Average Interbank Rate Drops as Shilling Gains Traction during the Month of January

The average interbank rate dropped to 3.5 percent during the month of January from 8.0 percent in December, pointing to improved liquidity during the month, supported by government payments and debt redemptions.

Last week, the average interbank rate rose to 4.6 percent from 3.2 percent the previous week, while the average volumes traded in the interbank market declined by 83.2 percent to 2.5 billion shillings from 14.8 billion shillings the previous week.

Despite the rise in the interbank rate, the money market remained relatively liquid with commercial banks recording excess reserves of 23.9 billion shillings in relation to the 5.25 percent cash reserves requirements (CRR) supported by government payments.

The Performance of Kenyan Eurobonds

According to Bloomberg, the yield on the 5-year and 10-Year Eurobonds issued in June 2014 declined by 0.8 percentage points and 1.4 percentage points to 4.2 and 6.9 percent in January, from 5.0 and 8.3 percent in December.

During last week, the yields on the 5-year Eurobond issued in 2014 declined by 0.2 percentage points to 4.2 percent from 4.4 percent.

The 10-year Eurobond issued in the same year declined by 0.1 percentage points to 6.9 percent from 7.0 percent the previous week.

Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6 percentage points and 2.8 percentage points for the 5-year and 10-year Eurobonds, an indication of the relatively stable macroeconomic conditions in the country.

The declining yields on all the Eurobonds during the month signals improving country risk perception by investors, partly attributed to bullish expectations of improved economic growth in 2019.

There is also an increased Eurobond demand in emerging markets with a similar trend observed in other Sub-Saharan African Eurobonds, driving the prices up and effectively the yields down.

The Kenya Shilling Vs the US Dollar

The Kenya Shilling appreciated by 0.9 percent against the US Dollar during the month of January to 100.9 shillings from 101.8 shillings at the end of December.

The slight appreciation was driven by hard currency inflows from diaspora remittances and offshore investors buying government debt, coupled with thin end month dollar-demand from oil importers.

During last week, the Kenya Shilling appreciated by 0.5 percent against the US Dollar to close at 100.6 shillings from 101.1 shillings in the previous week.

Last week saw increased dollar inflows from diaspora remittances and portfolio investors buying government debt amid reduced dollar demand from the energy and manufacturing sector.

On a YTD basis, the shilling has appreciated by 1.2% against the US Dollar. In our view, the shilling should remain relatively stable against the dollar in the short term.

What Investors Believe will Support the Local Currency

The narrowing of the current account deficit to 5.1 percent in the 12-months to November 2018, from 6.5 percent in November 2017.

The narrowing has been attributed to improved agriculture exports, increased diaspora remittances, strong receipts from tourism, and lower food and SGR-related equipment relative to 2017.

Improving diaspora remittances, which increased by 38.6 percent in 2018 to USD 2.7 billion from USD 1.9 billion recorded in 2017.

There is increased uptake of financial products by the diaspora due to financial services firms, particularly banks, targeting the diaspora, and new partnerships between international money remittance providers and local commercial banks making the process more convenient.

The CBK’s activities in the money market, such as repurchase agreements and selling of dollars will also play a role in shielding the shilling.

There are 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 5.1 months.