Shilling Depreciates 1.3% During The Week, The Lowest in 10 Months

Last week, Kenya shilling depreciated by 1.3 percent against the US Dollar to close at 103.2 shillings to the dollar from 101.9 shillings to the dollar recorded the previous week.

The depreciation of the shilling has been attributed to increased dollar demand by companies in the oil, manufacturing and energy sectors to close end of year orders ahead of the December holidays.

The shilling has continued to slide over the week, mainly due to the levels of dollar inflows failing to meet the demand mainly from oil importers, which has also seen the oil import bill rise on the back of a rally in fuel prices.

The depreciation, coupled with the declined value of Kenya’s principal exports, with the average price of tea has declined by 15.5 percent since January and the average price of horticulture declining by 19.7 percent has led to a deteriorating external position eating into the forex reserves and exerting pressure on the local currency.

Tea and horticulture contributed to 19.5 percent and 16.2 percent of the total August 2018 export bill. Key to note, Kenya’s forex reserves have fallen by 8.9 percent to USD 8.1 billion, from USD 8.9 billion since the start of the FY’2018/2019 in July.

All the gains made by the Kenya Shilling this year were eroded this week as it reached a 10-month low at 103.2 shillings the same price it closed the year 2017.

However, market analysts from Cytonn say that the shilling would soon resume its stability due to CBK’s activities in the money market, such as repurchase agreements and selling of dollars.

The shilling will also be supported by the high levels of forex reserves, currently at USD 8.1 billion equivalent to 5.3-months of import cover, compared to the one-year average of 5.5-months, which is above the IMF threshold for emerging markets, which is 3-months.

There has been an improving diaspora remittance, which increased by 71.9 percent y/y to USD 266.2 million in June 2018 from USD 154.9 million in June 2017 and by 4.9 percent m/m, from USD 253.7 million in May 2018, with the largest contributor being North America at USD 130.1 million.