Kenya losing out on better offshore incentives

May 24, 2012

, NAIROBI, Kenya, May 24 – More attractive yields on government papers in neighbouring states are luring offshore investor interest from Kenya’s declining yields, which had affected the shilling.

Market analysts say foreign investors have been keen on taking advantage of relatively high yields on offer in other countries regionally.

“The shilling will remain weak in the days to come. Repatriation of debt maturity to countries with better yields has been happening since interest rates in Kenya have tumbled significantly,” the Head of Trading at Commercial Bank of Africa’s Treasury Department Duncan Kinuthia said.

Last week, the 91-day Treasury bill (T-bill) was oversubscribed by 150 percent, with the market weighted average at 10.16 percent.

At the turn of the year rates on the 91-day T-bill hit a high of 21 percent in January after the Central Bank launched an aggressive cycle of monetary tightening.

The shilling has ceded its gains to the dollar for the fourth day in a row this week, trading between Sh85.20 and 85.40 on Thursday.

Since Monday, the local unit has been trading on the back foot due to constrained dollar supply conditions, high corporate demand and a bit of panic buying.

“I think the shilling will remain somewhere between 85 and 87 and therefore selling the shilling is not a reflexive ‘no brainer trade.’ Crude oil remains a curve ball but it has fallen sharply from 2012 highs and this should give some respite to the shilling,” the CEO of Rich Management Aly Khan Satchu said.

The Bank of Uganda (BOU) was to auction USh100 billion ($40.25 million) worth of two and five year bonds on Wednesday.

Foreign interest has been high for Ugandan paper, after the BOU left its indicative Central Bank Rate (CBR) level at 21 percent for May, helping shore up the country’s currency.

At the last week’s auction, Uganda’s flagship 91-day paper yield closed at 18.69 percent.

Though the Kenya shilling has not gotten reprieve from the Central Bank’s dollar sales to the market, Kinuthia expects to see some action to reign in the local currency once it reaches the Sh86 per dollar exchange level.

However, all eyes will be on the Monetary Policy Committee (MPC) next month for direction on interest rates.

Though expectations in the market are high for a cut, it is yet to be seen what the MPC will do, as it has held the CBR at 18 percent for five consecutive months.

“The MPC needs to keep the CBR relevant. Last year the CBR fell into irrelevance because it was so distant from the inflation rate. The MPC needs to be cognizant that market rates have adjusted and the CBR should not become as anomalous as it did,” Satchu said.

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