Fund managers, economists worried of forex cover drop

The country’s forex reserves have dropped by $940 million since the beginning of October. PHOTO | FILE

What you need to know:

  • Trend will result in greater demand for the dollar and a weaker local currency, fund managers say.

A new survey of money market players has revealed rising concern over the continued drop in the country’s forex cover in defence of the shilling, which has depreciated by 1.4 per cent to the dollar this year.

Fund managers, dealers from treasury departments of commercial banks and economists polled by Nairobi-based financial research and advisory firm HTM Capital say that the reduced reserve levels will lead to speculation of lower defensive capacity for the regulator, resulting in greater demand for the dollar and hence a weaker shilling.

The country’s forex reserves have dropped by $940 million since the beginning of October (from $7.79 billion to $6.85 billion), pulling down the value of the imports cover from 5.2 months to 4.49 months.

Part of the reserves have gone into dollar sales to ease shilling exchange rate volatility, which was markedly seen in the aftermath of Donald Trump’s election as US president in November, and again at the beginning of this year.

The regulator has, however, not disclosed the amount that has been sold to the market in currency support, with revaluation losses and payment of foreign debt also possibly contributing to the drop in reserves.

“There were only about two key external shocks to the shilling (Donald Trump and OPEC meeting) and so the CBK should not have been in the market for an extended period of time. This huge drop means that the shilling exchange rate is too dependent on CBK’s support,” HTM reported the respondents as saying.

“We expect continued demand and therefore strengthening of the dollar given further interest rates hike in the US. At some point CBK will have to stop intervention in the markets by outright sale of dollars using its reserves and resort to the IMF precautionary facility to support the shilling, which will further increase Kenya’s debt burden.”

HTM Capital polled 10 respondents in the survey. On Tuesday, the shilling was exchanging at 103.85/95 units to the dollar in banks, while the indicative rate published by CBK was 103.95.

The exchange rate has been stable in the past one week, aided in part by tighter shilling liquidity in the market.

Going forward, the HTM survey respondents say, there is a likelihood of sustained negative portfolio flows, especially if the US economy is boosted by the protectionist policies proposed by Mr Trump.

The political risk facing Kenya could hurt inflows from tourism, which would in turn deteriorate the current account. Importers are also likely to keep building up their dollar holdings with an eye on higher food and fuel import bills. Central Bank governor Patrick Njoroge has, however, struck a more positive note on the currency.

Speaking to news agency Reuters on the side-lines of the World Economic Forum in Davos last week, Dr Njoroge said there is little risk of the recent depreciation pushing inflation higher.

He also said that the regulator is committed to maintaining a flexible exchange rate for the shilling, continuing with the policy of only intervening when there is excess volatility.

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