Shilling slides to new low as dollar demand outstrips supply – The Star Kenya
•Forex reserves have fallen by $788 million (about Sh89 billion) since January, closing at $7.976 billion (Sh912.7 billion) last week.
•Financial Risk Analyst Mihr Thakar says the vast majority of pressure on the Kenya shilling is coming from the surging costs of imports.
The Kenya shilling hit a new low on Tuesday as high dollar importer demand outstripped low inflows mainly from diaspora remittances and tourism earnings.
The local currency is also exposed to the high oil prices and global reopening of economies which has increased demand for the dollar.
The Central Bank of Kenya quoted the shilling at 114.45 to a unit of the US currency, having weakened from 114.39 on Monday, with analysts predicting a further dip.
This is mainly on an expected capital flight at the NSE, as the interest rates in the US become more attractive where last Wednesday, the Federal Reserve hiked its rates by 0.25 per cent or 25 basis points.
Experts note the world is expected to experience capital flight as money flows out of frontier and emerging markets to dollar-denominated assets in the US.
Being a dividend-paying season by listed companies, mainly banks which started releasing their full-year results last week, billions in dollars is also expected to be moved abroad as they pay shareholders, a move that will increase dollar demand.
For instance, Safaricom alone is expected to pay up to Sh10 billion to foreign shareholders.
“We expect to see portfolio flows. This will add pressure on the shilling which is already under pressure due to demand for hard currency by importers in Kenya and globally,” Churchill Ogutu, Economist, IC Asset Managers (Mauritius), told the Star.
The country’s forex reserves have remained under pressure from debt repayment, mainly on the SGR loan, with the CBK whose Monetary Policy Committee is meeting next week expected to deep into the reserves to cushion the shilling.
Reserves which have fallen by $788 million (about Sh89 billion) since January closed last week at $7.976 billion (Sh912.7 billion), down from $8.011 billion (Sh916 billion) previous week.
The usable foreign exchange reserves however remained adequate (4.88 months of import cover) as of March 17, CBK notes.
“This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” it says in its latest weekly bulletin.
According to currency trading solutions provider, AZA Finance, the weaker currency is creating inflationary pressures, pushing up the cost of imports, and rising debt-servicing concerns.
Inflation is expected to average around six per cent this year, though that could potentially creep higher if a lack of rain during the wet season crimps food production, notes Terry Karanja, Treasury Associate at AZA.
AZA is Africa’s largest non-bank currency broker by trading volume.
“We expect the shilling to remain under pressure in the week ahead, though the central bank is likely to dip into those reserves to avoid a steeper decline,” she said.
Financial Risk Analyst Mihr Thakar said: “The vast majority of pressure on the Kenya shilling is coming from the surging costs of imports. As long as supply constraints remain, prices will remain high, thereby continuing to weigh on the current account deficit.”
He said this could be further worsened by a decline in Kenya’s exports, which are predominantly agricultural, stemming from potential fertiliser shortfalls and unfavourable weather.
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