Forex reserves dip by Sh28bn as CBK fights to stabilise shilling after Brexit

Kenya’s foreign currency reserves plunged by Sh28 billion last week as the Central Bank of Kenya (CBK) used its fire power to stabilise the market in the wake of financial markets’ turmoil that followed Britain’s recent vote to leave the European Union.

The CBK’s reserves stood at $7.237 billion (Sh732.45 billion) at the end of last week, equivalent to 4.73 months of import cover, having declined by $280 million from the previous week’s $7.517 billion (Sh760.8 billion) or 4.91 months of import cover, according to weekly official data.

The sharp fall in the amount of reserves held by the CBK also meant that the dollar reserves declined by $431 million (Sh43 billion) in June.

The CBK did not respond to our queries on the dollar expenditure over the one week period, although traders said that the regulator was active in the market selling dollars to forestall Brexit-related exchange rate volatility.

The decline in the reserves represents the biggest one-week fall this year. Although the reserves have been declining for the past eight weeks, the decline had prior to last week been gradual, at a weekly average of Sh2.7 billion.

“They (CBK) were active in the market last week, part of a co-ordinated effort by central banks in reaction to the Brexit, which was likely to cause volatility in financial markets,” said a fixed income trader who spoke on condition of anonymity.

READ: I&M suspends online pound trade as currency drops 11pc on Brexit vote

The CBK had said in a statement issued immediately after the UK vote that it stood ready to intervene in the money and foreign exchange markets to ensure their smooth operation, adding that other major central banks had also announced their readiness to intervene to minimise disruption in their markets.

The CBK data shows that the shilling has strengthened to the dollar post-Brexit — from 101.27 units on June 24 to 101.08 yesterday — contrary to expectations that it would weaken on account of the dollar strengthening worldwide against other currencies after the referendum.

The euro and pound, which were expected to weaken against the shilling after Brexit, have done so, with the shilling exchanging at 134.65 units to the pound from 150.21 and 112.67 units to the euro from 114.78 on June 24 respectively.

“The exchange rate displayed mixed performance against major international and EAC currencies during the week ending June 30, 2016 as world financial markets came under pressure after the result of Britain’s vote,” said CBK in its latest weekly bulletin.

Analysts at Ecobank Research raised concerns over the prospects for African currencies in the short term, saying that a number could experience volatility due to a stronger dollar and an unstable pound following Brexit.

“The short- term impact for all markets, including Sub-Saharan Africa, will be mostly negative as currencies struggle to manage volatility,” said Ecobank.

Traders said that although there would be some revaluation effect due to the pound and euro depreciation, this alone would not be sufficient to cause the reserves to fall by Sh28 billion in a week, especially with the dollar rate remaining stable.

The majority of the reserves are held in dollars, which is the main international trading currency for Kenya. Most central banks hold their reserves either in dollars or gold.

CBK does not break down the composition of the reserves in terms of the various hard currencies in its weekly bulletin, only giving the total in dollars.

The reserves have tended to show the most pronounced downward movement when there is decisive CBK intervention in the markets in support of the shilling, or when there is a sharp depreciation in the exchange rate of the dollar thus occasioning a significant revaluation.

They can also go down due to external debt repayment, which is done using dollars.

Last September, when the shilling was experiencing heavy volatility and weakened to 106 units to the dollar, the CBK made several dollar sales in the market causing the forex reserves to fall to Sh656 billion (or $6.252 billion), which was equivalent to 3.98 months of import cover.

Kenya is supposed to maintain an import cover of four months.

On the other hand, the reserves appreciate markedly when CBK buys dollars from the open market in times of favourable conditions, or when the country receives dollar inflows from foreign loans or grants, which then need to be traded in by the Treasury at CBK for shillings.

The CBK had taken advantage of the strengthening shilling in the first half of the year to accumulate foreign exchange reserves, with an additional boost from dollar-denominated external borrowing that added to the regulator’s coffers.

The reserves hit a record $7.7 billion in the first week of May, coinciding with a period when the shilling was exchanging at a nine- month high against the dollar at 100.8 units.

The first six months of the year also saw a favourable macroeconomic environment of lower oil prices, a falling current account deficit and growth in tourism and exports (tea and horticulture), which contributed to the higher levels of reserves.

Foreign investors in Kenya’s capital markets have this year also brought forex into the country, in addition to the regular diaspora remittances.

In case of any exchange volatility going forward, however, the CBK would be able to call upon the Sh152 billion ($1.5 billion) precautionary loan facility with the International Monetary Fund (IMF), which can be drawn should the country face major depreciation pressures.