Shilling weakens as dollar supply falls

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By Jackson Okoth and Reuters

The shilling continues to react sharply to a big drop in supply of foreign currency as effects of global recession hit the local economy.

Other signs of economic slowdown this year is a fall in corporate end year earnings as commercial banks cut back on lending to reduce risks on their loan books.

“The equity portion on the balance sheet of most firms has declined by more than 50 per cent,” says Jos Konzolo, Managing Director of Reliable Securities. While depression at the Nairobi Stock Exchange (NSE) is traced partly to the global recession, brokers also attribute its poor performance to the Safaricom IPO, which has led to flight of investors from the market after poor performance of Safaricom shares.

On Monday, the shilling weakened sharply against the dollar, pushed down by heavy demands for dollars on interbank market. The local currency is tumbling amid figures from Central Bank of Kenya indicating that remittances from abroad dropped to $39.5 million in January compared to $40.1 million in December last year.

Commercial banks posted the unit at Sh80.30/40 against the dollar, a level it last touched in December 2004, according to traders and Reuters data.

“We are still bearish on the shilling … this report about reduction in remittances from abroad could cause a problem with the flows,” said Mr Omar Abdalla of Gulf African Bank.

He also cited imports of maize as a factor weakening the shilling. Kenya is importing millions of bags of maize after a prolonged dry spell left 10 million people facing food shortages.

Remittances from Kenyans living abroad are an important source of support for the currency, along with earnings from agricultural exports and tourism.

There are growing fears the global economic downturn could batter the economy this year, stunting a recovery after post-election violence sent growth last year to its lowest since 2003.

The grim economic outlook has affected the stock market.

Traders said increased interest from offshore players has contributed to the shilling’s fall.

The slide comes after weeks of being boxed in the Sh79 to Sh80 ranges against the dollar.

Meanwhile, shares at the NSE are expected to be mixed to lower this week with continued gloom over the outlook for the economy weighing on investor sentiment.

The NSE-20 index slipped to 2,474.8 points last week from 2674.2 the previous Friday, its lowest level since November 2003

“We expect the index to hold or lose a few more points,” said Mr Johnson Nderi, an analyst at Suntra Investment Bank in Nairobi.

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