MARKET NEWS
Kenyan Shilling Strength Masks Underlying Risks to Economy - BLOMBERG
(Bloomberg) -- Kenya’s currency, which has weathered the surge in the dollar since Donald Trump won the US election, risks foundering unless the East African nation’s economic growth revives.
The shilling rallied 21% in the first seven months of the year — making it the world’s best performer — but has since remained locked in a narrow range around 129 per dollar, with volatility nearing zero. Interventions by the central bank, high interest rates and new foreign-exchange trading rules are among factors that have underpinned the currency’s stability.
That stability risks being undermined, with the $107 billion economy headed for its worst performance since a coronavirus-induced contraction in 2020 because of flooding that killed more than 300 people in April and anti-government protests that started in June which left dozens dead. The World Bank on Tuesday trimmed Kenya’s economic growth for this year and next to 4.7% and 5% respectively, compared with estimates of 5% and 5.3% in June.
Kenya’s reliance on external factors such as remittances and commodity exports point to a lack of robust domestic growth. Manufacturing growth remains sluggish, and high taxes continue to squeeze businesses.
Without structural reforms, the shilling’s stability remains fragile, and the currency’s short-term gains are vulnerable to erosion, said Daniel Wesonga, senior sales manager at Melbourne-based Pepperstone Group.
The shilling fell 0.1% to 129.4 per dollar by 1:38 p.m. in Nairobi, the capital.
If the Central Bank of Kenya “stops its interventions, the shilling could drop and imported inflation would spike,” said Herbert Opondo, managing director at EAR Services Ltd. The currency is overvalued and should weaken by about a third to trade “between 150 and 200 shillings to the dollar,” he said.
Governor Kamau Thugge said in October that the central bank is prepared to use record foreign reserves to defend the shilling. The nation’s holdings of foreign currency stood at $8.97 billion last week, down from a three-year peak of $9.32 billion a month ago.
“What will ultimately influence the direction of the exchange rate will obviously be the performance in the balance of payments,” Thugge said on Dec. 6. “More foreign exchange comes in, then the exchange rate will tend to appreciate.
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--With assistance from David Herbling.
