Kenya shilling slide to continue, Uganda, Tanzania’s to firm up

African currencies continued to suffer losses against the dollar after the US Federal Reserve hinted at a rise in interest rates.

US Federal Reserve chair Janet Yellen said an interest rate rise in its September policy meeting remains likely.

Many sub-Saharan currencies continued to perform dismally against the dollar. Analysts noted that the Kenyan, Nigerian and Angolan currencies are overvalued, hence are expected to depreciate further.

The Ugandan, South African, Tanzanian and Ghanaian currencies are seen as undervalued, with some expected to hold their current positions or gain slightly against the dollar.

The Kenya shilling has shed 11 per cent this year to trade at 101.90/102.00 to the dollar, down from the previous week of 102.10. This slight gain is after Kenya’s Central Bank sold an unspecified amount of dollars in the market.

In its July research update on African economies, Renaissance Capital (Rencap) said that Kenya’s real effective exchange rate (REER) was 20 per cent overvalued, and forecast that the shilling could hit 110 to the dollar by the end of the year.

Rencap economist Yvonne Mhango said the Kenyan shilling remains vulnerable to significant depreciation compared with other currencies in sub-Saharan Africa considering the deviation of its REER from the 10-year average of the region.

“Of eight sub-Saharan currencies we analysed, we found the Kenyan shilling to be especially vulnerable because its depreciation has been smaller than the depreciation of the euro against the dollar. However, Nigeria’s limited policy space implies the naira could weaken more than the Kenya shilling,” Ms Mhango said.

The overvalued position is similar to that taken by experts at the World Bank, who said the shilling had accumulated overvaluation of 36 per cent over the past 13 years.

Head of financials at EcoBank Capital George Bodo said the shilling is expected to slide further because of the poor inflow of dollars.

“We have seen a glut in tea markets and a tourism industry on its knees. This has weakened the dollar inflows into the country. The country is spending more on capital expenditure projects than it had budgeted for, putting pressure on dollar demand,” Mr Bodo said.

Nigeria’s is also expected to devalue its currency for the third time in nine months.

Ravi Bhatia, the director of sovereign ratings at Standard & Poor’s, said devaluation of the Nigerian currency by more than 15 per cent is inevitable.
Nigeria’s Central Bank (CBN) devalued the currency in November and February.

Recently, the CBN has focused on curbing access to hard currency on the official interbank market for importers. This year, the naira has shed 18 per cent to the dollar.

Nigeria has already increased its base lending rate to 15 per cent from 13 per cent; its year to year broad money supply has dropped from 16 per cent to 14.3 per cent.

The Tanzanian and Ghanaian currencies are expected to strengthen because of their undervalued stance. Rencap said their analysis suggests that the Ghana cedi and the Tanzania shilling’s depreciation in the year to May was overdone.

“These currencies are undervalued, and their respective depreciations exceeded that of the euro to the dollar,” Ms Mihango said.

The Tanzanian shilling has shed 21 per cent so far this year and is Africa’s second worst-performing currency after Ghana’s cedi. The country had hoped to use a $600 million loan facility from Rand Merchant Bank in South Africa to bolster its foreign-exchange reserves, but this has now been shelved.

“We have postponed the acquisition of this loan following the Greece bailout crisis. The bank had set more stringent conditions to the loan so we will have to wait for better market conditions before we take it,” Joseph Masawe, head of economic research and policy at the Bank of Tanzania, told the press.

Despite the cumulative 400 basis point increase in the base lending rate since April, the foreign exchange pressure has persisted in Uganda.

Last week, the Bank of Uganda held an unscheduled monetary policy meeting; it tightened policy as the shilling’s slide was deemed to be feeding inflation. The bank also sold an unspecified amount of dollars to the market after the shilling hit a new low of 3320.65 to the dollar.

“The BoU has raised the Central Bank Rate by 1.5 percentage points from 13 per cent to 14.5 per cent in July, because the recent exchange rate depreciation has raised the risk of higher inflation,” BoU Governor Emmanuel Mutebile-Tumusiime said.

“We will continue to sell dollars to the market in order to smooth out excessive volatility in the movement of the exchange rate,” said Christine Alupo, BoU’s director of communication.