Shilling Depreciated by 0.3% But Still Resilient Against The Dollar

Last week, the Kenya Shilling depreciated by 0.3 percent against the US Dollar to close at 102.9 shillings from 102.6 shillings the previous week.

The slight drop in the shillings was due to increased dollar demand from oil and merchandise importers during the week according to the weekly Cytonn Investments Report.

The Kenya Shilling has appreciated by 0.5 percent year to date in addition to the 1.3 percent appreciation in 2018.

“In our view, the shilling should remain relatively stable to the dollar in the short term,” said Cytonn.

The shilling continues to be supported by the narrowing of the current account deficit with preliminary data indicating that the current account deficit narrowed to 4.2 percent of GDP in the 12 months to May 2019 from 5.8 percent recorded in May 2018.

The decline has been attributed to the resilient performance of exports particularly horticulture and coffee, strong diaspora remittances, and higher receipts from tourism and transport services. Growth of imports also slowed mainly due to lower imports of food.

There have been continuous improving diaspora remittances, which have increased by 3.8 percent in May 2019 to USD 1.2 billion from USD 1.1 billion recorded in a similar period of review in 2018.

The rise in diaspora remittances is due to:

1. • 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 Central Bank of Kenya has remained supportive with its activities in the money market, such as repurchase agreements and selling of dollars.

There are high levels of forex reserves, currently at USD 9.8 billion (equivalent to 6.2-months of import cover), above the statutory requirement of maintaining at least 4-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.

The Rates

Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. A budget deficit is likely to result from depressed revenue collection with the revenue target for FY’2019/2020 at 2.1 trillion shillings, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit.

Despite this, we do not expect upward pressure on interest rates due to increased demand for government securities, driven by improved liquidity in the market owing to the relatively high debt maturities.