Companies bear the brunt of high exchange rate volatility

Kenyan companies made huge foreign currency losses last year, bearing the brunt of high volatility of the shilling that saw it depreciate to an all-time-low to the dollar.

Oil marketer KenolKobil, motor vehicle dealer CMC Holdings and cement maker Athi River Mining (ARM) are some of the firms that found it difficult to shield their earnings from the erosive effects of the turbulent shilling in 2011.

Despite the companies’ efforts to hedge their earnings against the weakening shilling, last year’s decline to a historical low of 107 units against the dollar and subsequent rapid gain to 82 units caught the companies on the wrong end of hedging bets.

At one time companies such as Kenya Airways and motor vehicle dealers switched to charging their customers in dollars as the shilling hit successive historical lows.

KenolKobil, for instance, made a foreign exchange loss of Sh1.2 billion on its operations, up 79 per cent from 2010.
The oil marketer also made an additional currency hedging loss of Sh1.5 billion.

Eric Musau, a research analyst at Standard Investment Bank, said managing foreign exchange risk was especially difficult for KenolKobil since it operates in eight markets, each of which has a unique currency, a factor that complicates hedging.

CMC Holdings took a Sh11.9 million loss from “exchange difference arising from translation of foreign operations,” according to a statement issued by the company.

ARM made foreign exchange losses amounting to Sh685 million due to the weakening of the shilling against the dollar in the period to September last year, which the company said could reverse if the shilling strengthened – as it already has compared to the third quarter.

“This exchange loss provision does not immediately impact the company’s cash flow, and any reversal of the weakening of the Kenya shilling against the US dollar will result in a reduction of the provision,” said ARM when it released it third quarter results.

Gregory Waweru, a research analyst at Kestrel Capital said hedging against foreign exchange loss does not translate to eliminating risk entirely, due to the unpredictability of currency movements.

“If you took out a hedge at Sh107 and the Central Bank of Kenya (CBK) intervened you were exposed,” said Mr Waweru.

The CBK’s intervention of increasing its base lending rate to 18 per cent from 6 per cent helped the shilling to strengthen from October’s record low to the current range of 82 units to the dollar.

Mr Waweru added that companies do not hedge all their exposure, which still leaves them partially at the mercy of international markets.

Source: www.businessdailyafrica.com

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