The Kenya shilling remained resilient, depreciating slightly by 0.1 percent against the USD, having appreciated by 1.2 percent against the dollar during the first half of the year.
This was mainly influenced by:
- the high levels of foreign exchange reserves averaged USD 7.5 bn, equivalent to 4.9 months
- improved diaspora remittances, with cumulative 12 months’ inflows to June 2016 increasing by 11.0% to USD 1.7 bn from USD 1.5 bn in the year to June 2015.
However, towards the end of the year, the shilling depreciated driven by global dollar strength driven by the Fed raising rates. The Central Bank of Kenya has been supporting the shilling leading to a decline in forex reserves to USD 7.0 bn, from USD 7.8 bn in October, which has led to the decline in the months of import cover below the 1-year average of 4.9 months, to 4.6 months, down from 5.2 months at the start of October.
Inflation rate has remained relatively stable over the year with the annual average at 6.3 percent. Inflation hit a low of 5.0 percent in May, following a steady decline since the start of the year from the 7.8 percent recorded in January 2016, owing to low food and fuel prices in the first quarter of the year.
For the last seven months (in 2016), inflation has been on an upward trend picking at 6.7 percent in November and closed the year at 6.4 percent in December. The low-income segment of Nairobi had seen the largest impact throughout the first half of 2016 with fuel price rises adversely affecting kerosene users and basic food item price rises worsening the situation.
Going forward, economic experts expect an upward inflationary pressure to be felt but be contained within the government target annual range of 2.5 – 7.5 percent. The key risks to high inflation include:
- the possible upward pressure from the food component of the CPI basket
- increasing oil prices following the Organization of Petroleum Producing Countries’ (OPEC’s) decision to reduce crude oil production by 1.2 mn barrels/day
- the low base effect for 2016
The graph below shows the summary of returns by asset class in 2016 (Real Estate, Bonds, Treasury Bills and Equities market). The best performing asset in 2016 was real estate and the worst performing was equities. Clearly, investors who did not have diversified and balanced portfolios, with exposures to real estate and fixed income registered under-performance in 2016.