December pinch as shilling slides, petrol nears Sh100 a litre

Kenyan consumers are facing deep erosion of their buying power ahead of the December festive season marked by a weakening shilling and rising petrol prices.

The shilling has in recent days sunk to a nine-month low against the US dollar, while petrol prices are racing towards the Sh100-a-litre mark. 

Commercial banks Monday exchanged the shilling at about 102 units to the US dollar, a level the Kenyan currency last touched in February.

A weaker currency raises the cost of imports, which then directly impacts on the cost of common goods and services.

A Sh3.38-per-litre increase in the price of petrol last week raised Nairobi pump prices to Sh94.94, indicating a climb toward the Sh100 psychological mark that was last breached before the global fuel price crash.

Kenya’s inflation rate currently stands at 6.5 per cent, an eight-month high.

Currency traders say that the weakening of the shilling is being driven by multiple factors, including heightened demand for dollars by Nairobi-based multinationals paying dividends to foreign shareholders and the after-effects of the US elections which have boosted the greenback.

“Cyclical demand for dollars is high at the moment, from corporates and importers in the sectors of manufacturing and energy. Some corporates are building up their dollar holdings in order to pay dividends,” said a currency dealer at a commercial bank who requested anonymity fearing reprisals from the regulator.

Safaricom and EABL, which have significant British ownership, are gearing up to pay out dividends of Sh1.44 and Sh5.5 a share respectively at the end of this month.

Their majority shareholders, Vodafone (Safaricom) and Diageo (EABL), are set to get a combined Sh25 billion, translating into a foreign exchange outflow of about $248 million.

Risk aversion

The global risk aversion hitting emerging markets in reaction to the election of Donald Trump as US president has also seen some investors shift their funds to safer havens such as US bonds.

This has put pressure on currencies like the shilling, the South African rand, Turkish lira, Indian rupee and the other East African currencies.

“The shilling has indeed been under pressure over the past couple of weeks. I believe this is primarily on the back of portfolio investors exiting not only the equity market but also from their infrastructure bond positions,” said Stanbic regional economist Jibran Qureishi.

The CBK had moved to reassure the market that it was ready to intervene in case of currency volatility in the wake of Mr Trump’s win, and dealers say that the regulator has been actively selling dollars in the market since the announcement of the election result. The CBK’s efforts have tempered volatility, but have not helped to stem the devaluation underway. 

The country’s foreign reserves fell by Sh92 billion ($92 million) last week from $7.63 billion to $7.54 billion, with the import cover depleting from 5.09 months to 4.8 months’ worth.

The Energy Regulatory Commission (ERC) on Monday last week announced increases in fuel costs, citing rising petroleum prices in the global market.

Thousands of Kenyans who travel across the country over the holidays are set to feel the pinch of higher fuel prices on their household budgets.

Other than raising expenses for motorists, the prices of basic items such as food ordinarily go up in tandem with fuel prices as businesses factor in the higher cost of logistics in their goods and services.

Eyes will now turn to the CBK to see the course of action the country’s monetary regulator takes in its next Monetary Policy Committee (MPC) meeting on November 28.

Analysts at Ecobank and Commercial Bank of Africa say the immediate inflationary pressure and weakening shilling is likely to push the CBK to cut short its recent easing cycle that saw the base rate (CBR) cut by 50 basis points to 10 per cent in September.

“The recent rebound in oil and other commodity prices (and strong import demand) are likely to increase pressure on the shilling, prompting the CBK to maintain a tight policy stance,” said Ecobank in a brief on African currencies.

CBA says in its November monthly economic report that the MPC will be confronted by a hard trade-off between low interest rates on the one hand and a stable currency on the other.

The CBR has taken on additional importance since it became the benchmark for pricing private sector loans, meaning that a return to a tightening policy — through an increase in CBR — would immediately raise the cost of borrowing.

Mr Qureishi, however, says that inflationary pressure is unlikely to extend beyond the food component, which going by past experience is unlikely to be enough to push the CBK to raise the CBR since core inflation, which excludes food and energy, remains stable.

“The epicentre of concern for inflation according to us remains food prices going forward. Nevertheless, owing to positive base effects, we expect to see headline inflation fall to around six per cent or slightly lower in December,” he said.

[email protected]