The Kenyan shilling depreciated marginally by 0.2 percent last week against the US dollar to close the week at Kshs 112.9, from Kshs 112.6 recorded the previous week.
The depreciation was mainly attributable to increased dollar demand from general importers. Key to note, this is the lowest the Kenyan shilling has ever depreciated against the dollar.
On a YTD basis, the shilling has depreciated by 3.4% against the dollar, in comparison to the 7.7% depreciation recorded in 2020.
Pressure on the shilling will continue coming 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.
The increased demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally will continue hitting the shilling.
The idening current account deficit which stood at 5.4% of GDP in the 12-months to October 2021 compared to the 4.8% of GDP in the 12 months to October 2020 attributable to a higher import bill which offset increased receipts from agricultural and services exports and remittances.
The rising global crude oil prices are on the back of supply constraints at a time when demand is picking up with the easing of COVID-19 restrictions and as economies reopen.
Key to note, risks abound this global recovery following the emergence of the new COVID-19 Omicron variant.
“We are of the view that should the variant continue to spread; most nations will respond swiftly by adopting stringent containment measures to curb the spread,” said Cytonn.
The shilling is expected to be supported by the Forex reserves, currently at USD 8.7 bn (equivalent to 5.3-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.
Key to note, the forex reserves have been steadily declining and are currently at a 3-month low. In addition, the reserves were boosted by the USD 1.0 bn proceeds from the Eurobond issued in July 2021 coupled with the USD 407.0 mn IMF disbursement and the USD 130.0 mn World Bank loan financing received in June 2021, and,
The improving diaspora remittances evidenced by a 24.2% y/y increase to USD 320.1 mn in November 2021, from USD 257.7 mn recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.