US rates: Is there light at end of the tunnel for battered shilling?

The Kenya Shilling could experience significant relief as the US dollar continues to weaken against major currencies. According to The Standard spot-check, the US dollar index, which measures the strength of the US currency against six major counterparts, has been easing in the last few months, indicating a continued decline in the value of the dollar. The dollar index tracks the relative value of the US dollar against a basket of important world currencies. If the index is rising, it means that the dollar is strengthening against the basket - and vice-versa. The dollar index, which weighs the value of the greenback against a basket of six major currencies, eased 0.27 per cent to 103.22 on Friday amid a growing conviction that the US Federal Reserve was done raising interest rates, and will begin cutting them in early 2024. The US currency ended lower against all currencies led by the Japanese Yen (USD/JPY). And yesterday, the dollar index and dollar index futures rose marginally but remained within sight of lows last seen in early August. The retreat is favouring emerging markets currencies including the shilling which for the better part of the year has suffered the debilitating effects of a stronger dollar. According to analysts, global investors are betting on the US dollar to weaken further as they believe that the US Federal Reserve has no plans of raising interest rates after keeping them steady in the previous rate-setting session. This speculation is fueled by the growing expectations that the US Federal Reserve may even start cutting interest rates next year. Investors are reportedly rapidly withdrawing from the US dollar, as they bet that the US Federal Reserve has finished its aggressive interest rate hike campaign and will implement multiple cuts in the upcoming year, as per Financial Times report. While the US Federal Reserve Chair Jerome Powell reiterated in late November that the US Fed is prepared to tighten policy further if deemed appropriate, but traders are convinced the rate-hike cycle is over. FT, for instance, recently quoted State Street, a dollar-rich fund manager that holds custody of $40 trillion worth of assets, predicting that asset managers will be divesting 1.6 per cent of their open dollar positions this month, resulting in the biggest monthly outflow since November 2020. Central Bank of Kenya (CBK) data showed that the shilling had reached a record low against the dollar of Sh153.2412 yesterday. This came as several banks sold the dollar at just below Sh160 according to The Standard spot-check of various banking halls. Last rate The CBK's Monetary Policy Committee (MPC) will have its last rate meeting of the year today, where the easing dollar will be a point of interest. The weakening shilling has hurt Kenya's import-driven economy, causing the Kenya Kwanza administration and the banking regulator to welcome any relief in the form of a weakened dollar. The current economic crisis in Kenya has been worsened by the devaluation of the shilling, placing an additional burden on already struggling consumers. "Right now, in light of the exchange rate sliding given market sentiment towards Kenya, there is nothing more critical than managing the national FX (forex) reserves to make sure inflation doesn't catch fire," said Deepak Dave of Nairobi-based Riverside Advisory. Mr Dave said global assessments of Kenya marked by the "rising threat of default by a government presiding over a weakening economy" drive the lack of foreign money coming to local markets, including sovereign bonds that push down the foreign exchange rate. This has worsened the foreign debt burden - making the government even more desperate to announce new taxes, he said. The high cost of living has pushed many people into poverty, and the depreciating shilling has sparked public outrage due to its impact on fuel prices. Furthermore, it has contributed to the country's increasing electricity expenses and the difficulties in servicing its debts. Public debt hit Sh10.58 trillion in September this year, with the National Treasury revealing that both domestic and external liabilities have risen rapidly under the government. "The depreciation of the Kenya shilling has been the primary driver of nominal growth of external debt," said Treasury Principal Secretary Chris Kiptoo recently. Kenyan investors have become known for accumulating dollars to participate in speculative activities, relying on past forecasts that the shilling would continue to lose value against the US currency. They either convert their dollars into shillings for profit or avoid losses when importing goods. Therefore, a decline in the dollar's value would mean the loss of a profitable opportunity for those who hoard dollars. Industries that heavily rely on exports, like tea, horticulture, and tourism, which have been experiencing substantial financial benefits, would be jittery about the news of a weakening dollar. The CBK, like other central banks around the world, has been working to stabilise the local currency and protect the local economy from the rapid interest rate hikes by the US Federal Reserve, which have favoured the greenback. CBK Governor Kamau Thugge acknowledged three months ago that the weakened currency had presented a challenge in reducing the cost of living. However, he expressed optimism that the pressure would ease. He repeated the sentiment yesterday when he met a Parliamentary Committee on Finance on the state of the economy. During a briefing with journalists in Nairobi after an earlier MPC meeting, Thugge acknowledged that when the shilling weakens, imported goods become more expensive, which poses an inflationary challenge. Despite this, Thugge predicted that there would be less pressure on the shilling in the future, especially as the US was expected to stop increasing interest rates and Kenya's foreign exchange reserves were expected to grow. "I think going forward, we do expect as I said, the current account is improving, the balance of payments will be in surplus and I think now also, with potentially the pausing of the raising of interest rates by the US, we should see perhaps less pressure on the shilling," he had said. "And so we don't really see the weakening of the shilling being a major challenge in terms of us addressing the inflation rate." Difficult situation Hence, any further depreciation of the US dollar would be advantageous for the banking regulator. However, it would be a difficult situation for others, particularly those in the services export sectors, including young professionals from Kenya who engage in online jobs. These individuals have been enjoying financial gains due to the strength of the dollar. Additionally, landlords who charge rent in USD or have linked their rents to the USD have also benefited greatly. Numerous commercial banks with subsidiaries in the region, such as KCB Group and Equity Group, have also reaped significant rewards. For example, Equity Bank Democratic Republic of Congo (DRC) has a loan portfolio denominated in dollars, resulting in substantial dollar inflows. Another group that has profited greatly are the Kenyans living abroad who send remittances back home. The stronger dollar has allowed them to send more money, benefiting their families who receive the remittances in addition to the appreciation of other major foreign currencies like the British Pound and the euro. The eagerness of Kenyans in the diaspora to take advantage of the strong dollar has increased the purchasing power of their local beneficiaries, especially during the decline of the shilling, leading to a surge in remittances.

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