On a YTD basis, the shilling has depreciated by 0.3% against the dollar, in comparison to the 7.7% depreciation recorded in 2020.
The Kenyan shilling depreciated by 0.1 percent against the US dollar last week to 109.6 shillings, from 109.5 shillings recorded the previous week.
The depreciation was mainly attributable to increased dollar demand from the energy sector and other general goods importers.
On a YTD basis, the shilling has depreciated by 0.3 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020.
“Pressure on the shilling will continue coming from the demand from merchandise traders as they beef up their hard currency positions in the coming days,” said Cytonn in this week’s report.
The slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture will also pile pressure on the local currency.
There is a continued uncertainty globally making people prefer holding dollars and other hard currencies due to the ongoing COVID-19 pandemic.
Support for the shilling will come from the Forex reserves which are currently at USD 7.6 bn 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 4.8 percent of GDP in the 12 months to December 2020 compared to 5.8 percent of GDP during a similar period in 2019 will help in supporting the shilling.
“Improving diaspora remittances evidenced by a 19.7 percent y/y increase to USD 299.6 mn in December 2020, from USD 250.3 mn recorded over the same period in 2019, has cushioned the shilling against further depreciation,” said Cytonn.
Rates in the fixed income market have remained relatively stable due to the discipline by the Central Bank as they reject expensive bids.
The government is 13.3 percent behind its prorated borrowing target of 527.7 billion shillings having borrowed 305.6 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,” added Cytonn.