Last week, the Kenyan shilling depreciated marginally by 0.1 percent against the US dollar to 108.8 shillings from 108.6 shillings recorded the previous week.
The marginal drop was attributable to the dollar demand from the energy sector. On a YTD basis, the shilling has depreciated by 7.3 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
Support for the shilling
The Forex reserves which are currently at USD 8.2 bn (equivalent to 5.0-months of import cover), which is 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 improving current account position has seen a 39.9 percent decline during Q2’2020, coming in at 82.2 billion shillings from 136.9 billion shillings in Q2’2019, equivalent to 7.0percent of GDP from the 10.9 percent of GDP recorded in Q2’2019.
“We are projecting the y/y inflation rate for October 2020 to increase to between 4.4 – 4.7 percent compared to the 4.2 percent recorded in September due to the 1.4 percent increase in petrol prices,” says Cytonn in this week’s report.
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 63.5 percent ahead of its prorated borrowing target of 130.9 billion shillings having borrowed 214.0 billion shillings.
“In our view, the government will not be able to meet their revenue collection targets of 1.9 trillion shillings 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 may be required to plug the deficit,” says Cytonn.
Owing to this uncertainty in the environment, Cytonn is of the view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.