VZCZCXYZ0000
RR RUEHWEB

DE RUEHNR #4645/01 3380902
ZNR UUUUU ZZH
R 040902Z DEC 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 3733
INFO RUEHDS/AMEMBASSY ADDIS ABABA 9721
RUEHAE/AMEMBASSY ASMARA 5017
RUEHJB/AMEMBASSY BUJUMBURA 0298
RUEHDR/AMEMBASSY DAR ES SALAAM 5606
RUEHDJ/AMEMBASSY DJIBOUTI 4941
RUEHKM/AMEMBASSY KAMPALA 2428
RUEHKH/AMEMBASSY KHARTOUM 1710
RUEHLGB/AMEMBASSY KIGALI 4996
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS NAIROBI 004645 
 
SIPDIS 
 
STATE FOR AF/E, AF/EPS, AND AF/RSA 
 
STATE PASS TO USTR FOR BILL JACKSON 
 
TREASURY FOR VIRGINIA BRANDON 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV ELAB ETRD PGOV EAGR KE
SUBJECT: KENYA SHILLING'S RISE AGAINST DOLLAR A TWO-EDGED SWORD 
 
SENSITIVE-BUT-UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY.  FOR 
INTERNAL USG USE ONLY. 
 
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Summary 
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¶1.  (SBU) The Kenya shilling has appreciated 12.3% against the U.S. 
dollar this year, from Ksh69.55 on January 1 to Ksh61 on November 
¶27. Kenya is highly dependent on dollar-denominated horticultural, 
tea, and tourism export earnings.  Frightened exporters are 
intensifying their pressure on the Central Bank of Kenya (CBK) to 
help them, but the CBK attributes much of the shilling's strength to 
the dollar's global weakness and the flow of foreign investment into 
Kenya, and it has no intention to intervene.  Kenya runs a large 
merchandise trade deficit, so importers should benefit.  Exporters 
stand to lose despite savings on their imported inputs.  They may 
try to make the shilling's appreciation into an election campaign, 
but it is unlikely the CBK will take action to support the dollar 
out of fear that doing so would fuel inflation.  End summary. 
 
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Shilling on a Rapid Recent Rise 
------------------------------ 
 
¶2. (SBU) After appreciating slowly from Ksh69.9 to the dollar in 
January 2007 to Ksh67.0 in October, the shilling suddenly zoomed to 
Ksh60.5 against the dollar on November 28, its highest level in 
eight years. CBK Governor Njuguna Ndung'u citedthe weakening of the 
dollar in international markets as a major cause of the stronger 
shilling locally.  Dealers cited low demand for the U.S. currency 
from corporate clients as banks unwound their dollar positions. 
Ndung'u noted that the situation has forced Kuwait and the United 
Arab Emirates to abandon the dollar as a reserve currency, while 
South and East African investors and central banks are putting less 
of their money into the dollar.  Dr. David Ndii, a leading Kenyan 
consultant, economist, and scholar, concurred with the CBK governor 
that the decline of the U.S. dollar has little  to do with the 
Kenyan shilling, but is caused by other global factors. 
 
¶3. (U) The shilling has not experienced similar appreciation against 
the currencies of its major trading partners.  From January to 
November 2007, the shilling depreciated 3.9% against the Euro, from 
Ksh91.4 to Ksh94.9.  The shilling appreciated by 3% against the UK 
pound in the first nine months of 2007.  During the same period, the 
Ugandan shilling depreciated 5% against the Kenya shilling, and the 
Tanzania shilling appreciated 1%. 
 
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Cashing in at Home 
------------------ 
 
¶4.  (U) The CBK Governor's analysis aside, local conditions have 
also contributed to shilling strength and dollar weakness.  Kenya is 
enjoying hefty inflows of greenbacks due to improved foreign export 
earnings, a booming tourism sector, and foreign participation in the 
privatization of leading parastatals.  An estimated Ksh60 billion 
(over $980 million), some of it in dollars, is expected to flood the 
local financial market following the recent investments by foreign 
companies in Equity Bank and Telkom Kenya, and the upcoming sale of 
shares in Safaricom, the country's largest mobile phone company 
through an initial public offer (IPO).  With these massive dollar 
inflows expected towards the end of the year, market players are 
predicting further shilling appreciation against the dollar. 
 
¶5.  (U) International organizations operating in the conflict areas 
of the region -- Southern Sudan, Somalia, Burundi and Democratic 
Republic of Congo (DRC) -- are also keeping all their dollars in 
Kenyan banks.  Jaindi Kisero, managing editor of the EastAfrican 
weekly newspaper, claimed they have created an unprecedented 
regional demand for the shilling.  Kisero added that Nairobi's 
Eastleigh Estate has become an informal hub for remittances by the 
Somalia diaspora, transmitting millions of dollars every day from 
Europe, Canada and the U.S. to Mogadishu. However, there is no 
analytical work on the impact of these informal inflows on the 
shilling's rise. 
 
