Is There Hope For The Kenyan Shilling Against The Dollar?

During the week, the Kenyan shilling depreciated marginally by 0.3 percent against the US dollar to close the week at 110.4 shillings, from 110.1 shillings recorded the previous week.

The depreciation according to a report compiled by Cytonn Investments was mainly attributable to increased dollar demand from oil and general merchandise importers.

“On a YTD basis, the shilling has depreciated by 1.1 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020. We expect the shilling to remain under pressure for the remainder of 2021,” said Cytonn.

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.

At the same time, the widened current account position which increased by 0.5 percentage points to 5.4 percent of GDP in the 12 months to August 2021, from 4.9 percent of GDP for a similar period in 2020 will affect the shilling.

Cytonn says the demand from energy importers as they beef up their hard currency positions in the prevailing elevated global oil prices will continue piling pressure on the shilling.

The shilling is expected to be supported by the Forex reserves, currently at USD 9.5 bn (equivalent to 5.8 months of import cover), 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 diaspora remittances evidenced by a 14.2 y/y increase to USD 312.9 mn in August 2021, from USD 274.1 mn recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.