Kenyan Shilling Dips 1.3% Last Week To End At Ksh 108.5

The Kenya Shilling depreciated against the dollar by 1.3 percent, to close at 108.5 shillings, from 107.1 shillings recorded the previous week, attributable to increased demand from oil, manufacturing, and agricultural importers.

On a YTD basis, the shilling has appreciated by 0.6 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020.

Pressure on the shillings will come from the rising uncertainties in the global market due to the Coronavirus pandemic, which has seen investors continue to prefer holding their investments in dollars and other hard currencies and commodities.

Continued strengthening of the US Dollar against major currencies as evidenced by a YTD gain of 2.1 percent in the ICE U.S. Dollar Index as compared to a 6.7 percent decline in 2020.

The ICE U.S. Dollar Index is a benchmark index that measures the international value of the US Dollar where investors can monitor the value of the US Dollar relative to a basket of six other world currencies.

Shilling will be afforded by the Forex reserves, currently, at USD 7.7 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.

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The improving current account position 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.

Improving diaspora remittances evidenced by a 27.1 percent y/y increase to USD 290.8 million in March 2021, from USD 228.8 mn recorded over the same period in 2020, has cushioned the shilling against further depreciation.

Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The government is 32.1 percent ahead of its domestic borrowing target, having borrowed 596.7 billion shillings against a pro-rated target of Kshs 451.6 bn for the financial year 2021/2021.

“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, thus leading to a larger budget deficit than the projected 7.5 percent of GDP,” said Cytonn.

The high deficit and the lower credit rating from S&P Global to ‘B’ from ‘B+’ 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 fixed income securities to reduce duration risk.