CBK dips into foreign reserves to shore up shilling

Other analysts said the Central Bank may have to spend even more foreign reserve money to stabilise the shilling, especially as the Eurobond coupon comes around next month.PHOTO:STANDARD

Central Bank of Kenya (CBK) has withdrawn Sh25 billion from the country’s foreign currency reserves to cushion the shilling and pay debts, sending the country’s import cover to a five-month low.

Last week, foreign reserves stood at $7.5 billion (Sh766.8 billion) down from $7.8 billion (Sh792.6 billion) on October 6, bringing the import cover down to 4.8 months, levels last seen in June.

“From where we stand, I think portfolio investment exits from the equities market and an infrastructure bond may be driving the dollar demand,” said Jibran Qureishi, regional economist at Stanbic Bank.

Other analysts said the Central Bank may have to spend even more foreign reserve money to stabilise the shilling, especially as the Eurobond coupon comes around next month.

“Debt repayment for the Eurobond coupon in December may put more pressure on the reserves because I think the shilling has remained quite stable for the past one year,” said Sterling Capital’s Eric Munywoki.

Mr Qureishi, on the other hand, pointed out that CBK is under similar pressure to spend foreign currency to settle the other Eurobond coupon in June that saw reserves dip coupled with market uncertainties after Britain voted to leave the Eurozone.

Kenya issued the $2 billion (Sh200 billion) Sovereign Bond in June, 2014 and the tap sale of $750 million (Sh7.5 billion) in December of the same year.

Mr Qureishi said the shilling could come under further pressure after Donald Trump’s election failed to affect the financial markets, leaving the option of a rate hike by the US Federal Reserve.

 Analysts had predicted that Trump’s victory could create market volatility and risk-off posturing, which could decrease the likelihood of a Fed rate hike by 25 basis points in December.

However, after an initial shock, the market quickly adapted and calmed down, something that could allow the Janet Yellen’s committee to increase the lending rate for the second time in two years to 0.75 per cent.

The impact of a rate hike in the US on emerging markets is usually huge capital outflows as money trickles back to the stable economy as the dollar strengthens further. Reuters reported that the Kenya shilling was steady against the dollar yesterday but was seen easing on increased demand from importers and multinational companies making foreign exchange settlements.

Last December, the shilling withstood pressure, losing marginally by 0.09 per cent to close at 102.4 against the greenback when the Fed raised rates from 0.25 per cent to 0.5 per cent, increasing the cost of lending for the first time in nine years.

Between October 6 and November 3, CBK spent Sh16.3 billion ($161 million) of its reserves although the import cover had remained strong at 5.09 months of import cover, according to a statistical bulletin from Kenya National Bureau of Statistics.