CBK says it’s holding enough reserves to cushion shilling

The Central Bank of Kenya (CBK) Monday said it was holding enough reserves to cushion the shilling despite a recent slide blamed on dividend repatriation by foreign shareholders.

The industry regulator said it is holding Sh549 billion in hard currency reserves, which is equivalent to 4.4 months of import cover.

The statement came after the shilling breached the Sh88 barrier as pressure mounted from the demand side, a growing trade deficit and rising government spending.

CBK forecast the shilling would appreciate when the Eurobond is floated next month. The Treasury has said it will sell the bond early next month.

“The increased pressure on the Kenya shilling is attributed to seasonal factors as corporations pay out dividends to external shareholders,” said CBK. The phenomenon of outflows during dividend payment periods had been observed around this period in the previous years, it noted.

READ: CBK sees shilling rebounding after Eurobond sale

Just before the shilling fell to trade at more than Sh88 to the US dollar, market players had warned that weak inflows from tourism and pressure from importers would precipitate a depreciation, especially after the government increased its spending.

Being the second last month of the government’s fiscal year, May is the month when most State agencies and departments go on a spending spree, increasing liquidity in the market.

Accounts of commercial banks at the CBK, one indicator of the shilling’s supply levels, showed that deposits exceeded the legal minimum by Sh1.18 billion for the week ending last Thursday.

In the previous week, the deposits had exceeded the limit by over Sh13 billion meaning there had been a substantial draw down.

Interbank lending rates, another indicator of local currency liquidity, fell to 7.54 per cent in the week ending May 21st from 8.03 per cent in the previous week.

As a way to reduce the shilling’s liquidity in the market, CBK reported in its Weekly Statistical Bulletin dated May 23rd that it had mopped up Sh21 billion from the market in the previous five working days through repurchasing agreements (Repos), a form of borrowing, and the slightly longer-dated term auction deposits (TADs).

“The money market was relatively liquid in the week ending May 21, 2014, supported by repo maturities and government payments. The Central Bank liquidity management withdrew net liquidity of Sh21.0 billion through repo securities and Term Auction Deposits,” said the bulletin.

In a report, Reuters said that the CBK had tried to limit the amount of local currency in the market yesterday by seeking to buy Sh3 billion worth of shillings through TADs.

“Kenya’s central bank on Monday sought to mop up three billion Kenyan shillings ($34.17 million) of excess liquidity from the money markets by using term auction deposits (TADS),” wrote Reuters.

CBK noted that the current foreign exchange reserves stood at $6.24 billion or 4.4 months of import cover. This level has remained the same in the past few weeks showing that the CBK has hardly injected any foreign currency into the market during that time.

“The current level of foreign exchange reserves of $6.24 billion, equivalent to 4.4 months of import cover, are sufficient to provide adequate cushion against temporary shocks,” the bank said.

It said it expected the Eurobond would shore up the reserves even further and put pressure on the local unit to appreciate. The Treasury plans to raise up to Sh135 billion ($1.5 billion) through the sovereign bond.

“The proceeds from the debut Eurobond will significantly raise the level of foreign reserves with the exchange rate expected to come under pressure to appreciate in the coming months,” CBK said. Analysts said the shilling faced a two-way risk since it could either depreciate or appreciate.

StanChart head of research Razia Khan had earlier said that the limited depreciation offered an opportunity to exporters.

“If anything, the limited depreciation that we have seen serves as a reminder that there is two-way risk in the Kenyan shilling. On balance it should provide a marginal boost to regional export competitiveness, where other East African currencies have depreciated a lot more,” said Ms Khan.

The CBK said the situation was temporary, terming the factors involved in the depreciation as only “seasonal.”

“The Central Bank therefore expects the situation to normalise as the impact of seasonal factors dissipates. In the meantime, the bank continues to monitor developments in the market and stands ready to provide support to minimise the volatility of the exchange rate,” it said.

Robert Gatobo, a forex dealer at Bank of Africa, had mid last week predicted that the shilling would break the Sh88 to the dollar barrier as CBK’s intervention was insufficient to stop the tide.

“The CBK has been in the market, but their intervention is not sufficient in view of the limited inflows and demand from various sectors of the economy. As net importers, we can’t avoid this pressure,” he said.