Cost of Propping Up Kenya's Shilling Seen in Dwindling Reserves

(Bloomberg) -- Kenya’s shilling is one of only two African currencies that have eked out gains against the dollar this year -- but it’s come at the cost of diminishing foreign-exchange reserves.

The shilling is still up 1.3 percent against the greenback this year even after losing some ground since mid-April as higher oil prices and rising government debt weighed on investors’ minds. The Central Bank of Kenya’s foreign reserves dropped by 13 percent in the same period to the lowest since March, when they were bolstered by a $1 billion Eurobond sale. Using reserves to protect the shilling may prove futile, however.

The currency fell the most in 20 months on Monday even as the central bank sold dollars, and extended declines on Tuesday after a Treasury official said the East African country will seek to raise $2.8 billion in Eurobonds and loans this fiscal year. The International Monetary Fund estimates Kenya’s total public debt will peak at 63.2 percent of gross domestic product this year from 58 percent in 2017, and warned the higher debt level increased the nation’s fiscal vulnerabilities.

Cost of Propping Up Kenya's Shilling Seen in Dwindling Reserves

“Negative sentiment from the IMF on Kenya’s debt levels and news of another Eurobond issue” weighed on the shilling, Stephen Wausi, a trader at Nairobi-based Family Bank Ltd., said in a client note. “The CBK sold an unspecified amount of dollars to support, but there was minimal effect.”

The shilling slipped 0.1 percent to 101.9 per dollar by 12:42 p.m. in Nairobi to the weakest level in nine months, extending Monday’s 0.5 percent drop. More pain may be in store, according to Bank of America Merrill Lynch.

Elevated fiscal and current-account deficits will weigh on the currency as oil prices rise and remittances from Kenyans working abroad -- a major source of foreign-exchange -- slow amid tightening conditions globally, Rukayat Yusuf, a London-based analyst at Bank of America, said in a note dated Oct. 16.

“The Kenyan shilling has proven resilient but could face pressures next year as higher oil prices and slowing remittance momentum feed into the current-account deficit,” he wrote.

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