away from agriculture and tourism.”