The Kenyan shilling marginally depreciated against the US dollar by 0.3 percent to 109.4 shillings from 109.1 shillings last week according to data compiled by Cytonn Investments.
The depreciation of the shilling during the week was mainly attributable to the persistent dollar demand from general goods importers and low inflows from sectors like tourism.
On a YTD basis, the shilling has depreciated by 7.9 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
The shilling will continue receiving pressure from the demand from merchandise and energy sector importers as they beef up their hard currency positions amid a slowdown in foreign dollar currency inflows.
Continued uncertainty globally making people prefer holding dollars and other hard currencies are also expected to continue piling heat on the local currency.
Support for the shilling will come from the Forex reserves which are currently at USD 7.9 billion, 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 7.0 percent of GDP from the 10.9 percent of GDP recorded in Q2’2019.
Improving diaspora remittances evidenced by a 17.3 percent y/y increase to USD 263.1 million in October 2020, from USD 224.3 million recorded over the same period in 2019, has cushioned the shilling against further depreciation.
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 52.0 percent ahead of its prorated borrowing target of 187.0 billion shillings having borrowed 284.3 billion shillings.
“In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at 1.9 trillion shillings for FY’2020/2021,” says Cytonn Investments.
“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.”