* Shilling down 2 pct year-to-date
* Central Bank says ready to act to minimise volatility
* Tourism hurt by bombings, travel warnings
(Adds market close)
By Richard Lough
NAIROBI, May 26 Kenya's central bank has
signalled its intent to defend the ailing shilling by selling
dollars and says it has deep enough foreign reserves to cushion
the currency against shocks.
The shilling has been on the back foot this year, hurt by
lower than expected dollar inflows into the tourism and tea
sectors. More recently, a spate of bombings has added to worries
that if a slump in tourism continues and deepens it could shave
a percentage point or more off growth, economists say.
The Central Bank of Kenya has persistently drained liquidity
to shore up the currency in 2014, but on Friday it acted more
aggressively, selling an undisclosed amount of dollars. Two
commercial banks on Monday confirmed the sale.
"(The bank) gave the message that they're willing to cap the
shilling at these levels," said Nahashon Mungai, a trader at
Kenya Commercial Bank.
On Friday the shilling fell through the psychologically
important 88 per dollar barrier to its lowest in 2 1/2 years,
before the bank's actions hauled it back. On Monday, banks
priced the shilling at 87.85/95 at the market close, a touch
weaker than Friday.
Central Bank of Kenya Governor Njuguna Ndung'u blamed
seasonal pressures, including the payment of corporate dividends
to foreign shareholders for volatility in the currency over the
past two weeks. He made no mention of the slowdown in tourism,
an important source of foreign exchange.
The governor said the current level of foreign exchange
reserves of $6.24 billion, equivalent to 4.4 months of import
cover, gave the bank sufficient muscle to tackle what he called
"(The bank) stands ready to provide further support to
minimise the volatility of the exchange rate," Ndung'u said in a
statement on Monday.
Proceeds from a planned debut Eurobond issue before the
close of the fiscal year on June 30 would raise reserves higher
still, and the shilling could appreciate, Ndung'u said.
The central bank does not reveal the size of its hard
currency sales or purchases. A second trader called Friday's
sale a "sizeable amount" to move the currency by 30 cents.
"They hit all the banks with quite large amounts," said I&M
bank trader Abhinav Mathur.
The prospect of further sales of hard currency meant
investors were now reluctant to break the 88 level again, Mathur
Even so, both traders forecast the shilling could weaken
further this week as routine end-month dollar demand from
corporate clients kicked in and with the government widely seen
to be struggling to contain militant attacks.
The Somali Islamist militant group al Shabaab said last week
it was "shifting its war" onto Kenyan soil. Tourists have left
in droves, and travel agencies report cancellations following
travel warnings by Britain, the United States and others.
"It does help to see that the central bank is willing to
intervene and intervene in a strong manner," said Mungai. "But
security concerns and (dollar) demand will keep the shilling on
the back foot."
In January, the Kenyan Treasury estimated the economy, the
biggest in East Africa, would expand by 5.8 percent this year,
after a 4.7 percent expansion last year. But the government
delayed announcing its official forecast last month, saying it
needed more time for consultations.
The shilling is expected to trade in a range of 87.80 and
88.20 in the coming sessions.
The central bank governor's comments had little impact on
Nairobi's stock market, where the benchmark NSE-20 Share Index
closed down 0.5 percent on Monday at 4,899.92 points.
(Editing by Edmund Blair and Susan Fenton)