Local currencies face new hurdle over US Fed decision

Regional economies face foreign capital flight after the US Federal Reserve raised its interest rates by 25 basis points, dimming further hopes of their currencies strengthening against the dollar.

The raise could see investors reorganising their assets in emerging economies’ currency, bond, and stockmarkets as they troop back to a risk-free US market, leaving African economies and currencies weaker.

Federal Reserve Chair Janet Yellen said the continuing economic growth and the improving labour market contributed to the decision to lift the federal interest rate. The new benchmark rate, will hover between 0.25 per cent and 0.5 per cent.

READ: Fed raises interest rates, cites ongoing US recovery

The Fed rate decision has already seen marginal losses in the regional currencies as dealers adjusted to market sentiments.

The Kenya shilling moved marginally from the week’s opening of 101.90 units to the dollar to trade at 102.50 on Thursday. The Ugandan shilling, which had dropped 18.8 per cent against the dollar since the beginning of the year, appreciated to Ush3,400/3,410 to the dollar mid-week, after the central bank held its rate.

However, once the Fed announced its rate hike, it weakened, opening at Ush3,420/3,430 to the dollar on Thursday. The Tanzania shilling was trading at Tsh2162 to the dollar, having lost 0.25 per cent from its opening price.

“The rate hike has been largely anticipated as the Fed has indicated that it will maintain caution when adjusting the rate upwards, thereby limiting the overall effect of the hike. The hike will definitely put some pressure on the already repressed currencies,” said Kevin Tuitoek, Genghis Capital macroeconomic analyst.

Most emerging markets pre-empted the rate hike through monetary policy interventions. In the past three months, regional economies have held back or marginally raised their rates in anticipation of this move by the US fed, to mitigate against severe currency volatility.

Inflation steady, currency stable

On Wednesday, Uganda retained its base lending rate at 17 per cent, noting that inflation was holding steady and the currency was stable against the dollar. Uganda and Kenya are expected to make their next rate decision in January 2016.

“We believe that holding the rate is still effective enough to stabilise inflation pressures as well as support our economic growth rate of five per cent for this financial year,” said Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda.

READ: Uganda holds key policy rate at 17pc

The decision to keep the rate at 17 per cent has surprised some analysts, who had anticipated a rise due to the increase in the inflation rate and the expected hike in the US Fed rate.

In November, Kenya’s Central Bank Governor Patrick Njoroge said they were ready for the rate hike but the CBK has in its past two monetary policy meetings held its base lending rate at 11.5 per cent.

“We hope that the Fed will be more sensitive to the dynamics outside their financial markets in their decision. We understand that most of the dynamics in the forex market have been pegged on expectation of actions taken in the US. Our concern is that there shouldn’t be instability but we are ready for it,” said Dr Njoroge.

In the broader African market, Ghana is expected to bear the brunt of this rate decision as more than 60 per cent of the country’s debt is in dollar-denominated bonds, making repayments more expensive. Ghana’s cedi hasn’t moved after the US interest rate hike, trading at 3.8250 to the greenback on Thursday, compared with 3.83 a week ago.

Renaissance Capital chief economist Charles Robertson said the emerging markets currencies that were once overvalued have depreciated, but there is a negative feedback loop between weak currencies and countries’ external debt burden.

South Africa also saw its rand weaken slightly by 0.49 per cent to 14.97s unit to the dollar, even as its economy is expected to take a hit from the increased interest rates. The South African rand has fallen more than 30 per cent so far this year.

In a note, Rand Merchant Bank currency analyst John Cairns said after the week-long gains by the rand after the finance minister fiasco, the US rate hike decision has seen the dollar gain slightly against the rand and is expected to hold in the coming weeks.

Razia Khan, the regional head of economics for Africa at Standard Chartered Bank, said African currencies are expected to slide further into the New Year but at a rate slower than that seen through the year.
“We are seeing economies facing risks to their dollar-denominated loans. They will have to face the increase in their debt service costs,” said Ms Khan.
Analysts at Uganda’s Crested Capital said there will be more losses at the regional stockmarkets as dollar investors pull out their assets for the risk free and rising US market.

“Dollar investors in the regional stockmarkets have been the biggest losers this year. With the Fed decision, we are seeing a likelihood of reorganisation of assets classes, and the bourses will be the losers,” the analysts said.