The Kenyan shilling has come under heavy pressure in the past week as companies and individuals stockpiled dollars ahead of Thursday’s election, forcing the central bank to support the local currency with the sale of dollars, traders said.
The Central Bank of Kenya (CBK) sold dollars in the forex market early on Monday after the shilling came under increased pressure as companies increased their demand for dollars and foreign investors exited the stock exchange days to a repeat presidential election that has plunged the country into a political crisis.
Market data showed that the shilling slipped to 103.75/85 against the greenback — a two-month low — before the central bank sold unspecified amount of dollars to cushion it from further decline.
The injection of dollars helped the shilling recoup some ground to trade at last Thursday’s closing level of 103.20/40, Reuters reported.
“There’s a preference among corporate and some retail clients to hold their cash in dollars and that’s putting the shilling under pressure,” said a trader at a local commercial bank.
“We expect the trend to continue and depending on the CBK interventions and political development, the shilling could weaken further,” he said, adding that the persistent dollar sale was eroding the central bank’s foreign exchange reserves.
Companies usually hold cash in dollars ahead of elections to cushion them against unexpected eventualities.
Traders said the CBK has been selling dollars frequently in the past few weeks to support the shilling and avoid volatility in the local currency market as political temperatures hot up.
Kenya has been walking an uncharted political path since the Supreme Court nullified the August 8 election in which President Uhuru Kenyatta had been declared the winner.
The apex court on September 1 ruled that the presidential vote had been marred with irregularities and illegalities that made it impossible to determine its integrity. It ordered for a fresh one to be held in the next 60 days.
Political grandstanding that ensued has since seen the main opposition candidate, Raila Odinga, withdraw from the race and a commissioner with the electoral agency resign after fleeing the country, deepening a political crisis that caused anxiety among investors.
“The proviso is that we can get a clean guillotine on the 26th otherwise we are at risk of asymmetric downside moves,” said Aly-Khan Satchu, Nairobi-based analyst and CEO of Rich Management.
Mr Odinga’s opposition party, Nasa, has in recent weeks called for nationwide demonstrations to push for electoral reforms and postponement of the fresh election to allow for dialogue.
But Mr Kenyatta has pressed on with campaigns and insisted the election must go on as planned. The uncertainly hanging over the Kenyan economy has seen the Nairobi Securities Exchange (NSE) ranked the worst performing in the world for the fourth time in eight weeks, according to MSCI Indices tracking frontier markets.
The NSE’s All Share Index (NASI) has been in the red for the past five weeks, Standard Investment Bank said in a weekly market wrap report.
Last week, the NASI, the NSE 20 Index and the NSE 25 Index declined 2.7 per cent, 2.3 per cent and 1.8 per cent respectively — a trend that has been blamed on the exit of foreigners from the bourse.
“There are more foreigners exiting than locals. They are bargaining that things could get worse,” Johnson Nderi, manager corporate finance and advisory at ABC Capital, said.
Mr Satchu said lacklustre volumes on the stocks market had prevented foreign investors from “trading out of the market meaningfully”, something that has made performance even worse.
Capital Economics said in a report last week that Kenya could be headed for violence that could plunge it into a chaos similar to the post-election turmoil witnessed after the December 2007 presidential election.
The 2007/08 violence left more than 1,200 people dead and hundreds of thousands others internally displaced. It also caused massive disruptions to the economy — both locally and regionally — as businesses could not move goods across the country.
“The latest developments all suggest that the country’s chance of avoiding a violent (and economically painful) crisis is dwindling,” Capital Economics said in a note.
Source: Asoko Insight