--------------------------------- 
While Exporters Fear Crashing Out 
--------------------------------- 
 
¶6.  (U) Some Kenyans recognize the strong shilling will cut Kenya's 
import bill for capital goods and crude oil, and ease foreign debt 
repayment.  Others worry that the shilling's precipitous rise will 
impact negatively on companies which earn their revenue in dollars 
and other international currencies.  They believe the drop in the 
dollar is bound to affect the earnings of a number of listed firms, 
and could even lead to job losses.  These companies have seen their 
share prices fall on the Nairobi Stock Exchange.  Kenya's national 
airline, Kenya Airways, recently revealed that its revenues declined 
by Ksh728 million (over $11.7 million at current exchange rate of 
Ksh61) between September 2006 and September 2007 as a result of the 
shilling's appreciation.  The airline earns most of its revenues in 
foreign currency.  A property consulting firm estimated that 10%-20% 
of Kenyan property leases are denominated in dollars, some at a 
fixed rate.  The firm estimated that some property owners have 
already suffered a 10%-15% drop in rental earnings from the 
shilling's appreciation, especially for offices, shopping malls and 
retail outlets, whose property lease terms are irrevocable for six 
years. 
 
¶7.  (U) CBK itself took a Ksh9.3 billion ($129 million) foreign 
exchange loss on its official reserves in the fiscal year ending 
June 31, 2007.  Official foreign exchange reserves of $2.82 billion 
were worth Ksh182.5 billion at the end of September. When the 
shilling peaked at 60.35/USD on November 27, the value of reserves 
dropped to Ksh170.2 billion.  The book loss of Ksh18.3 billion means 
that CBK will not be able to pay a dividend to Treasury.  Over the 
past year, the CBK has accumulated usable official reserves of $2.8 
billion as of July 2007, equivalent to at least 4.4 months of import 
cover. 
 
¶8.  (U) Tiku Shah, the chairman of the Fresh Produce Exporters 
Association of Kenya, contends that the gain in the Kenya shilling 
has thrown the local exporting sector into jeopardy.  A strong 
shilling erodes local earnings from horticultural, tea, coffee and 
other agricultural exports, which account for 49.8% of the total 
domestic export earnings in 2006.  His counterparts in the tourist 
industry are equally alarmed.  Kenya's tourism sector has witnessed 
tremendous growth, earning the country about $803 million in 2006. 
The number of American visitors grew 17.6% in 2006 to 86,528, making 
the U.S. Kenya's second largest source of visitors.  The strong 
growth continued in the first three quarters of 2007, and the 
Tourism Board reported that Americans are, on average, the highest 
spending visitors to Kenya.  However, a weak dollar may dampen 
earnings for industry players.  According to Kenya Association of 
Hotelkeepers and Caterers Coast branch chairman Mohamed Hersi, big 
hotels in the country could lose about Ksh30 million (about 
$492,000) if the shilling continues to gain against the dollar.  He 
claimed tourist hotels that signed contracts with travel agents when 
the dollar was at Ksh66 stand to lose 30% of their revenue. 
 
------------------------------ 
Reprieve for Importers for now 
------------------------------ 
 
¶9.  (U) Importers are having an easier time as their 
dollar-denominated import commodities are coming in more cheaply. 
With rising energy and capital goods import bills, the stronger 
shilling is expected to slow down inflation generated by high crude 
oil prices.  According to its Economic Survey 2007, Kenya in 2006 
imported goods worth Ksh521 billion (over $7.2 billion) compared to 
Ksh228 billion (over $3.0 billion) in 2005.  Kenya would save about 
$1.3 billion for a similar import bill in 2007 if the current 
exchange rate is sustained. 
 
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Analysis 
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¶10.  The shilling's appreciation against the dollar hurts 
agricultural exporters, favors urban consumers, and has a mixed 
effect on industrial firms depending on a company's export 
orientation.   Exporters who earn dollar revenues will feel the 
squeeze as the shilling value of their earnings falls, and the 
dollar cost of their labor and local inputs rises.  Those that 
import their inputs for dollars but earn shilling revenues will 
conversely benefit.    Horticulture, tea, and coffee exporters face 
a choice: Reduce their local costs, including their staff and/or the 
wage bill, or ask their largely European customers to switch to 
Euro-denominated payments.  Importers in COMESA, Kenya's biggest 
export market, are unlikely to be able to switch to Euro payments. 
Exporters within the country's Export Processing Zones (EPZs), whose 
high costs of production already hurt their competitiveness, may 
leave.  AGOA garment exporters may be especially vulnerable.  They 
import most of their inputs from Asia and pay in dollars.  If their 
Asian suppliers raise their prices to protect their local currency 
profits from the dollar's depreciation, it would further reduce 
Kenya's competitiveness against Asian garment producers. 
 
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Comment 
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¶11.  (SBU) If shilling stays in the Ksh60/dollar range or 
appreciates even further, companies whose revenues are largely 
denominated in dollars will face a grim fourth quarter.  Few Kenyans 
appear to be thrilled about their shilling's newfound muscle.  The 
CBK will face continued pressure from exporters to establish some 
special exchange rate program, or to buy more dollars.  This would 
be problematic, however, because it would expand money supply 
precisely at a time the CBK is trying to restrain money growth as 
way to control inflation, which remains stubbornly high.  Thus, even 
if the shilling's appreciation becomes an election campaign issue, 
we doubt very much the CBK will take action to support the dollar at 
this time. 
 
Ranneberger