The Weekly Brief, by The Kenyan Wall Street, is a newsletter that goes out to 20k+ subscribers every Monday morning at 9 am (EAT).

There was blood in the FX waters at the end of last week, as the shilling’s exchange rate against the USD took a ‘sudden’ swing in favour of the shilling.

That even took focus from the flowers and fuel week, although there wasn’t much to report there. Flowers were bought, fuel prices went down by a measly KShs. 1.

In this week’s issue, an analysis of what might happen to the shilling’s strengthening exchange rate this week, and why Niger and Senegal are leading the pack on the region’s economic growth in 2024.

Exchange Rate Swings, But What Next?

There was blood in the FX markets on the last two days of trading last week, as the shilling rapidly strengthened against major currencies. Of particular interest is the USD, in which many of Kenya’s external loans are denominated.

• The shilling’s exchange rate improved across the board, making marginal gains against the Sterling Pound, the Euro, the Japanese Yen, and regional currencies.

• Although most quotes ranged at Kshs. 140-Kshs 150, some commercial banks and forex bureaus were buying USD in the KShs 130-Kshs 135 range on Thursday.

• According to analysts, the bloodbath only eased when the Central Bank intervened to stabilise the exchange rate in the Kshs. 140-KShs. 150 range.

The immediate reasons for the exchange rate swing were the successful $1.5bn Eurobond that has eased concerns about a potential default on a looming $2bn repayment on a previous Eurobond, and a KShs. 70billion infrastructure bond that has been oversubscribed by over 400%.

“The extreme volatility in the Kenya shilling exchange rate is not good for business since it is affecting business contracts and product pricing,” Rufas Kamau, Lead Market Analyst at FX Pesa, told The Kenyan Wall Street on Friday, “However, the strengthening of the shilling is welcome for Kenyans since it’s expected to lower import prices.”

Taken with other policy and macroeconomic indicators, the recent volatility of the KES’s exchange rate presents more short-term gains and pains than any long-term improvement in macroeconomic indicators.

• According to CBK’s weekly bulletin, the usable foreign exchange reserves went down marginally in the second week of February, from USD 7.131 billion on 8th Feb to USD 7.031billion on 15th Feb.

• At the Nairobi Securities Exchange, the NASI, NSE 25 and NSE 20 share price indices declined by 1.1 percent, 1.2 percent and 0.6 percent.

• Market capitalization and equity turnover declined by 1.1 percent and 2.1 percent, respectively, while total shares traded increased by 49.8 percent

When the exchange rate crossed the Kshs. 150 mark in October 2023, CBK Governor Dr. Kamau Thugge admitted to a parliamentary committee that his predecessors had consistently intervened to keep the shilling overvalued.

But the governor, who was still relatively new in office, laid out a plan whose results are becoming clear now. “The ongoing engagement with investors, the expected inflows from multilateral, bilateral and regional development financial institutions as well as deliberate measures to improve forex inflows will help us support the shilling from a further decline,” he said at the time.

What Happens Next?

In early February, Governor Thugge laid the groundwork for a CBK intervention saying that “…that the exchange rate has overshot the equilibrium rate, so, there could be scope for the CBK to support [it] going forward.”

• The post-Valentine’s Day bloodbath in the FX markets was also driven by short term politics.

• At a rally on Thursday, Deputy President Rigathi Gachagua encouraged more panic sales, saying “sell your dollars today, tomorrow and the day after. If you don’t sell, you will make huge losses. The way the President has planned, the dollar will hit Sh100.”

• As far back as March 2023, President Ruto had told traders that “those of you who are holding dollars you shortly might go into losses. This is going to be different in a couple of weeks.”

These political undertones are likely to shake investor confidence in the shilling’s true value and long-term stability, especially if it does not become apparent where the exchange rate can ‘rest’ this week without further CBK intervention or political encouragement to dump dollars.

“Trust that the economic, monetary, and regulatory policies in a destination will remain predictable is far more important for investors than almost any other risk,” Declan Galvin, a geopolitical risk analyst based in Nairobi, wrote in this op-ed last week.

