East African currencies weaken, Ugandan shilling best performer

The Ugandan shilling is the best performing among the region’s four major currencies since January, new data shows.

While all the currencies have been weakening, the Ugandan shilling has posted the least decline — only 0.2 per cent against the dollar — since January, compared with Rwanda’s one per cent.

The Kenyan and Tanzanian units are the weakest performers losing 1.3 per cent and 2.7 per cent respectively in the wake of falling exports and concerns over insecurity.

The Kenyan unit has come under pressure following a series of terrorist attacks in the country over the past three months, which have led to volatility in the currency and impacted on tourism, the country’s second leading export earner.

READ: Tough times ahead for EA tourism as insecurity scares visitors away

The Tanzanian unit has lost ground to the dollar, partly due to falling export earnings from gold and rising imports, especially of oil, that have widened the country’s current account deficit. The deficit widened by 35 per cent last year to stand at 17 per cent of GDP. Kenya’s current account deficit stands at 9 per cent.

“Given the overall macro-economic trends, the logical outcome points to further depreciation of the Kenyan shilling we see it trading at Ksh89.5 at the end of this year and Ksh93.50 at the end of next year,” said David Cowan, the chief economist at Citibank.

Forex traders said the upcoming Eurobond issue will have an impact on the local currency, with investor attention increasingly turned towards the sovereign bond.

On Thursday, Kenya’s Treasury Principal Secretary Kamau Thugge told Bloomberg News that the country plans to sell its $2 billion inaugural Eurobond by mid-August, when its $600 million syndicated loan is scheduled to mature after it agreed to a three-month extension with lenders.

READ: Kenya plans to sell Eurobond by August as debt payment extendedAll the regional currencies have faced pressure from the continued monetary easing by the US government, with Uganda’s central bank saying it was keeping an eye on the shilling.

The Bank of Uganda (BoU) said that although it does not expect foreign investors to liquidate a substantial amount of the $400 million that they hold in government securities any time in the short-term, it would not hesitate to intervene should easing impact the local unit.

“Obviously, if this money were to exit the market all at once, it would put pressure on the exchange rate. However, with Uganda’s foreign exchange reserves of about $3.4 billion, BoU is in a good position to contain the exchange rate volatility associated with such an exit,” said BoU Deputy Governor Dr Louis Kasekende.

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The US had over the past year bought back its government bonds, forcing yields to fall and pushing investors to scour emerging markets for better returns. The prospect of less easy monetary policy in the US comes at an awkward time for many countries in Africa.

One, slower economic growth in China has lowered the prices of  commodities like copper and gold, affecting their key export earners, which provide most of the foreign currency used to support their local units. For example, copper and gold prices are trading at four-year lows.

Second, most countries — with the exception of oil exporters — run huge current account deficits and need the foreign capital to plug it. The inflows from the US had helped strengthen currencies in emerging markets, leading to fears that the easing could bring these units under pressure.

Dr Kasekende said this has already happened in some emerging market economies like Turkey, Brazil, India and South Africa, with the currencies of these countries depreciating sharply, resulting in interest rates hikes to contain the rapid decline.

“It will have some impact since our economies are small and open. The most pressing issue is how best to conduct cautious monetary policies to handle the obvious eventuality,” he said.

The managing director of Alpha Capital, Stephen Kaboyo, said that Uganda’s debt market has been attractive to foreign investors in terms of yields.

“Offshore investors have been actively participating in Uganda’s securities markets because of the high returns they have been getting on their investments,” he said.  

Additional reporting by Peterson Thiong’o

SOURCE: The East African