Thursday, September 22, 2011

KES 100 to US$?

It seems many Kenyans have resigned themselves to KES 100 to US$.

The odd thing is they complain while;

  • drinking imported beers instead of Tusker/Sierra
  • wearing imported shoes instead of Bata
  • eating imported cereals instead of local Weetabix
  • imports galore instead of acceptable local products/services
So why complain about the KES 100???

Wednesday, September 07, 2011

CBK Mismanagement of the Discount Window

*My apologies for any technical language but I shall try to simplify the blog post to appeal to all my readers. Suggestions/Corrections are welcome. Not complete coz I need to clean it up as well + complete it*

Banks just like retail/corporate borrowers need to borrow money.

Banks lend money they 'borrow' from depositors (you & I). Sometimes, due to various reasons, they need 'cash' which does not mean the banks are 'broke' but they face a liquidity (cash) shortfall due timing issues.

Banks lend to customers/borrowers.
Banks buy T-Bills & T-Bonds (lending to governments) for interest or trading income.
Banks buy other assets which might not be cash-like (i.e. not very liquid) for income.
Banks buy corporate Bonds or other instruments for income.
Banks buy/hold Foreign Exchange for trading or business dealing.

Therefore a bank at a specific point in time may be 'illiquid' i.e. it does not have the'cash' it needs therefore at the end of that day it needs to borrow 'cash' from other sources. These sources are:
- Depositors/Customers
- Other Banks
- Central Bank

Getting last minute cash from Depositors/Customers is a tough call but the first port of call NORMALLY are other banks in the 'Interbank' market. If the cost or availability in the Interbank market is too high then the 'illiquid' bank can approach the Discount Window of the CBK.

CBK's Discount Window - The borrowed funds are normally short-term in nature and at rates higher (often punitive) than the benchmark or prevailing T-Bill rates.
* Different CBs may use different benchmarks including 30-day T-Bills.

There is a Monetary Policy Committee that seems out of sync with the 'real' economy. The MPC sets the Central Bank Rate (CBR) which was at 6.25% which the CBK used as the DWR (Discount Window Rate) but which was not correlated to the T-Bill Rates.

So the 'smart' banks:
- Borrowed at the CBR at 6.25% & bought T-Bills at 8%+ (Almost risk-free arbitrage)
- Lent in the Interbank at 6.25%+ then borrowed at the CBR at 6.25% (Risk-free arbitrage)
- Borrowed KES at 6.25%, converted into USD/Euro/Forex then lent the forex at 7.5%+
*So the bank benefits from arbitrage in interest rates but also potential depreciation*

Sensible Central Banks make the DWR higher than the benchmark i.e. there is a 'haircut' to borrow from the CB. Not so in Kenya where CBK's DWR < T-Bill Rate.

Not surprisingly banks loaded up on T-Bills while borrowing from the CBK. Other banks went all out to buy Forex (hard currencies). This led to a rapid drop in the KES vs 'hard' currencies.

What did the CBK do? Nothing at first. Then some 'hidden' moves which were promptly ignored by the banks concerned. Ndungu (CBK Governor refused to reveal the banks' names).

Next: CBK Governor blamed KenolKobil for the rapid increase in inflation & depreciation of the KES. So while he refused or was afraid to tell Kenyans which banks were behind the rapid & massive depreciation of the KES, he was happy to blame KenolKobil about an opinion!

Next: Issue circulars that were contradictory or at the minimum confusing!
The new DWR = CBR + Prior Day's Interbank Rate - CBR + 3% = Huh?
*Why not just say IBR + 3%? No need to "+ CBR - CBR" coz = ZERO

And the crap hit the fan! The overnight IBR started jumping 2-3% daily and soon breached 30%. Crazy! The KES remained 'weak' since the banks paid more for large short-term (wholesale) deposits but paid peanuts to small depositors. The lending rates started creeping up for ALL borrowers. Go figure!

The banks that had 'hoarded' forex were sitting pretty as long as they were not very illiquid. They simply waited it out.

*Still more to come*

Tuesday, September 06, 2011

CBK - What is going on? Or not?

Can anyone make head or tail of CBK's recent moves relating to the Monetary Policy or Exchange Rate Policy?

I am going to refer to the August 2011 newsletter by Cannon Asset Managers - please click on this link for the entire newsletter - for an incisive look at what the CBK is saying or not saying or who knows what it's saying...

"Central Bank once again reverted to a tight monetary policy stance, just 2 weeks after indicating that they did not believe tight policy stance would have the desired result"

Flip flop... Well, at least they are willing to change but have the mandarins at CBK really thought it through? Or will the flip flop continue?

"We forecast that, having got its message across to the banking sector (though we are not sure what the message is), the CBK will relent and bring the overnight discount rate closer to 8%, without diluting its tight monetary policy stance."

So as CAM said "not sure what the message is" - What happened to clarity? Heck, I think CAM is being polite. You can't go start, stop, start, stop, start, stop... then start the process all over!

"we estimate that the weighted average rate of the rejected bids for the 30-year bond was about 21.7%"

Gulp! This would kill off investment since many would rather invest in T-Bonds than invest in the real economy! I do agree that CBK/Treasury should reject such bids but it also shows the lack of confidence in Kenya's Economic or Monetary Policies. If the (estimated) WEIGHTED AVERAGE is 21.7%, I dread to think what the higher end of the range was!

Bottomline: These announcements & badgering by CBK is confusing folks leading to a higher premium on loan & forex to 'mitigate' the uncertainty. I have spoken to many bankers who say they are MAXIMIZING the risk premium/spreads on loans & forex since they can't plan. 

Some banks have even stopped (reduced) lending - not because of the liquidity crunch - but the uncertainty of CBK's unpredictability. Unpredictability leads to Volatility leads to Higher Spreads leads to Higher Pricing/Costs leads to Reduced (sustainable) Economic Activity.

If I get the time I will blog on the CBK's crazy shenanigans at the Discount Window & how even a mediocre Finance/Economics/Banking students would have collectively scratched their heads at CBK's moves.

Or CBK Guv can blame KenolKobil for the woes facing Kenya!

No rain? - KK should plant more trees. 
KES falling? - KK decided to pay for fuel imports instead of delaying payments.
Interest Rates Up? - KK has a Commercial Paper out.
Traffic Jams? - KK has made it easier to buy fuel by opening up more stations.
Fuel Shortage? - KK hasn't opened enough stations.
Inflation up? - KK's Deal Poa should be 10/- not 5/-
Food Shortage? - KK should be in the business of growing food crops.

* I hope Cannon is OK with the use of the quotes in red. I assume it is OK as long as I give credit to CAM & the newsletters are posted on their website *

Disclaimer - All comments/opinions are mine. The 'original' newsletter can be found at and has a lot more detail. I also like the grading given to banks but note the lack of sufficient detail provided to the investing public.