The shilling weakened slightly yesterday to lows last seen more than three years ago and traders said the slide was prompting more demand for dollars from businesses wary of a further dip.
“The significant thing to note here is we have broken the 91 level (to the dollar),” said Nahashon Mungai, a trader at Kenya Commercial Bank. “The sentiment has already shifted for a weaker shilling.”
“The main factors driving down the shilling against the dollar is that our traditional exports have fallen drastically, including tea, flowers and tourism numbers,” said Kariithi Murimi, a risk analyst in Nairobi.
On the flip side the appetite for imports has gone up, including equipment and machinery for ongoing public projects such as the Lamu port and the standard gauge railway.
“Diaspora inflows have remained static while tourism earnings for the end-year season were down almost 40 per cent. We should be worried because as demand for imports increase, these could deplete our foreign exchange reserves, leading to a further weakening of the shilling and affecting ongoing projects,” said Murimi.
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At the opening of business yesterday, the shilling was trading at 91.00/91.10, edging down from Tuesday’s close of 90.90/91.00. The last time the shilling traded at these levels was in late 2011.
The stab at the 91-level was prompting some extra demand from companies and other investors concerned that the currency would slide further, traders said.
Any dollar sales by the Central Bank of Kenya might slow but not halt the slide, they said. The Central Bank, in a bid to support the local unit, has been mopping up excess liquidity from the money market using various monetary instruments.
Yesterday, the bank mopped up Sh7 billion($77 million) in excess liquidity from the money market using repurchase agreements, or repos, and term auction deposits.
By mopping up excess liquidity, the Central Bank makes it more costly to hold dollars, which tends to support the shilling.
“Anybody who is short (of dollars) is covering on the interbank market,” said one dealer who asked not to be named. Another said the 91.50 level was now in sight.
Dollar sales
The Central Bank has on occasion intervened with dollar sales in recent weeks but that has not stopped the currency’s depreciation for long.
The Kenya shilling weakened steadily last year in part because of a downturn in tourism following a series of Islamist militant attacks. Tourists are a major source of dollars and other hard currencies for Kenya.
On the flip side, Kenya’s economy has begun to experience reduced inflationary pressure although cost of credit still remains high.
“GDP growth has been moderate but lower than expected rains and delays in launching large infrastructure projects is going to put pressure on growth numbers going forward,” said Eric Musau, an analyst at Standard Investment Bank.
Kenya’s exports have been doing badly on the international market in recent times, including tea prices which are high but unmatched by Kenya’s low volumes.
