Kenya Central Bank Chief Sees Scope to Support Battered Shilling

David Herbling
·3 min read
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(Bloomberg) -- Kenya’s central bank governor said the depreciation of the shilling that has lost almost a quarter of its value against the dollar since the start of last year is overdone, providing room for it to be supported.

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The current rate is “elevated,” and “not really consistent with the macroeconomic fundamentals,” Kamau Thugge told journalists Wednesday, a day after unexpectedly raising interest rates by 50 basis points. “It is my view now that the exchange rate has overshot the equilibrium rate. So, there could be scope for the central bank to support the exchange rate going forward,” he said, while declining to state what he views as the equilibrium rate.

The central bank does intervene when there’s excessive volatility, he said without elaborating on what assistance it would give in future.

Previous attempts by central bankers to defend the currency have significantly depleted the nation’s reserves. They sold close to a cumulative $2.8 billion in the year through May 2023, including $1.3 billion in 2020 and almost $650 million in 2021, the governor, appointed in June, has previously said.

The shilling has been on a rare upswing in recent days. It has appreciated 1.9% against the dollar since hitting a record low of 163.47 on Jan. 25.

“The average shilling rate in today’s money since 2010 has been 147/$. That of course will weaken due to inflation, to perhaps KES155-160/$ by the end of 2024,” said Charlie Robertson, head of Macro Strategy at FIM Partners. “But this means the Kenyan shilling is cheap on a forward looking basis, not just today.”

Tuesday’s central bank rate hike to 13%, which took borrowing costs to their highest level since 2012, loan disbursements from the International Monetary Fund and World Bank, as well as portfolio inflows from foreign investors buying local currency bonds will help boost the shilling, Thugge said. The World Bank is expected to loan Kenya $1.5 billion by the end of April, he said.

In a view shared by analysts including Goldman Sachs, the governor also sees the country regaining access to international capital markets, which will help to alleviate pressures on the currency. The East African nation has been among a number of developing countries struggling to tap those markets because of high interest rates.

President William Ruto said last month it plans to return to international capital markets to help fund the repayment of a $2 billion eurobond that falls due in June.

Based on the central bank’s actions and expected inflows of foreign currency, “the exchange rates should stabilize and move towards that rate that is consistent with the strong macroeconomic fundamentals,” the governor said.

Meanwhile, plans to issue a diaspora dollar bond have been “put on hold,” the governor said. A new platform for trading government securities has made it convenient for those in the diaspora to trade and the government will monitor its performance first.

(Updates with analyst comment in sixth paragraph)

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