Bloomberg News

Kenya Shilling 17-Year Low on Inflation Sparks State Concern

June 21, 2011

(Updates currency move in 13th paragraph.)

June 21 (Bloomberg) -- Kenya’s shilling is plummeting to its weakest level in 17 years and government borrowing costs are the highest since 2002 as a fourfold surge in inflation shakes investor confidence in East Africa’s largest economy.

The shilling, the continent’s worst performer, has slumped 12 percent this year, while 91-day Treasury yields have jumped 6.4 percentage points since February to 9.006 percent at last week’s sale, according to data compiled by Bloomberg. Standard Bank Group Ltd., Africa’s biggest lender, expects the shilling to lose another 2 percent within a month to 92.5 per dollar.

Kenya, the world’s largest exporter of black tea, is grappling with 13 percent inflation, up from 3.2 percent in October, as corn, the nation’s staple food, soared 43 percent. The central bank cut interest rates to a record low in January, before raising them by a total of a half a percentage point at the following two monetary policy meetings in March and May.

“The central bank entirely misread the inflation cycle,” Leon Myburgh, a sub-Saharan Africa strategist for Citigroup Inc. in Johannesburg, said in a June 17 phone interview. “The shilling remains vulnerable.”

Inflation may reach 18 percent in the fourth quarter unless the central bank accelerates rate increases, said Matthew Pearson, the head of Africa equity products in London at Standard Bank.

The central bank unexpectedly cut its benchmark rate to 5.75 percent on Jan. 27 even after inflation surpassed the official 5 percent target to reach 5.4 percent the same month.

Panic Unwarranted

Central bank Governor Njuguna Ndung’u told traders on June 19 there was no need to panic.

“The bank wishes to assure the market that the panic is not warranted,” Ndung’u said in comments published by the Nairobi-based Standard on Sunday newspaper. The shilling is likely to stabilize when Greece’s sovereign debt crisis settles and Kenya completes the current cycle of importing capital goods, he said.

Finance Minister Uhuru Kenyatta told reporters in Nairobi last week the government has “some concern” about the currency’s weakness.

The potential for intervention is a “subject of discussion,” said Kenyatta. Still, “we don’t want to say that we are going to interfere with market forces,” he said.

The shilling will only end its depreciation when policy makers show that rates are set to “spike,” said Razia Khan, head of Africa research at Standard Chartered Bank Plc, which operates in 13 sub-Saharan African countries.


“It’s not enough to express concern about the currency, but not do anything to ensure that the turnaround takes place,” Khan said in a phone interview from London. Any signal of “much higher” interest rates will “make it very painful to be short the Kenyan shilling,” she said.

The currency depreciated as much as 0.9 percent to 91.60 per dollar, the weakest since 1994, and traded 0.6 percent down at 91.25 as of 2:58 p.m. in Nairobi.

Kenya is feeling the effects of rising global commodity prices as a drought forces the country to import more food than it exports, according to Peter Kegode, a Nairobi-based independent economist who advises agricultural associations.

Oil accounts for about 20 percent of imports, based on Central Bank of Kenya data published in March. Brent crude has climbed 19 percent this year.

IMF Accord

“Unless the central bank addresses those real rates of inflation and real interest rates, there’s going to continue to be pressure on the shilling,” said Standard Bank’s Pearson.

The weaker shilling is lifting costs for the central bank as it buys dollars to boost reserves in line with a Jan. 31 International Monetary Fund accord. While Kenya is targeting having dollars to cover four months of import bills, reserves last week fell to $3.98 billion, equivalent to 3.79 months of imports, from $4 billion a week earlier, the bank’s data show.

The central bank kept bond yields from rising at its auctions last week compared with the previous week’s sale by limiting issuance to the lowest in at least three months. The bank accepted 49 percent of the 13.7 billion shillings ($151 million) of bids at its June 16 auction. The yield fell one basis point from the previous sale to 9.006 percent, the bank’s data show.

“Clearly the central bank is trying to manage the upsurge in rates,” Ronald Olembo, a Nairobi-based fixed-income trader at CFC Stanbic Bank Ltd., said in a June 17 phone interview.

Election Shock

Kenya is rated B+ at both Fitch and Standard & Poor’s, four levels below investment grade, and equal with Zambia, Georgia and Bolivia. Fitch and S&P have a “stable” outlook.

The IMF expects Kenya’s economic growth to slow to 5 percent this year from 5.6 percent last year, compared with an average of 6.6 percent for developing nations worldwide.

“They’re obviously getting headwinds from high inflation and the currency is depreciating, but we think they will get through this,” said Veronica Kalema, a director for Fitch Ratings’ sovereign group in London. “The economy is finally recovering and the politics are looking better.”

Kenya implemented a new constitution last year to devolve some power from the presidency to regional legislators in an effort to prevent ethnic tension before next year’s presidential election. Legislators are also seeking to redistribute land ownership, an issue that is at the heart of tribal tensions that left 1,500 people dead after the last election in December 2007.

A more than four-month stand-off in the Ivory Coast after contested voting that ended in April and revolts that toppled the presidents of Egypt and Tunisia have raised investor wariness of election risks, said Standard Bank’s Pearson.

“Political risk in Africa has come to the fore again,” Pearson said. There’s the prospect of a “near-term potential shock” from Kenya’s election, he said.

--Editors: Ana Monteiro, Linda Shen

To contact the reporters on this story: Chris Kay in London at; Sarah McGregor in Nairobi at

To contact the editor responsible for this story: Gavin Serkin at

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