Last week, the Kenya Shilling depreciated by 0.2 percent against the US Dollar to close the week at 108.2 shillings from 108.0 shillings recorded the previous week.
The slight depreciation by the local currency was due to end-month importer dollar demand amidst lackluster inflows.
On a year-to-date basis, the shilling has depreciated by 6.8 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
The local currency will continue receiving pressure from the demand from merchandise and energy sector importers as they beef up their hard currency positions.
Currently, there is a deteriorating current account position, with the current account deficit deteriorating by 10.2 percent during Q1’2020, to 110.9 billion shillings, from 100.6 billion shillings recorded in Q1’2019.
30 percent decline in the secondary income balance (transfers recorded in the balance of payments whenever an economy provides or receives goods, services, income or financial items), to 124.1 billion shillings, from 128.0 billion shillings in Q1’2019.
A 67.0 percent decline in the services trade balance (the difference between the imports and exports of services) to 20.4 billion shillings from 61.9 billion shillings.
There are high levels of forex reserves, currently at USD 8.9 million 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 that will support the shilling.
There is a relatively strong diaspora remittance that Increased to USD 277.0 million in July compared to USD 225 million in July 2019 though lower than the USD 288.5 million in June 2020.
Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.
The government is 89.9 percent ahead of its prorated borrowing target of 93.5 billion shillings having borrowed 177.5 billion shillings.
“In our view, the government will not be able to meet their revenue collection targets of Kshs 1.9 trillion for FY’2020/2021 because of the current subdued economic performance in the country brought about by the spread of COVID-19, and therefore leading to a larger budget deficit than the projected 7.5 percent of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market will be required to plug in the deficit.
Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.”