Shilling to weaken against US dollar on import demand

By James Anyanzwa

Kenya: The shilling, which has relished a relatively long spell of stability, is set to come under immense pressure in the second half of this year.

Fund managers at PineBridge Investments (EA) Ltd warn that the local currency could weaken to as low as Sh89 against the US dollar between July and December as import demand gathers momentum.

Kenya spends more abroad than it receives from other countries.

This warning comes amid fears that overall inflation — the general level of prices for goods and services in the country — could also hit double-digit figures over the same period.

The likely loss of value of the local unit could spell doom for importers, households and businesses through an increase in commodity prices.

The shilling, which hit a low of Sh107 against the dollar in October 2011, has gained ground to be among the best performing currencies on the continent.

The local unit is currently trading at a high of Sh85 against the dollar.

Looking forward

Fund managers attribute its stability to increased short-term capital inflows, increased remittances, disbursements under the International Monetary Fund’s Extended Credit Facility programme and Central Bank’s activity in the foreign exchange market.

“Looking forward, the outlook is a story of two halves, with the shilling expected to remain strong in the first half of 2014 and operating in the Sh85-Sh86 range, while in the second half, we expect the shilling to weaken up to the lows of Sh89 against the US dollar,” said Mr Joel Warutere, the investment manager at PineBridge.

“The key risk to the shilling’s stability lies in the likelihood that the current account status will deteriorate as soon as import demand picks up, which would more likely happen in the second half of 2014.”

This will have the impact of escalating the prices of crude oil imported into the country and eventually have a knock-on effect on the cost of living.

Experts have also raised concerns over the rising current account deficit (which is a measure of payments for imports against earnings from exports).

According to Mr David Cowan, the chief economist and director in charge of economic and market analysis at Citibank Group, reasonably robust growth, increase in the fiscal deficit, erratic domestic food production and high global oil prices have combined to push up Kenya’s imports.

For the five-year period 2004 to 2008, Kenya’s imports averaged 36.7 per cent of the gross domestic product. However, between 2008 and 2012, imports averaged 42.1 per cent of GDP.