tom_boy wrote:Yowel wrote:tom_boy wrote:Let me be counted among the pro rate cap hoi poloi. I still dont understand why rate cap is bad for business. The sooner banks get over their pity party , double down and get to work lending to those who deserve loans, the better it will be for all of us. No need having registered shylocks masquerading as banks. By June 2017, they will have seen the light and done away with their credit crunch games.
By the way, can someone explain to me slowly what interest rates have to do with weakening kenya shs against the dollar. What is the relationship.
First, refer to post #1522. Then ask questions.
@Yowel, kama huna jibu, dont expose your ignorance. Post #1522 does not answer my question. Let me give you another chance to answer the question. Go ahead, give it a shot, sio mtihani . . . nkt.
@tom_boy, kuwa mpole bwana.
Currency exchange rates are determined by a number of factors e.g. interest rates, current account on balance of payments, economic growth, relative inflation rate etc. Now looking at interest rates in isolation: if Kenyan interest rates rise, it shall become more attractive to save in Kes, thus a demand for the currency thus appreciation, but the KES is not a major currency and no one will dare do what ive explained considering the fragile nature of third world countries where savings could be wiped out in a flash.
Now, answering your question based on the current situation: most emerging economies have borrowed in USD, i.e. both governments (read Eurobond in kenya, Nigeria, Ghana etc) and even the private sector. When the US raise their interest rates, investments and funds shall start trickling back at the expense of other countries, demand for the dollar shall rise and the USD shall appreciate and other currencies shall depreciate (KES etc).
These shall be the effects:
1) investment shall be withdrawn by foreigners, a capital outflow which shall affect key investments both in the private sector and public sector.
2) repayment of debt shall be more expensive since the govt source of revenue is kes and repayment of debt is in usd, thus it shall take more kes to buy the same dollar. Thus the govt shall borrow more, still in Kes to meet the obligation, this shall cause interest rates to rise and the debt burden to increase even further. (For Kenya this is dangerous considering our budget deficit stands at 9.3% of GDP). For the government to protect the KES it needs to by either buy more dollars or raising interest rates higher crowding out funding for the private sector.