Arnold mrass cannambo
JF-Expert Member
- Apr 13, 2018
- 4,067
- 2,640
The Kenya Shilling is uppermost in most folks' minds. The Shilling depreciated 0.8% against the US Dollar in October to Sh101.8 from Sh101.0 at the end of September. After last month's correction, it remains positive versus the Dollar for the year, one of very few currencies in Africa and the world to have achieved such an outcome. We tend to be fixated on the Dollar rate but its worth looking at a trade-weighted index and what you will see is that the Shilling has in fact appreciated sharply against all its Peers. A theory is that we would be better served by a weaker currency but I don't subscribe to that theory essentially because there is no elasticity in our exports. A weak currency has not been a catalyst for a flood of exports. In fact, I would posit, we are better off with a strong Shilling because our import to export ratio is around 3 to 1 and therefore we are better off keeping a lid on prices via a strong currency. Ever since I can recall, folks have been arguing the Shilling was overvalued and I have found that many of these models simply do not account for the ''carry'' [the positive interest rate differential earned when you hold Kenyan Assets] component. The latest trigger for the spike in conversation around the Shilling was the IMF who urged the central bank to allow “greater exchange-rate flexibility,” given well-anchored inflation expectations and adequate reserves, saying this would boost the shilling’s role as a potential shock absorber.
The IMF reclassified the Shilling from “floating” to “other managed arrangement” to reflect the currency’s limited movement due to periodic Central Bank interventions. The currency, which has the fourth-best performance globally, is also overvalued by about 17.5 per cent, it said.
The Central Bank reiterated its position on the Shilling’s value, saying the currency reflects its true and fundamental value.
“Our calculations support the view that there is no fundamental misalignment reflected in our exchange rate,” it said in an emailed response to questions.
Today, if you scan Sub-Saharan Africa you will note many dual currency regimes all of which are interfering with the free markets. Here in Kenya, you can exchange your money at a 50 cents bid offer spread. Sure, the Central Bank [and I rank their foreign exchange operations as an ''Outlier'' when you compare it to any other Central Bank on the continent] probably smooths lumpiness but that is prudent and sensible. If you are aware of a lumpy trade, it certainly makes sense to spread it out because after all Participants have access to enormous amounts of Leverage in the FX markets and Kenya does not fold infinite FX reserves. I have always enjoyed parsing the linguistics and in this respect the characterisation of “other managed arrangement” is wrong on the facts as I see them.
The finding that the Shilling is 17.5% overvalued is also alarmist and not borne out by facts. Such a devaluation would ''cry havoc'' with our debt-to-GDP ratios. The International Monetary Fund raised its assessment of the chance of Kenya’s external debt distress to moderate from low due to increasing refinancing risks and narrower safety margins in East Africa’s biggest economy. The Washington-based lender estimates Kenya’s total public debt will peak at 63.2 per cent of gross domestic product this year and gradually decline over the medium term. This compares with 58 percent in 2017 and 53.2 percent in 2016, when the nation ramped up infrastructure projects. There is an argument that we need to be tapping Euro denominated Eurobond borrowing and not just dollar denominated debt.
The Central Bank is sitting on the highest hard currency reserves in its history. Remittances have surged by 71.9% y/y to $266.2M in June 2018 from USD 154.9 mn in June 2017. Remittances are the most important source of Forex bar none. Our single biggest expense Item is of course Crude Oil and you will have noted that since the Istanbul incident, the crown Prince has been finessing the price lower to release some of the pressure in what remains a pressure cooker. Of course, the markets would appreciate a more aggressive GOK cost cutting program. Key levels are from 2011 and are 105.00-107.00.
In the matter of the Shilling I would prefer to be long than short and I beg to differ with the august and venerable IMF in this matter.
Sent from my TA-1032 using JamiiForums mobile app
The IMF reclassified the Shilling from “floating” to “other managed arrangement” to reflect the currency’s limited movement due to periodic Central Bank interventions. The currency, which has the fourth-best performance globally, is also overvalued by about 17.5 per cent, it said.
The Central Bank reiterated its position on the Shilling’s value, saying the currency reflects its true and fundamental value.
“Our calculations support the view that there is no fundamental misalignment reflected in our exchange rate,” it said in an emailed response to questions.
Today, if you scan Sub-Saharan Africa you will note many dual currency regimes all of which are interfering with the free markets. Here in Kenya, you can exchange your money at a 50 cents bid offer spread. Sure, the Central Bank [and I rank their foreign exchange operations as an ''Outlier'' when you compare it to any other Central Bank on the continent] probably smooths lumpiness but that is prudent and sensible. If you are aware of a lumpy trade, it certainly makes sense to spread it out because after all Participants have access to enormous amounts of Leverage in the FX markets and Kenya does not fold infinite FX reserves. I have always enjoyed parsing the linguistics and in this respect the characterisation of “other managed arrangement” is wrong on the facts as I see them.
The finding that the Shilling is 17.5% overvalued is also alarmist and not borne out by facts. Such a devaluation would ''cry havoc'' with our debt-to-GDP ratios. The International Monetary Fund raised its assessment of the chance of Kenya’s external debt distress to moderate from low due to increasing refinancing risks and narrower safety margins in East Africa’s biggest economy. The Washington-based lender estimates Kenya’s total public debt will peak at 63.2 per cent of gross domestic product this year and gradually decline over the medium term. This compares with 58 percent in 2017 and 53.2 percent in 2016, when the nation ramped up infrastructure projects. There is an argument that we need to be tapping Euro denominated Eurobond borrowing and not just dollar denominated debt.
The Central Bank is sitting on the highest hard currency reserves in its history. Remittances have surged by 71.9% y/y to $266.2M in June 2018 from USD 154.9 mn in June 2017. Remittances are the most important source of Forex bar none. Our single biggest expense Item is of course Crude Oil and you will have noted that since the Istanbul incident, the crown Prince has been finessing the price lower to release some of the pressure in what remains a pressure cooker. Of course, the markets would appreciate a more aggressive GOK cost cutting program. Key levels are from 2011 and are 105.00-107.00.
In the matter of the Shilling I would prefer to be long than short and I beg to differ with the august and venerable IMF in this matter.
Sent from my TA-1032 using JamiiForums mobile app