Kenyan Shilling Slightly Depreciates Against The US Dollar

The Kenyan shilling depreciated against the US dollar by 0.2 percent to 107.0 shillings, from 106.9 shillings recorded the previous week.

The slight depreciation was attributable to increased dollar demand from energy and general merchant importers.

On a YTD basis, the shilling has appreciated by 2.0 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020.

Pressure on the shilling 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.

Demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally will also pile pressure on the local currency.

The shilling will receive support from the forex reserves, 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 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 43.8 percent y/y increase to USD 299.3 mn in April 2021, from USD 208.2 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 due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.

The government is 1.6 percent ahead of its prorated borrowing target of 484.6 billion shillings having borrowed Kshs 492.1 billion.

“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 having collected Kshs. 1,337.4 bn as at 10 months to April 2021,” said Cytonn Investments.

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.