Kenyan Shilling Proved Resilient But Should we be Worried in 2018?

The Kenyan shilling has proved to be remarkably resilient despite showing mixed performance when rated against the dollar and the sterling pound.

Last year, the shilling traded in the 103.00-104.00 range against the US dollar for the better part of the year largely supported by the Central bank.

Fusion Capital Analyst “The Kenyan shilling remained mostly flat at KES 103.1 against the US dollar, due to increased inflow of dollar and reduced political disruption.”

Stephanie W. Kimani, Research Economist, Commercial Bank of Africa limited notes that “The Central bank buoyed local currency volatility given shifting investor sentiments in light of the fluid political landscape. In its capacity, the Central bank acted directly in the FX market and also through its open market operations in an effort to manage shilling liquidity.”

“Nevertheless, the last few months of the year (2017) were characterized by mute dollar demand as business operations slowed during the extended electoral cycle. The shilling ended the year on a strong footing against the US dollar,” she adds.

Cytonn Investments Analysts, on the other hand, say “At the beginning of the year, we expected the Kenya Shilling to come under pressure due to expected strengthening of the dollar due to expectations of three Fed rate-hikes in 2017, and continued importation of capital goods for infrastructure and real estate investments, which was expected to have a negative effect on the current account position.”

However, Cytonn notes that the shilling remained resilient in 2017, only depreciating by 0.7 percent against the USD during the year to close at Kshs 103.2 from Kshs 102.5 at the beginning of the year.

This was supported by the weakening of the USD in the global markets as indicated by the US Dollar Index, which shed 9.9 percent in 2017, and the CBK’s intervention activities, as they had sufficient forex reserves, which closed the year at USD 7.1 bn (equivalent to 4.7 months of import cover).

Analysts from Citi also note that “As many currencies in Africa have come under significant pressure in recent years, the Kenyan Shilling (KES) has proved to be one of the more resilient ones.”

But, they are of the view that it is “arguably even more surprising given that the Kenya economy continues to run significant twin – fiscal and current account – deficits and even experienced considerable political uncertainty last year.”

“So given the stability of the Kenyan Currency in recent years, should we be worried about the outlook into 2018? They pose.

“This sort of economic and political cocktail is enough to weaken a currency significantly without the Central Bank running a very tight monetary policy.”