Kenyan Shilling Sheds Off 0.2 Percent But Still Holding Fort

The Kenyan shilling depreciated marginally by 0.2 percent against the US dollar to close at 109.9 shillings, from 109.6 shillings recorded the previous week.

The depreciation was mainly attributable to strong dollar demand from general merchandise manufacturers and energy importers, which outweighed dollar inflows from offshore investors and commodity exports.

“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. We expect continued pressure on the Kenyan shilling,” said experts from Cytonn Investments.

Pressure on the local currency will continue coming from a slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture.

The continued uncertainty globally making people prefer holding dollars and other hard currencies will also mount pressure on the struggling shilling.

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The shilling will receive support from the Forex reserves, currently at USD 7.4 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 shield the shilling.

The improving diaspora remittances evidenced by a 7.3 percent y/y increase to USD 278.3 million in January 2021, from USD 259.4 million recorded over the same period in 2020, has cushioned the shilling against further depreciation.

Rates in the fixed income market have remained relatively stable but we have seen an upward trend in the short-term papers’ yields.

The government is 9.6 percent behind its prorated borrowing target of 396.5 billion shillings having borrowed 358.5 billion shillings for the financial year 2021/2021.

The high deficit and the lower credit rating will mean that the government might be forced to borrow more from the domestic market which will ultimately create uncertainty in the interest rate environment.

“In our view, investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk,” said Cytonn.