Kenyan Shilling Seen Weaker Before Vote on Violence Fears

Kenya’s shilling will probably weaken further over the next five weeks after hitting a 13-month low yesterday as businesses accumulate dollars on concern March 4 elections may spark violence, according to a Bloomberg News survey of traders and analysts.

The currency of East Africa’s biggest economy may fall 1.8 percent to 89 a dollar, the survey of eight analysts and traders on Jan. 23 showed. The median forecast was for the shilling to trade at 88 a dollar by voting day after falling to 87.73 yesterday, the worst intraday level since Dec. 13, 2011. Barring any violence, it may then strengthen by year-end, according to Solomon Alubala, head of trading at National Bank of Kenya Ltd.

“The political uncertainty surrounding the outcome of the elections will be the key determinant on how the shilling will trade in the market,” Alubala said in a phone interview. “The shilling will decline to 88 a dollar and with a peaceful election it will recover ground to trade at 86 per dollar, while contested elections may push it further down.”

The shilling fell 0.7 percent this week to 87.45 a dollar as of 5:17 p.m. in Nairobi. The currency is down 1.5 percent this year following ethnic clashes last month, a widening current account deficit and as the central bank lowers interest rates to boost the flagging economy. Kenya is vulnerable to election-related shocks following violence that occurred after elections more than five years ago, the World Bank said in a review of the country’s economy on Dec. 5.

Industries Collapse

More than 1,100 people died and another 350,000 were displaced in ethnic clashes that followed disputed elections in 2007. The violence led to a collapse in agricultural output and a tourism slump, the two industries that generate most of Kenya’s foreign-exchange earnings. Growth slowed to 1.5 percent in 2008 from 7.1 percent the previous year.

The shilling fell 9.9 percent between the vote on Dec. 27, 2007, and Feb. 27, 2008, the day before an accord to end the violence was signed, according to data compiled by Bloomberg.

The currency is weakening at a slower pace than the South African rand as policy makers intervene to slow the declines. The currency of Africa’s largest economy fell yesterday to its lowest since April 2009 and is down 5.9 percent this year, the worst among 25 emerging markets monitored by Bloomberg.

The central bank has sold dollars each day since Jan. 18, Nairobi-based NIC Bank Ltd. said in an e-mailed note to clients yesterday. An official at the central bank, who declined to be identified in line with policy, said by phone from Nairobi today that the bank sold dollars on Jan. 18 and all this week bar Jan. 21. The official declined to provide more details.

Continued Intervention

It will probably continue efforts to support the currency by draining liquidity from the market through repurchase agreements and selling dollars to smooth volatility, said Christopher Muiga, a senior trader at Kenya Commercial Bank Ltd. in Nairobi.

“We have seen the central bank intervening by selling dollars and mopping up liquidity to ensure the shilling does not decline rapidly, a position that will continue at least through the first quarter,” Muiga said. Kenya Commercial Bank, the nation’s largest, estimates the shilling will trade at 89 a dollar on March 4 and 88 by Dec. 31.

The shilling weakened to a record of 106.75 a dollar in October 2011 after a drought boosted inflation to almost 20 percent. The bank raised borrowing costs by 12.25 percentage points to a record 18 percent in 2011 to bolster the shilling and curb prices. It reversed that policy with four reductions totaling 8.5 percentage points since July, the latest a 1.5 percentage point cut on Jan. 10 to take rates to 9.5 percent.

Growth Slows

Economic growth slowed in the first two quarters of 2012, to 3.4 percent and 3.3 percent. The government forecasts the economy will expand by about 5 percent in 2013, from 4.5 percent last year. That compares with South African Reserve Bank estimates released yesterday for growth of 2.5 percent in 2012 and 2.6 percent this year, while inflation may average 5.8 percent in 2013 compared with 5.7 percent last year.

Kenya’s current account shortfall is also adding pressure on the currency, Leon Myburgh, an African strategist at Citigroup Inc. in Johannesburg, said in an e-mailed note yesterday.

The deficit on the current account, the broadest measure of trade in goods and services, widened by 40 percent to $4.4 billion in the year to October from a year earlier, according to the Central Bank of Kenya’s latest data. The nation’s foreign-exchange reserves dropped to $5.26 billion on Jan. 17 from $5.4 billion on Dec. 27, according to central bank data.

Rivals Clash

Political parties in Kenya held primary elections last week. Riots and looting erupted in towns including Kisumu, Homa Bay and Siaya in western Kenya as supporters of rival candidates clashed, according to the Nairobi-based Daily Nation. Protests also took place in the Nairobi slum of Kibera, as well as in the central and southeastern provinces of the country, it said.

“The primaries were not conducted well and that may have indicated to investors the elections may not to peaceful,” said Ignatius Chicha, the head of markets at Citigroup in Nairobi. Citigroup sees the shilling at 88 a dollar by March 4 and 89 by year end.

Kenyan President Mwai Kibaki has ordered security forces to ensure the elections are peaceful.

Violence in Kenya since the start of 2012 left 450 people dead and forced 112,000 more to flee their homes, according to the United Nations. In one incident last month in the Tana River delta in Kenya’s southeastern Coast province, at least 39 people died in clashes between the ethnic Pokomo and Orma communities that Police Inspector-General David Kimaiyo said were politically motivated.

Hedging Positions

Kenya adopted a new constitution in 2010 after almost 20 years of promises from political leaders to replace one dating back to the country’s independence from Britain in 1963. The charter aims to spread political power among dozens of ethnic groups and end quarrels over land distribution that were at the heart of the 2008 violence. The nation of 41 million people held its first multiparty elections in 1992. Every election since then, bar one in 2002, has been marred by violence.

“Businesses are hedging their dollar positions, accumulating to ensure they have enough for their operations,” said Bernard Matimu, chief dealer at NIC Bank, who predicts the shilling will reach 89 a dollar by the elections and 88 by Dec. 31. If the elections pass peacefully, “the shilling is expected to recover ground” as businesses would have implemented capital projects and on “expectations of increased foreign direct investment,” he said.

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