“FIM Partners expects the KES to stabilise soon – and around 150/$ is easy to justify from an economist’s point of view,” says Charles Robertson, Head of Micro Strategy at FIM Partners,  “In my view, a little weaker at 155-160/$ would suit Kenya better with a view to shrinking the current account deficit.”

Headlines You Might Have Missed

• The government has reduced chances of defaulting on $2 billion debt due mid this year after successfully issuing a new $1.5billion Eurobond at 10.375%, due in 2031.

• Service sector businesses operating within the TRIFIC Special Economic Zone will reap the benefits of tax incentives, world-class facilities, and the SEZ’s One-Stop-Shop business services centre to optimize their competitiveness in the global market. 

• Here is what experts think about the panic selling that triggered the sudden drop in the exchange rate, and CBK’s efforts to keep it from dipping below KShs. 140 and distorting the market.

• Kenya Electricity Generating Company PLC (KenGen) has paid a dividend of Ksh.545mn to 190,784 shareholders, constituting 30 per cent of the power generator’s shareholder base.

• The cabinet has approved the sale of Development Bank of Kenya (DBK) and five other non-strategic commercial state-owned enterprises.

Africa’s Economies to Grow, Outpacing Global Average

Africa will account for eleven of the world’s 20 fastest-growing economies in 2024, the African Development Bank Group said in its latest Macroeconomic Performance and Outlook (MEO) of the continent released on Friday.

• Overall, real gross domestic product (GDP) growth for the continent is expected to average 3.8% and 4.2% in 2024 and 2025, respectively.

• This is higher than projected global averages of 2.9% and 3.2%, the report said.

• The continent is set to remain the second-fastest-growing region after Asia.

Despite the challenging global and regional economic environment, 15 African countries have posted output expansions of more than 5% . The top 11 African countries projected to experience strong economic performance forecast are Niger (11.2%), Senegal (8.2%), Libya (7.9%), Rwanda (7.2%), Cote d’Ivoire (6.8%), Ethiopia (6.7%), Benin (6.4%), Djibouti (6.2%), Tanzania (6.1%), Togo (6%), and Uganda at 6%.

Up to 41 countries across the continent will in 2024, achieve an economic growth rate of 3.8%, and in 13 of them, growth will be more than 1 percentage point higher than in 2023.

“Despite the challenging global and regional economic environment, 15 African countries have posted output expansions of more than 5%,” AfDB Group President Dr Akinwumi Adesina said, calling for larger pools of financing and several policy interventions to further boost Africa’s growth.

East Africa Leads the Pack

East Africa will continue to lead Africa’s growth momentum, with growth projected to rise to 5.1% in 2024 and 5.7% in 2025, supported by strong strategic investments to improve internal connectivity and deepen intra-regional trade.

• North Africa: Successive adverse weather conditions and macroeconomic challenges will hold the region’s growth steady at 3.9% in 2024 with a slight improvement to 4.1% in 2025.

• Central Africa: Growth is forecast to moderate to 3.5% in 2024 but projected recovery in private consumption and increases in mining investment and exports could help push growth to 4.1% in 2025.

• Southern Africa: Growth will remain sluggish at 2.2 and 2.6% in 2024 and 2025, respectively. This reflects continued economic weakness in South Africa, the region’s largest economy.

West Africa’s growth is projected to pick up to 4 and 4.4% in 2024 and 2025 respectively. Strong growth in most countries in the region is projected to offset slowdowns in Nigeria and Ghana.

The announced withdrawal of Burkina Faso, Mali, and Niger from the Economic Community of West African States (ECOWAS) casts a shadow over the sustainability of gains amid growing uncertainty.

Upcoming Events

• Africa Agri Expo: Nairobi, 19-20 Feb.

• Africa Media Festival: Nairobi, 21-22 Feb.

• Global Black Impact Summit: Dubai, 27 Feb.

• Africa Investment Exchange: Nairobi, 28-29 Feb.

• Omniverse Summit: Lagos, 1 Mar.

Interview of the Week

Two Rivers International Finance & Innovation Centre SEZ launches Innovation Hub

Have a great week!