Oil inflows to cushion shilling from US stimulus cutback

Foreign currency inflows from oil and gas exploration firms are set to cushion the shilling from any cutback in the US monetary stimulus programme, research analysts at Standard Chartered bank have predicted.

Analysis by the bank’s research department shows foreign direct inflows (FDIs) into Kenya have helped to cushion the shilling despite concerns over the currency account, which shows Kenyaimports more than it exports, a factor that should ordinarily weaken the currency.

The shilling has maintained a stable exchange rate of between 83 and 88 units to the dollar in the past 22 months buoyed by an increase in FDI inflows.

Head of research for Africa region at StanChart, Razia Khan, said FDI flows into East Africa had been a major stabiliser of the Kenya and Uganda units.

Foreign direct inflows to Kenya amounted to Sh22 billion ($259 million) last year.

“More recent evidence – the relative resilience of the Ugandan and Kenyan shillings to the suggestion of (monetary stimulus) tapering, for example – also hints at the importance of the longer-term inflows to the region,” said Ms Khan.

The US Federal Reserve has hinted at a possible end to the bond buying, which has kept global markets liquid in recent years. The report said that East Africa had traditionally not done as well in attracting FDI as its counterparts in either southern or West Africa, having neither the scale of South Africa minerals nor the oil wealth of some West African economies.

“This is now changing, with new oil and gas exploration in East Africa. FDI to East Africa increased to $6.3 billion in 2012 from $4.6 billion in 2011,” she said.

Ms Khan noted that the Kenyan shilling has appreciated modestly since early September, adding that the foreign exchange reserves at $5.9 billion were also serving as a key stabiliser of the currency.

“With usable foreign exchange reserves at $5.907 billion at end-September, which is equivalent to 4.18 months of import cover, there is limited evidence of economic or market stress,” she said.

The maiden eurobond expected to be issued during this fiscal year will also boost forex reserves.

Other analysts see the shilling remaining stable in the coming months as will also be supported by short-term flows such as those getting into the bond and equities market.

“From a balance of payment perspective we still expect short-term capital flows to support the currency and the short-term outlook is favourable ahead of the Eurobond issue,” said Alexander Muiruri, a bond dealer at African Alliance Investment Bank.

He said that stability in the local unit is likely to be maintained, ruling out any excessive appreciation even if the benchmark Central Bank Rate (CBR) is raised.

“We do not expect a hike in CBR to negatively impact the currency,” said Mr Muiruri.

Ms Khan said that the Central Bank of Kenya is likely to raise the benchmark interest rate by the end of the first quarter of next year in the view of the expected spike in food prices.

She noted in the report that the poor rains predicted for this season would pressure the general level of prices upwards but this will only be next year.

Ms Khan said the benchmark rate is, however, likely to remain stable to March next year, noting that last month increase in overall inflation to 8.29 per cent was a one-off affair caused by the imposition of value added tax (VAT).

The inflation rate rose due to increases in prices of various goods and services after Parliament passed VAT Act. It was the fourth consecutive month that overall inflation rose.

“The CBR is likely to remain on hold at 8.5 per cent until next year, although some disappointment over the short rains and a modestly higher inflation profile suggest that the first 50 basis points rate hike may come in March 2014, rather than May 2014 as we had previously assumed,” said Ms Khan.

Mr Muiruri said he saw the CBR rising as early as January next year.

The CBK’s Monetary Policy Committee (MPC) has maintained the CBR at 8.5 per cent in the past few months as a way to curb possible inflationary and exchange rate pressures.

Ms Khan discounted the recent events in Kenya including the Westgate terrorist attack and the fire tragedy at the JKIA earlier as likely to influence the economy in the remainder of the year.

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