During the week the Central Bank of Kenya (CBK) publicly announced its intention to buy US Dollar (USD) worth 40.5 billion shillings between March and June 2020 to increase its dollar reserves amid rising uncertainty on global markets due to the coronavirus outbreak.
CBK, however, announced that it would buy the dollars at the prevailing market rate to ensure the purchase does not introduce volatility in the market.
This was not the case, since, during the week, the Kenya Shilling depreciated by 1.6 percent against the US Dollar to 102.6 shillings from 101.0 shillings recorded last week, due to increased demand for the dollar by the banks and importers who are looking to stockpile the dollar for a chance to sell to CBK.
On a YTD basis, the shilling has depreciated by 1.2 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
“In our view, the shilling should remain relatively stable against the dollar in the short term with a bias to a 2.4% depreciation by the end of 2020,” said Cytonn Investments.
The shilling continues to enjoy the narrowing of the current account deficit, with preliminary data indicating that Kenya’s current account deficit was equivalent to 4.6 percent of GDP in 2019, from 5.0 percent recorded in 2018.
This was mainly driven by lower imports of SGR-related equipment, resilient diaspora remittances which stood at USD 0.3 bn in January 2020, a 5.9 percent increase from the USD 0.2 bn recorded in January 2019.
There are also strong receipts from transport and tourism services with preliminary data indicating that the number of tourists landing in the country stood at 132,019 in December 2019, which was a 9.0 percent increase, compared to the 121,070 recorded in November 2019.
There are high levels of forex reserves, currently at USD 8.4 bn (equivalent to 5.1-months of import cover), above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.
The country has witnessed foreign capital inflows, with investors looking to participate in the domestic equities market. The Central Bank of Kenya has remained supportive of its activities in the money market, such as repurchase agreements and selling of dollars.
However, the shilling is expected to receive a hit from the rising uncertainties in the global market due to the Coronavirus outbreak. The virus outbreak is likely to cause supply-side shortages which may result in inflationary pressure as prices readjust to the forces of demand and supply.
The Central Bank of Kenya (CBK) is looking to purchase Kshs 40.5 bn from banks in the next four months, which will bolster the forex reserves that stood at Kshs 8.7 bn on 28th February 2020.
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