WB sees fresh round of shilling volatility on Fed rate increase

The World Bank has warned of an impending second round of shilling volatility owing to the country’s vulnerability to a raise in interest rates in the United States.

The multilateral institution said the Kenyan economy had benefited immensely from a loose monetary policy in the world’s largest economy but the latest volatility of the shilling exposed its vulnerability to America’s plan to stop offering cheap money to businesses.

“With the ending of the Fed monetary stimulus the flow of cheap capital that has been funding the current account could dry up as investors build their dollar-denominated assets, creating volatility in the foreign exchange market,” warned the World Bank in its latest analysis on the Kenyan economy.

The Federal Reserve was expected to raise the American benchmark rate for the first time in close to a decade last month but postponed the move, with many analysts now saying it is likely to happen before the end of the year.

The Central Bank of Kenya Governor Patrick Njoroge has underlined the expected magnitude of the impact of the rate increase by saying that its postponement was like dodging a nuclear explosion rather than just a bullet.

READ: Moody’s says Fed rate raise poses threat to Kenya

Dr Njoroge had earlier said his peers from emerging markets planned to use the recently closed Lima (in Peru) meeting bringing together heads of central banks and national treasuries across the globe to ask the Fed to delay the move.

However during the meeting some of the governors urged the Fed to get on with it and save the markets the agony of waiting.

Many foreign investors have been flocking to the Kenyan market as it offered high returns compared to other markets in both the fixed-income and equities market.

Improved rate of return in the stable US market is expected to draw most of them back to the large economy, pulling the props from the Kenyan market.

Lately, fixed-income has become a major attraction to both foreign and local investors, with returns as high as 22 per cent being offered for the both the 182- and 364-day Treasury bill in the latest auction. Corporate bond offers have reached as high as 15 per cent.

Rating agency Moody’s has also mentioned Kenya amongst countries most vulnerable to the increase of interest rates in the American economy.

“Ghana, Mozambique and Kenya are among the most vulnerable African economies due to tighter external financing conditions stemming from a US rate rise. Zambia and Uganda also have moderate levels of exposure,” said the agency in a report released last month.