Steady Currency, Rate Cap Mark Kenyan Bank Governor's Term
Steady Currency, Rate Cap Mark Kenyan Bank Governor's Term
(Bloomberg) -- Patrick Njoroge will Monday make his final interest rate-setting announcement of his first four-year term as Kenya’s central bank governor.
In that time, he saw East Africa’s biggest economy expand at the fastest pace in eight years in 2018, fought against a government-imposed cap on the interest rate banks can charge for lending, and had run-ins with his former employer -- the International Monetary Fund -- on the valuation of the local currency.
While Njoroge, 57, is eligible for reappointment for one more term, President Uhuru Kenyatta has yet to announce his decision. Njoroge declined to comment when contacted by Bloomberg News.
Below are some of the successes and difficulties that have characterized his period in office.
The Shilling
While all major African currencies barring those of Botswana, Mauritius and Tanzania have seen double-digit depreciation against the dollar since June 2015, when Njoroge started his tenure, the shilling has weakened just 2.5% in his time.
“This is one area he has either worked a miracle or been stunningly lucky,” said Deepak Dave, founder of Nairobi-based Riverside Capital Advisory. “The inexplicable strength of the shilling in the face of all rational calculation has bolstered his standing.”
The IMF sees the shilling being about 18% overvalued, but Njoroge told Bloomberg Television in April that there are “mistakes” in its calculation. “We do not prop it up,” he said. “We have a flexible exchange rate. We do not target a rate or direction.”
The Washington-based lender last year reclassified the currency’s management regime from “floating” to “other managed arrangement” to reflect its limited movement due to periodic central-bank intervention.
The IMF and Kenya are at the same time negotiating a loan the country can tap in case of certain economic shocks, after a similar facility of $1.5 billion expired in September. While Njoroge sees negotiations concluding in months, he said Kenya is not in a “rush” for the loan because it doesn’t have balance of payment problems.
Rate Caps
Lending by Kenyan banks slumped dramatically after lawmakers in 2016 introduced a limit of no more than 4 percentage points above the prevailing benchmark rate for loans by banks, something Njoroge was against because it hamstrung the regulator’s core mandate.
His decision to rally against the rate caps “to a certain extent reflected the central bank’s independence -- a cornerstone of an effective central bank,” said Jacques Nel of NKC African Economics. The High Court in March annulled the law, but suspended the judgment for 12 months to give lawmakers an opportunity to reconsider the provisions.
Bond Yields
The limit on loan rates has had a benefit for the central bank, though. Lenders seeking better returns than what they’d get from providing credit bought government securities instead, allowing the central bank to drive yields down in competitive bidding, said Renaldo D’Souza, head of research at Sterling Capital Ltd.
“In the case of domestic-debt financing, the government is the biggest beneficiary of interest-rate caps,” said D’Souza. The yield curve on local borrowing has consequently flattened.
Banking-Sector Consolidation
Njoroge in 2015 rejected the Treasury’s bid to increase banks’ capital requirement fivefold to 5 billion shillings ($49 million) as a strategy to force consolidation, saying he preferred organic tie-ups rather than a regulator-led approach.
“It is good when consolidation is market-driven, so you have mergers and acquisitions that bring synergies and not strange bedfellows,” said Habil Olaka, chief executive officer of the Kenya Bankers Association, a lobby group.
Kenya has 43 banking institutions and a population of 48 million people, making it overbanked relative to Nigeria and South Africa, said Cytonn Investments Management Ltd., a Nairobi-based company. KCB Group Plc is buying National Bank of Kenya Ltd. and NIC Group Plc and Commercial Bank of Africa Ltd. are merging.
That said, Njoroge hasn’t been afraid to act when needed: within the first four months of taking office, he placed Dubai Bank Kenya Ltd. and Imperial Bank Kenya Ltd. under receivership.
“He has been able to instill discipline in the banking sector,” Olaka said.
Inflation
Spells of drought have forced up prices, making it difficult for the central bank to stay within its stated inflation target of 5% with a margin of 2.5 percentage points on either side. Consumer-price growth jumped to a 19-month high of 6.6% in April because of dry weather that has left more than a million people in need of food aid. Still, policymakers will on Monday probably keep the benchmark interest rate unchanged at 9%, according to a Bloomberg survey.
Njoroge hasn’t shied away from challenges, and maintaining this would bode well for another tenure, analysts said.
“The governor’s honesty and personal work ethic have been impressive,” said Riverside’s Dave. “Even in a city where dark rumors are ever-present, no one questions his integrity. But integrity alone is not enough, as shown by some of the rockier patches during his tenure.”
--With assistance from Adelaide Changole.
To contact the reporter on this story: David Herbling in Nairobi at dherbling@bloomberg.net
To contact the editors responsible for this story: David Malingha at dmalingha@bloomberg.net, Ana Monteiro, Rene Vollgraaff
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