Renaissance Capital said Kenya’s high interest rates are holding the country’s currency at a stronger level than it should be, undermining the investment bank’s view that the shilling has to depreciate almost 50 percent against the dollar to reach fair value.
“The currency we have the most problem with is the Kenyan shilling,” RenCap analysts said in an e-mailed note on Monday. “On recent marketing trips, we kept showing our charts which have the Kenyan shilling as the most overvalued currency in frontier markets. We ourselves are struggling with this.”
The shilling slumped 8.7 percent against the greenback in the first half of the year, prompting the Central Bank of Kenya’s Monetary Policy Committee to increase the key lending rate by 300 basis points in June and July, before keeping borrowing costs unchanged for the next three meetings. Governor Patrick Njoroge has also stepped in with periodic intervention by selling dollars to ensure stability in the currency.
The shilling has traded in a range of between 101.7 and 103.2 this month, rebounding from a low of 106.10 on Sept. 7, which was close to the record low of 106.75 reached in Oct. 2011, according to data compiled by Bloomberg. According to RenCap’s analysis, the currency’s fair value is at 152 per dollar. Yields on benchmark 91-day Treasury bills soared to a record 22.49 percent on Oct. 22, helping to attract foreign investors, before easing to 9.6 percent at an auction on Nov. 19.
“The inflows to support the shilling at 102 per dollar are there,” the RenCap analysts said. “Unlike Egypt or Nigeria, Kenya does not need capital controls to maintain the currency.”
Still, RenCap is nervous that current account and budget deficits in East Africa’s largest economy risk adding pressure on the currency as the government ramps up spending on infrastructure to support economic growth. The shilling gained 0.1 percent to 102.05 per dollar as of 6 p.m. in Nairobi, the capital.
“We remain bullish on Kenya’s pro-business reforms,” they said. “But nervous about the shilling.”