The Kenyan shilling is forecast to weaken by about 2.5% over the next year to 94.4 to the dollar.
Factories in key tea-growing areas in southwestern Kenya are scaling back operations as hot, dry weather cuts deliveries by more than half, according to the government’s Kenya Tea Development Agency.
The amount of tea sold at the world’s largest auction of the leaves in Mombasa last week dropped by 27% from a year earlier.
“The weaker foreign exchange receipts are, the more pressure the currency may well find itself under,” Jeff Gable, the head of macro- and fixed-income research at the Barclays Africa Group, said this week. “Falling tea prices are one part of the puzzle.”
Tea was introduced to the country’s highlands in 1903 by British settlers. The Mombasa auction, which sells tea from at least 12 African countries to buyers as far afield as Afghanistan and Russia, and the Colombo tea auction in Sri Lanka are the world’s two biggest.
The Kenyan shilling is forecast to weaken by about 2.5% over the next year to 94.4 to the dollar, Gable said.
The currency eased 0.1% to 92.15 per dollar this week, after earlier falling to its lowest rate since November 2011. Over the past six months, the shilling has declined 3.7% against the dollar, compared with a 2.1% drop in the value of the Sri Lankan rupee.
Tea exports earned Kenya $1.03-billion last year, National Bureau of Statistics data shows. Kenya’s foreign exchange earnings have also been curtailed by a drop in tourism because of “terrorist attacks” that have killed 361 people since September 2013, according to the risk consultancy Verisk Maplecroft. Tourism earns the country about $1-billion a year.
Agriculture accounts for a quarter of Kenya’s $55-billion economy and its growth is expected to rise to 6% this year from 5.4% last year because of lower global oil prices, the World Bank said this month.
“Longer-term prospects for the currency are becoming more challenging with tea production faltering,” Gareth Brickman, an analyst at ETM Analytics, said last week. “While the dip in expected supply is supporting prices, decreasing export volumes will counteract this.”
Tea auction prices are 24% higher than last year and leaves sold at this week’s sale averaged $2.57 a kilogram, according to Tea Brokers East Africa. The total amount sold was 5.41-million kilograms.
Prices may climb in May because, even if it rains in April, which has been predicted by the Kenya meteorological department, this won’t have an immediate impact on the crop.
“Despite efforts by the government to put in place technology such as irrigation, a large portion of farming is still dependent on rain,” Maureen Kirigua, a research analyst at Sterling Capital, said.
“Reduced rainfall will have a significant impact on output and that will be reflected on overall economic growth.” – Bloomberg, with assistance from Joseph Burite in Mombasa