Kenya’s deadliest attack threatens economy, currency tanks to three-year low in sell-off

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The good news is that, based on the currency’s reaction to previous attacks like on the Westgate mall in 2013, it staged a quick recovery.

THE sell-off that has driven the Kenyan shilling to the lowest against the dollar in more than three years is poised to extend after the country’s deadliest attack by Islamist militants in more than 16 years.

The currency weakened to its lowest since Nov.16, 2011 after militants attacked a university on April 2, killing 147 people. With Somalia’s al-Shabaab militants threatening more violence, tourism, which has been in decline since the start of 2013, may shrink further, impacting the East African nation’s second-largest source of foreign exchange, according to Rich Management Ltd. The shilling has declined for four consecutive weeks.

“It was of a magnitude that will shock the market,” Aly- Khan Satchu, chief executive officer of Nairobi-based Rich, an adviser to companies and wealthy individuals, said by phone on April 3. “The first reaction will be seen on the shilling. We should expect to see some weakening.”

The al-Qaeda-linked group is scaring off visitors to Kenya, known for its bush safaris and beaches, by intensifying attacks on sites including bars, churches and malls over the last two years.

This comes at a time when President Uhuru Kenyatta’s administration is also facing a drought in key tea-growing areas, with factories reporting lower deliveries of the country’s biggest export.

The shilling weakened for a seventh day to 92.80 per dollar on April 3, when local markets were closed. It has declined 3.8% over the past six months and may drop to 94.4 over the next year, Barclays Plc said last month.

Security fears

Al-Shabaab claimed responsibility for the pre-dawn attack on Garissa University College that also left at least 78 people injured, the latest in a series of assaults on Kenya that the militant group says is retaliation for the 2011 deployment of troops to fight them in neighboring Somalia. The severity of the attack only became apparent after markets had closed.

It was the deadliest raid since al-Qaeda bombed the U.S. Embassy in Nairobi in 1998, killing more than 200 people.

“This attack renews the fears people have on security,” Faith Atiti, a research analyst at Nairobi-based CBA Capital Ltd. said by phone on April 3. “The currency will suffer from these jitters.”

The FTSE NSE Kenya 25 Index, the country’s benchmark stock gauge, decreased 0.9% to 229.47, on April 2, the biggest one-day decline since March 3, and pared its gain this year to 6%. Domestic bonds lost 0.6% for dollar investors last week, the biggest drop among 31 emerging markets, according to Bloomberg indexes.

Yield spreads

Kenya’s $2 billion of Eurobonds due June 2024 ended a 10- day winning streak on April 2, with yields climbing three basis points to 6.10%.

Initial losses in the shilling may be limited based on the currency’s reaction to previous attacks.

It gained more than 3% against the dollar in the month after al-Shabaab’s raid on Nairobi’s Westgate Mall in September 2013 killed 67 civilians and security personnel. Over the next 12 months, it weakened 5.6%. The shilling’s 14-day relative strength index rose above the 70 level seen by some technical analysts as oversold for the third day on April 3.

Growth in Kenya, which has a population of 41 million people and a gross domestic product of $55 billion, may accelerate to 7% by 2017 from 6% this year, the International Monetary Fund said on March 5.

Still, the increased intensity of al-Shabaab attacks and threats of more violence is clouding the outlook for growth, with airlines, hotels and other tourism-related businesses set to suffer the most, Rufus Mwanyasi, head trader at Nairobi-based Canaan Capital Ltd., said by phone on Sunday.

Kenya’s tourism industry contracted 14.6% in the third quarter of 2014, continuing a trend seen every quarter since the start of 2013, according to the Kenya National Bureau of Statistics.

“We may see a reduction of the economic growth forecast to 5.5% or even 5%,” Mwanyasi said. “Tourism and hotels contribute quite a bit to GDP.”

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