Kenya the beacon of East Africa
As a regional trade and investment hub, Kenya has witnessed economic growth where other emerging markets have failed. In stark contrast to its Sub-saharan African neighbours, Kenya’s GDP growth rate topped 5.8% in 2015, surpassing a rate of 2.9% in 2014.
In spite of this impressive economic performance a major cause for concern has also arisen, namely currency depreciation.
From the third quarter of 2015 and continuing into 2016, the Kenyan Shilling has slumped as the US Dollar strengthened. Currently, the problem is most acutely felt by importers at a distributor level, with the costs of goods becoming significantly higher overtime. In the short-term this will likely affect sales. Assuming a downward trend in currency value continues, currency depreciation will also likely impact the long term profitability of their product line in their specific market.
The global market of uncertainty
Globally, 2015 was a year marked by extreme turbulence. Hastened by the US Federal Reserve rates rise, markets were hit by a strong Dollar. To compound matters China also unexpectedly announced the devaluation of the Yuan. Off the back of this, Kenyan Shilling was rocked by sudden volatility and depreciation, eventually slumping to a low of 106.12007 against the Dollar in September.
Since that low point, the Central Bank of Kenya has managed to contain the issue, with the Shilling remaining stable in 2016 after weakening 11 per cent in 2015. Although the intervention has been successful in halting major fluctuations and movement so far, analysts still expect the Shilling to gradually weaken as the year progresses.
The typical pain points associated with devaluation have, for the moment, been kept at bay. Cheap oil imports and low commodity prices have shielded Kenya from the economic hardships of currency depreciation felt by the likes of Nigeria and South Africa. That said, recent proposals by Saudi Arabia and Russia to freeze oil production should serve as a warning to Kenyan businesses that whilst the Shilling is stable now, market forces remain uncertain and are subject to rapid change.
What’s more, Kenya is a net-importer with a reported negative trade balance of $12.4 billion in 2014. This further raises concerns because if the Shilling continues to weaken and imports become more expensive, inflation will be pushed higher forcing local costs to increase. Signs have already become apparent that this may already be the case following the announcement in early February that Kenyan car imports have significantly dropped for the first time in four years.
Protecting your business against uncertainty
Whilst Kenya’s economy is currently outperforming its regional neighbours and the wider collective emerging market economies as a whole, it remains prudent for local businesses to develop and implement a foreign exchange framework that will help guard against the risk of spiraling currency depreciation.
Primarily this can be done by integrating regular Spot Transactions (a standard FX trade that allows you to take advantage of current market movements) with Forward Contracts to create a bespoke foreign exchange hedging strategy.
Forward Contracts enable Kenyan businesses to lock in today’s exchange rate for delivery at a later date, hedging against any future negative market movement. Fixing the rate is advantageous as it eliminates currency risk due to all your foreign exchange costs being determined upfront.
At Kwanji we’re able to provide this very solution. We help Kenyan businesses across all sectors and industries, whether reliant on imports or exports, to manage any foreign exchange risk that may arise from currency depreciation with bespoke hedging strategies that cater to their specific needs.
Kwanji posses local Kenyan currency experts and a product suite, including Spot Transactions and Forward Contracts, that can provide foreign exchange solutions to complement your specific payment requirements. We can supply accurate businesses forecasting, giving you effective financial control that will protect your bottom line.
Take the next step and limit your business’ exposure to further currency depreciation.