Shilling Up 0.1% But Still Struggling Against The Dollar

The Kenyan shilling appreciated marginally by 0.1 percent last week against the US dollar to close at 109.8 shillings, from 109.9 shillings recorded the previous week.

The slight appreciation was mainly attributable to inflows from agricultural products and remittances which outweighed the slowing importer dollar demand.

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 Cytonn Investments.

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

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The continued uncertainty globally making people prefer holding dollars and other hard currencies, and the expected dividends payouts to foreign investors by corporates in the coming months will pile pressure on the shilling.

The Forex reserves, currently at USD 7.3 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 will support the shilling.

The Forex reserves have been declining and this may mean that the government of Kenya will struggle to support the local currency when it depreciates if the trend continues.

The improving current account position which narrowed to 4.6 percent of GDP in the 12 months to February 2021 compared to 5.8 percent of GDP during a similar period in 2020 will help the shilling to hold on.

The improving diaspora remittances evidenced by an 18.9 percent y/y increase to USD 260.3 million in February 2021, from USD 219.0 million recorded over the same period in 2020.

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

The government is 6.2 percent behind its prorated borrowing target of 407.5 billion shillings having borrowed 382.2 billion shillings for the financial year 2021/2021.