Published On: Mon, May 26th, 2014

Kenya’s Central Bank shows intent to defend ailing Shilling

NAIROBI (Reuters) – Kenya’s central bank has shown its intent to defend the ailing shilling by selling dollars and then declaring on Monday it has deep enough foreign reserves to cushion the currency against shocks, traders said.

The shilling has been on the back foot all year, hurt by lower than expected dollar inflows into the tourism and tea sector. A spate of bombings more recently have added to worries that if a slump in tourism is sustained and deepens it could shave a percentage point or more off growth, economists say.

The Central Bank of Kenya has persistently drained liquidity to shore up the currency in 2014, but on Friday it acted more aggressively, selling an undisclosed amount of dollars. Two commercial banks on Monday confirmed the sale.

“(The bank) gave the message that they’re willing to cap the shilling at these levels,” said Nahashon Mungai, a trader at Kenya Commercial Bank.

Central Bank of Kenya Governor Njuguna Ndung’u blamed seasonal pressures, including the payment of corporate dividends to foreign shareholder for volatility in the currency over the past two weeks. He made no mention of the any slowdown in tourism, an important source of foreign exchange.

The governor said the current level of foreign exchange reserves of $6.24 billion, equivalent to 4.4 months of import cover, gave the bank sufficient muscle to tackle what he called “temporary shocks”.

“(The bank) stands ready to provide further support to minimise the volatility of the exchange rate,” Ndung’u said in the statement.

Proceeds from a planned debut Eurobond issue before the close of the fiscal year on June 30 would raise reserves higher still, and the shilling could appreciate, Ndung’u said.

SECURITY WOES

On Friday the shilling fell through the psychologically important 88 per dollar barrier before the bank’s actions hauled it back. On Monday, commercial banks priced the shilling at 87.78/98.

The central bank does not reveal the size of its hard currency sales or purchases. A second trader called Friday’s sale a “sizeable amount” to move the currency by 30 cents.

“They hit all the banks with quite large amounts,” said I&M bank trader Abhinav Mathur.

The prospect of further sales of hard currency meant investors were now reluctant to break the 88 level again, Mathur said.

Even so, both traders forecast the shilling could weaken further this week as routine end-month dollar demand from corporate clients kicked in and with the government widely seen to be struggling to contain militant attacks.

The Somali Islamist militant group al Shabaab said last week it was “shifting its war” onto Kenyan soil. Tourists have left in droves, and travel agencies report cancellations following travel warnings by Britain, the United States and others.

“It does help to see that the central bank is willing to intervene and intervene in a strong manner,” said Mungai. “But security concerns and (dollar) demand will keep the shilling on the back foot.” In January, the Kenyan Treasury estimated the economy, the biggest in East Africa, would expand by 5.8 percent. But the government delayed announcing its official forecast last month, saying it needed more time for consultations.

The shilling is expected to trade in a range of 87.80 and 88.20 in the coming sessions.

Source: Reuters

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Kenya’s Central Bank shows intent to defend ailing Shilling
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