Demand for imports will be supported by increased liquidity.
East African currencies will come under added pressure in the first half of this year due to increased demand for imports.
Analysts expect the demand for imports to grow faster than that for the region’s exports, driven in part by falling oil prices that will propel increased liquidity across Kenya, Uganda, Rwanda and Tanzania.
In contrast, the region’s major exports of tea and coffee will continue fetching lower prices in the global market, widening the current account deficits and weakening currencies.
“The market will demand more dollars to settle the import bill, hoping for a rise in the global prices for regional major exports to support the local currencies. A rebound in agriculture could also lead to more demand for inputs like fertilisers,” said Maureen Wangari, an analyst with Dyer and Blair Investment Bank.
Those fears are already being borne out in the market where the Ugandan and Kenyan shillings last week hit three-year lows to trade at an average of Ush2,850 and Ksh91 against the dollar respectively on Friday, according to data from the countries’ central banks.
The Rwanda Franc and the Tanzania shilling strengthened against the dollar to trade at Rwf695.8 and Tsh1709 respectively on Friday.
“Throughout 2014, there was sustained corporate demand for the dollar fuelled by high market liquidity from maturing Treasury bills and bonds. Further, interest rates have remained low making it easy to fund long dollar positions, a trend seen holding in 2015,” said Faith Atiti, a research analyst at CBA.
READ: East Africa currencies fall against dollar
In Kenya, tourism prospects have been dimmed by concerns over insecurity, which could undermine dollar inflows. Total visitors to Kenya declined by 2.14 per cent to 171,671 persons in October last year from 175,810 persons in September.
In addition, tea and coffee revenues are constrained by low global prices following a surge in production and weak demand from Europe and Asia as those regions suffer an economic slowdown.
Data from the Kenya National Bureau of Statistics shows that the total value of exports declined by 7.9 per cent to Ksh40.4 billion ($4.4 million) as imports expanded to Ksh159 billion ($1.7 billion) in September 2014 from Ksh143 billion ($1.5 billion) in August.
In Rwanda, the current account deteriorated by $564 million to a deficit of $1.816 billion in the first 10 months of 2014, according to figures from the National Bank of Rwanda. Uganda’s export receipts decreased by 7.2 per cent from $2.865 billion recorded in the first 10 months of 2013 to $2.660 billion in 2014.
Although the central banks are mopping up currencies to reduce the liquidity in the market, analysts warn that maintaining the CBR rates will see increased local currency flow as commercial banks lend more to the market.
Rwanda’s central bank in December maintained its key repo rate at 6.5 per cent, while Kenya maintained its CBR at 8.50 per cent throughout the third quarter. Uganda maintained its CBR rate at 11 per cent.
Demand for greenback
“Positive economic conditions driven by low interest rates should sustain the demand for the greenback in 2015, and unless there is marked improvement in dollar supply, the local units should remain bearish. Central banks may thus need to raise interest rates to curb any further slide,” said Ms Atiti, adding that the Kenyan currency might hit ksh94 against the dollar in coming weeks. Globally, the dollar appreciated on average by about 9.1 per cent in 2014.
Analysts predict that although Tanzania will hold its General Election this year, a positive outlook and a conducive political environment will outweigh election nervousness for investors. Tanzania is currently in the advanced stages of preparing a new constitution, which is expected to be in place before the General Election.
Economists, however, warned that the Tanzanian currency may weaken the most compared with its counterparts, driven by politics and withdrawal of donor funds.
“Investors will focus on investing in other East African countries for the better part of first half as they wait and see the approach Tanzania will take ahead of the elections and a new constitution,” said Kenneth Karuga, an economist at CBA.
The country may, however, attract more foreign investments in the long run following the removal of the 60 per cent capitalisation requirement on foreign investors, thereby increasing access of profitable companies to non-Tanzanians. A plan to issue a Eurobond this year might boost confidence in the economy.
The East African
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