East Africa Fights Currency Rout With Aggressive Rate Action

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East African central banks are having little success in stemming a rout in their currencies despite taking ever-more aggressive monetary policy action.

The Bank of Uganda raised its benchmark interest rate by 150 basis points at an unscheduled meeting on Monday, the third increase this year. That follows the decision by the Central Bank of Kenya to raise its key rate by a total of 300 basis points in two consecutive meetings.

Uganda, Kenya and Tanzania are among the worst hit currencies in Africa this year as heightened risk aversion prompts investors to move money out of emerging markets. As import-dependent economies, the East African nations are exposed to foreign-exchange reversals, while dwindling reserves mean policy makers have little ammunition to halt the decline.

“Domestic policy will have very little impact on the currencies,” Aly-Khan Satchu, the chief executive officer of Rich Management Ltd., an adviser to wealthy individuals and companies, said by phone from Kenya’s capital, Nairobi. “It’s a strong-dollar story, a risk-aversion story.”

The Kenyan shilling has weakened 8.2 percent against the dollar in the past three months, Uganda’s currency has dropped 9.4 percent and Tanzania’s unit is down 7.1 percent. Only the Angolan kwanza is a worse performer in Africa in the period after slumping 12.8 percent against the dollar.

Vulnerable Region

Inflation in Kenya, East Africa’s biggest economy, accelerated to 7 percent in June, close to the upper limit of the central bank’s 2.5 percent to 7.5 percent target range. In Uganda, which is on the cusp of oil production, consumer prices were unchanged at 4.9 percent in June from a year ago.

Wide deficits on the current account and budget in Kenya and Uganda are worrying investors, adding to the worsening sentiment. Kenya’s government is forecasting an 8.7 percent fiscal gap for the year that began July 1, while Uganda widened its shortfall to 7 percent this year from 4.5 percent last year.

“The region is seen as vulnerable to a change in external conditions because of its sizeable twin deficits,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in e-mailed responses to questions. “It will take strong policy resolve on the part of East African central banks to turn this around.”

Kenya’s current-account deficit increased 30 percent to 536 billion shillings ($5.3 billion) in 2014, according to the government’s statistics agency, while Uganda’s balance stood at $2.57 billion, central bank data shows. In Tanzania, the shortfall was $4 billion in the year ended April 2015.

Shilling Forecast

While Kenyan and Ugandan authorities have been pumping dollars into the market to support their currencies, the strategy is unsustainable and risks depleting reserves, Satchu said. Uganda’s reserves dropped 17 percent to $2.8 billion in May from a year ago, while Kenya reserves fell 9.8 percent to $6.6 billion since the beginning of the year to July 9.

“I expect further weakness in Kenya and Uganda units because the central banks are running out of ammunition and the dollar rally has still further to run,” Satchu said.

Kenya’s shilling gained 0.6 percent to 101.50 against the dollar as of 4.30 p.m. on Tuesday in Nairobi, while Uganda’s currency fell 1.1 percent to 3,315.

Kenya’s tightening monetary policy stance may keep the shilling from weakening past 120 per dollar, Yvonne Mhango, an economist at Renaissance Capital in Johannesburg, said in a note to clients on Monday. The bank revised its year-end shilling forecast to 109 shillings from 100.7 previously.

“We believe policy tightening will slow the shilling depreciation, but it will not halt it because weak exports, growing imports and a slowdown in financial inflows will weigh on the currency, as will U.S. rate hikes that are due in the short-term,” Mhango said.