Future Capital Kenya

A quick post! I read the newspapers this morning and saw that the national carrier Kenya Airways is now charging domestic passengers in dollars. This follows on the heels of other companies such as CMC Motors and Toyota Kenya who are also pricing their products. Together with my biggest foe Multi Choice Kenya, it seems that more and more companies are abandoning the shilling.

This really frustrates me and should work as a wake up call to the CBK governor who has long been an advocate of "private sector solutions to exchange rate volatility".

For a long time, the CBK in their publications have been against having any capital/exchange rate controls as it goes against the ethos of having a free market economy. In their view, the private sector should come up with solutions to exchange rate volatility through financial innovations such as forward exchange rate contracts. In their rather idealistic world, companies like KQ when faced with the prospect of a weak shilling, should contact their bankers and arrange for forward currency contracts to hedge against the weak shilling. Now, the simple question is this; If KQ, a company domiciled in Kenya, which mark you has a functional currency, can charge in dollars; why on earth would they bother taking forward contracts to hedge against a weak shilling? They have a natural hedge as they simply switch their pricing to the more stable currency, and in addition, book decent exchange gains as they report their annual statements in the weaker Kenyan shilling.

In essence, if the CBK and the government want to deal with the currency issue, they should start by making sure that all companies in Kenya are in charge of their own exchange rate risk. Companies like KQ, CMC Motors, Toyota Kenya and Multichoice should all price their products in the Kenyan Shilling. This would first of all ensure that companies take control of their own exchange rate exposures and importantly for the economy, it would allow the exchange rate to perform its most pivotal function; to act as a pressure valve in the face of current account imbalances. A weaker currency always acts to turn trade deficits into trade surpluses and a strong currency does the opposite i.e. turn a trade surplus into a trade deficit. It's simple economics and the CBK should start thinking about making economics work in Kenya. If you travel to South Africa, you will notice that even their duty free products are priced in the Rand. This actually goes a long way in stabilising your currency. To me it seems that the Kenyan economic policy makers follow the Reagan School of Economics, following voodoo economics that clearly don't work.

On October 14th 2003, a young man named Steve Bartman was watching a Major League Baseball match between his favourite team the Chicago Cubs and the Florida Marlins. The Marlins hit a ball that was heading to the stands and particularly it was headed to where he was seated. The young fan like any other fan, took his chances and stretched out his hand so as to catch the ball as it approached. Unfortunately, the Chicago Cubs outfielder Moises Alou was also trying to catch the same ball. Steve Bartman therefore inadvertently impeded Mr. Alou from making the catch and the Marlins got a home run. The Cubs lost momentum and ended up losing both the game and the chance of making it into the World Series. They simply capitulated. However, in retrospect, most Cubs fans realise that the team's capitulation was not down to Bartman, but to their own shortcomings. Steve Bartman was simply in the right place at the wrong time therefore making the perfect scapegoat.

I find myself writing on the Kenyan Shilling, a topic which to me is rather cliche. However, reading, hearing and watching the media has to say, I feel that some grounded and balanced analysis would do. Especially in light of the fact that the currency has already, as expected, been politicised. The Prime Minister Hon. Raila formed a taskforce to "investigate" what is really ailing the currency. Now Hon. Chris Okemo, Chairman of the Parliamentary Finance Committee has entered into the fray. Requesting that the CBK governor explain what is happening to the shilling.

I would simply request that both the PM's taskforce as well as the Parliamentary committee refer to an "Introductory Economics" text book. That would really elucidate their respective tasks and solutions.

To the currency, I'd simply quote an excerpt from the recently released Q2 GDP figures from the Kenya National Bureau of Statistics.

Over the second quarter of 2011, the current account deficit widened to KShs 97.929 million compared to a deficit of KShs 43.839 million recorded in a similar period in 2010

Now, the question that automatically comes to the media is; "Who's to blame"?. The answer to that of late has been that it's Prof Njuguna Ndung'u of the CBK. I beg to differ, indeed the Central Bank has made some mistakes. Particularly their knee-jerk reactions to the current macro-economic climate. However, I opine that we're all to blame. Consider for instance the fact that most people only think of "real estate" when they are thinking of how to invest their hard earned money. Coffee Estates in the outskirts of Nairobi are being sold for real estate. Coffee is one of our biggest forex earners and as such, we are weakening the shilling in the pursuit of quick profits.

A house is a non-tradeable good, it can only be consumed where it is produced and as such can never earn us any forex. Therefore, as long as the country is focused on being less productive, the shilling at 104.00 looks rather cheap to me.

Back to Prof. Ndung'u, what is a Central Bank governor to do, in the face of society wide efforts towards non-tradeable goods? I posit that there is little much he can do. I go further and suggest that even a dream team of Ben Bernanke and a re-incarnated Milton Friedman wouldn't do our currency any good. Who is to blame?, we are all to blame. Prof Ndung'u is just the Steve Bartman of this game, he is at the right place at exactly the wrong time.

On the issue of interest rates being risen to mitigate the fall of the currency; If the South African Rand, Malaysian Ringgit and even the Singaporean Dollar are all facing pressures due to the current global macro climate, what makes anyone think that a 16% yielding shilling will attract global funds? Secondly, haven't interest rates already been risen? What is the point of focusing on the CBR when the real emphasis on the money markets is the Interbank Rate and the 91-day T-bill rate? Haven't these rates already risen?.

To surmise, the Central Bank governor cannot do much about the currency. Furthermore, we are all to blame in our pursuit of super profits from real estate investments, we have weakened the shilling. I suggest that any Kenyan following the current currency situation to read deeply about the causes of the Asian Financial Crisis. You will be spooked!