From Reuters via Mail & Guardian Africa

East African central banks are having little success in stemming a rout of their currencies despite taking ever-more aggressive monetary policy action; the Kenyan shilling (KES) is particularly vulnerable as industry analysts say the KES is approximately 20% overvalued.

Uganda, Kenya and Tanzania are among the worst hit currencies in Africa this year as heightened risk aversion prompts investors to move money out of emerging markets. As import-dependent economies, the East African nations are exposed to foreign-exchange reversals, while dwindling reserves mean policy makers have little ammunition to halt the decline.

The Bank of Uganda raised its benchmark interest rate by 150 basis points at an unscheduled meeting on Monday, the third increase this year. That follows the decision by the Central Bank of Kenya to raise its key rate by a total of 300 basis points in two consecutive meetings.

“Domestic policy will have very little impact on the currencies,” Aly-Khan Satchu, the chief executive officer of Rich Management Ltd., an adviser to wealthy individuals and companies, said by phone from Kenya’s capital, Nairobi. “It’s a strong-dollar story, a risk-aversion story.”

The Kenyan shilling has weakened 8.8% against the dollar in the past three months, Uganda’s currency has dropped 9.1% and Tanzania’s unit is down 8.4%. Only the Angolan kwanza is a worse performer in Africa in the past three months, slumping 12.8% against the dollar.

An industry brief to clients from Renaissance Capital indicates that in Kenya’s case, the slide is likely to fall even further: The Kenyan shilling is approximately 20% overvalued, inidicates the note authored by economist Yvonne Mhango, given the deviation of its real effective exchange rate (REER) from the 10-year average, and that its recent slide is smaller than the Euro/depreciation.

The analysts believe that recent policy tightening will slow the Kenyan shilling depreciation, but it will not halt it because weak exports, growing imports and a slowdown in financial inflows will weigh on the currency; as will US rate hikes that are due in the short term.

Read more at Mail & Guardian Africa