Shilling Hits An All-Time Low Of 111.5 During The Week

Last week, the Kenyan shilling depreciated against the US dollar by 0.4 percent to an all-time low of 111.5 shillings from 110.7 shillings.

This is partly attributable to insufficient dollar inflows from subdued sectors such as tourism and horticulture, which failed to match the dollar demand from businesses as they rush to meet their end year obligations.

On a YTD basis, the shilling has depreciated by 10.0 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.

Pressure on the shillings will continue to come from the demand from merchandise traders as they beef up their hard currency positions ahead of the festive season, amid a slowdown in foreign dollar currency inflows.

The continued uncertainty globally making people prefer holding dollars and other hard currencies will continue hitting hard on the local currency.

The shilling will be supported by the Forex reserves which are currently at USD 7.8 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 which narrowed to 4.9 percent of GDP in the 12 months to October 2020 compared to 5.3 percent of GDP during a similar period in 2019 will play a role in supporting the shilling.

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 29.7 percent ahead of its prorated borrowing target of 215.1 billion shillings having borrowed 278.8 billion shillings.

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 Kshs 1.9 trillion for FY’2020/2021 thus 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.