Shilling Slightly Smiles Against The Dollar But Still Crawling

The Kenyan shilling appreciated by 0.3 percent against the US dollar to 109.8 shillings from 110.1 shillings recorded the previous week.

This was mainly attributable to increased dollar inflows from exports in the agricultural sector including tea, coffee, and horticultural produce.

On a YTD basis, the shilling has depreciated by 0.6 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.

There is likely to be a  slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture and the continued uncertainty globally making people prefer holding dollars and other hard currencies.

Support from the shilling will come from the Forex reserves which are currently at USD 7.6 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 4.8 percent of GDP in the 12 months to December 2020 compared to 5.8 percent of GDP during a similar period in 2019 will support the local currency.

There is the improving diaspora remittances evidenced by a 19.7 percent y/y increase to USD 299.6 million in December 2020, from USD 250.3 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 discipline by the Central Bank as they reject expensive bids.

The government is 1.2 percent ahead of its prorated borrowing target of 330.4 billion shillings having borrowed334.2 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 Kshs 1.9 tn for FY’2020/2021,” said Cytonn in a report.

“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.”