East African currencies are likely to weaken further should European banks sell off assets in the form of stocks and government securities that they hold in emerging markets like Kenya.

Jose Vinals and Peter Dattels of the IMF pointed out that the banks are under pressure from the European Central Bank (ECB) to increase their capital.

This could see the banks sell the assets it owns in emerging markets to the tune of $2.6 trillion by the end of next year.

When the banks sell these assets, they will hold more cash thereby improve their capital requirements as demanded by ECB last year.

Foreign assets held in US dollars across several emerging markets are highly targeted in the asset reduction programmes, something that could ignite severe shocks similar to those witnessed following the collapse of Lehman Brothers in 2008, according to Mr Dattels.

The effect was also felt at the stock markets with the Nairobi Securities Exchange losing by 30 per cent in 2011. But the trend reversed in the first quarter of 2012 with considerable offshore dollars, which mainly benefited East Africa’s government debt markets.

For instance, huge offshore inflows, supported by sharp increases in interest rates earned on government securities between August 2011 and January helped the Uganda shilling appreciate against the dollar.

In spite of the looming shocks, market analysts remain defiantly optimistic, insisting volatility from asset cuts poses small danger to market performance.