Economists forecast a stronger shilling in 2016 - Daily Nation

Economists forecast a stronger shilling in 2016

Economists forecast a stronger shilling in 2016

Overvalue, balance of payments deficit may stop currency appreciation

Kenya’s currency fared better against the US dollar than the currencies of other leading economies in Africa and the Americas last year even as economists predict a stronger, more stable shilling in 2016, reveals an analysis of global currencies data by Nation Newsplex.

The shilling depreciated against the US dollar by 12 per cent from January to November 2015, which was a modest decrease relative to the decline of other currencies around the world.

As the effects of a strengthening US currency were felt across global financial markets, only major economies in Asia held their own against the US dollar, according to an analysis by Newsplex and the Institute of Economic Affairs (IEA).

“It is very counterintuitive but the shilling has not been weak. It has been strong on a trade-weighted basis.”

In an interview at the end of last year, economist Aly Khan Satchu, the chief executive officer of Rich Management Ltd, was optimistic that the shilling would do better in 2016.

“During the last 16 weeks, the shilling has been one of the best performing currencies anywhere in the World. I am confident the shilling is set to improve further and move back into double digits versus the dollar,” Mr Khan Satchu said.


His optimism is due to the fact that Kenya is likely to reduce its import bill significantly if the price of petroleum continues to fall in the global market, a trend that is likely to result in huge savings that will continue to drive down the demand for dollars locally.

“The sharp slide in fuel prices meant hard currency dollar demand has eroded by about 1.5b US$ in 2015 in favour of the shilling,” said Mr Khan Satchu.

Kenya’s single largest import expense item is petroleum, and its derivatives and refined products, which have been dropping sharply in the last few months in the global markets.

“It is very counterintuitive but the shilling has not been weak. It has been strong on a trade-weighted basis,” said Mr Satchu.

A country's trade-weighted exchange rate is an average of its bilateral exchange rates, weighted by the amount of trade with each country.

When the weakening in the value of the shilling was compared with those of five Africa’s leading economies, the review found that Kenya’s currency outperformed all of them, except the Nigerian naira. This indicates that the weakening of the currency was not unique to Kenya.


At 32 per cent, the rate of depreciation of Angola’s currency was three times as much as Kenya’s from January to November 2015. Algeria and South Africa saw a 21 per cent and 20 per cent depreciation in the dinar and the rand respectively. The Egyptian pound fell by the same rate as the Kenyan shilling while the Nigerian naira declined by nine per cent.

Closer home, the value of the Ugandan and Tanzanian shillings decreased at double the rate of the Kenyan shilling, the Rwandan franc fared slightly better, depreciating at a rate of eight per cent while Burundi’s franc lost only 0.2 per cent of its value against the US dollar, thus becoming the East Africa country whose currency depreciated the least against the US dollar.

Experts attribute the shilling’s performance to Kenya's relatively developed manufacturing industry, which saw the country chalk a lower import bill compared with some of her neighbours.

The performance of the Burundi currency is because the country does not import a lot of products, thus reducing its exposure to developments in the global market.

The shilling, in fact, performed far better than most of the currencies in the Americas and Oceania, beating strong economies such as Australia, whose dollar depreciated at a rate of 16 percent against the US dollar, as well as Canada (14 per cent), and Mexico (13 per cent).

The worst performing currency among the select countries in the two regions was the Brazilian real, which plunged to a low of 46 per cent.


According to the IEA/Newsplex analysis, the Kenyan shilling’s performance against the dollar was most closely mirrored by the performances of various European currencies. Data shows that the euro, the currency used in 19 European countries, including economic powerhouses such as Germany, France and

Italy, depreciated at a rate of 10 per cent against the US dollar, which was only two per cent lower than the Kenyan shilling. Only the British pound had a minimal depreciation of two percent.

Overall, the countries whose currencies performed best against the US dollar are in the Asian trading block. The rates of depreciation for South Korean (four per cent), Indian (three per cent), Chinese (two per cent) and Japanese (one per cent) currencies were all in single-digit values.

But some financial analysts and banks such as Renaissance Capital (RENCAP) foresee tough times ahead for the shilling against the US dollar this year.

The dim forecast for the Kenyan shilling by RENCAP is hinged on two main factors: overvalue and account deficit.

According to RENCAP, the country will run a 10 per cent current account deficit of its Gross Domestic Product between 2015 and 2016. This means that the value of the country’s imports will be higher than exports to an amount equal to 10 per cent of the GDP.

“The IMF now forecasts that Kenya will run a significant 10 per cent of GDP current account deficit (import/export imbalance, more import than exporters) in 2015-16,” says a RENCAP report on emerging and futures markets.


It also notes that the shilling is among the most overvalued currencies. “It seems to show the shilling is 57 per cent overvalued and would need to be at 160 to the US dollar to be at fair value,” said Mr Charles Robertson, an economist with RENCAP.

“From our forecasts for the Kenya shilling, we see the currency weakening to around 115 to the dollar by December 2016,” explained Mr Robertson.

But Mr Aly Khan Satchu is confident that the situation will not be as grim if the Central Bank of Kenya continues to intervene like it has been doing in the last few months. He attributes the slowdown in the slide of the shilling against the dollar in the second half of last year partly to monetary interventions by the Central Bank of Kenya.

He said the change of guard at the Central Bank has been very well received and the bank has achieved control of monetary policy making, which will also lend support to the Shilling.

Given that Kenya is a net importer, a weak currency hurts the economy more, since it makes its imports more expensive. It is therefore necessary that measures such as increasing the value of exports be enhanced so that the deficit in the balance of payments is reduced.

Besides the value of a currency, its stability is also is important to protect the confidence of the investors and the entire economy in general. According to IEA, the Kenyan shilling exhibited a rate of fluctuation of 5.5 per cent from January 2015 to November 2015, ranking it third in East Africa. But in the last half of the year, its fluctuation reduced, signifying that the currency was stabilising.

Efforts to strengthen the currency, such as sound macroeconomic policies, e.g., increasing both the value and quantity of the exports, ought to be enhanced since, currently, Kenya is a net importing country and a weak currency makes imports more expensive while a stable currency preserves consumers’ purchasing power.