Shilling to Weaken More Against a Strengthening Dollar in 2017

By David Indeje / January 9, 2017

US-Dollar-Demand-Weakens-Shilling

The Kenyan currency could weaken this year compared to 2016 attributed decline in foreign-exchange reserves limiting the central bank of Kenya’s ability to intervene in support of the shilling.

In 2016, the 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 influenced by the high levels of foreign exchange reserves averaged USD 7.5 billion, equivalent to 4.9 months and improved diaspora remittances, with cumulative 12 months’ inflows to June 2016 increasing by 11.0 percent to USD 1.7 billion from USD 1.5 billion in the year to June 2015 from the Central bank of Kenya data.

However, analysts expect the shilling to be under pressure due to:

One, the strengthening of the dollar in the global market after the Fed rate hike coupled with expectations that the Fed will accelerate its rate-hike cycle in 2017, given that the economy is expected to do even better in 2017,

Two, the continued infrastructure and real estate investments, which require imported capital goods, which will have a negative effect on the current account position,

Three, pressure on the current account position due to increased importation bill, resulting from the recovery of global oil prices following a deal by Oil Producing and Exporting Countries (OPEC) to cut global oil supply,

Four, reduced capital inflows into the capital markets due to uncertainty caused by general elections, and;

Finally, the reduced forex reserves. Currently the reserves stand at USD 7.1 billion equivalent to 4.6 months of import cover.

“Currently the government doesn’t have power to support the Kenyan Shilling. Further, the power and capacity to manage the shilling by the Central Bank of Kenya is limited,” according to Maurice Oduor, Cytonn Investment Manager.

Johnson Nderi, Manager, Corporate Finance and Advisory at ABC Capital Ltd on the contrary says, “CBK doesn’t have limited power to stem inflation. It is the primary cause of inflation.”

And on how far the CBK can go in using the foreign reserves, “I’d say it depends on monetary policy. There’s a cap however on the sum of the current account and the borrowed reserves.”

Foreign-exchange reserves declined to USD6.97 billion at the end of December, the first time they have fallen below $7 billion since January 2016.

Faith Atiti, an economist at Commercial Bank of Africa says if the CBK will not intervene by bolstering the reserves, then the shilling depreciates at a much faster rate.

The Kenya Shilling closed out the week trading around the103.70 Level and that makes a -1.17 per cent slide versus the Dollar since the start of 2017.

“The Kenyan Shilling exhibits less volatility than nearly all of its Sub Saharan Africa peers. Our forex markets are visible, liquid and transparent which is commendable. So, the Shilling has fallen-1.17 percent versus the Dollar since the start of 2017 and-2.167 percent since November 8,” according to Aly-Khan Satchu a Financial Analyst.

Going forward, economic experts expect an upward inflationary pressure to be felt rom both the food and non-food-non-fuel sectors with a projected inflation rate of between 6.7 – 7.2 percent for 2017 but, will be contained within the government target annual range of 2.5 – 7.5 percent.

“The same will not initiate a more radical decision to the economy from the Monetary Policy Committee. The interest rate has stabilised; the currency is trading current (as of Monday) at 103.75 to the Dollar.  Nothing should warrant a rate increase from the current 10 percent,” according to Cytonn Investment.

Related: 2016 Characterized by Stable Macroeconomic Environment -#CytonnReport

 



About David Indeje

David Indeje is a writer and editor, with interests on how technology is changing journalism, government, Health, and Gender Development stories are his passion. Follow on Twitter @David_Indeje

David can be reached on: (020) 528 0222 / Email: [email protected]

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