Kenyan Shilling Drops To The Lowest In History

The Kenyan shilling depreciated by 0.2 percent against the US dollar, to close the week at 114.2 shillings from 113.9 shillings recorded the previous week, partly attributable to increased dollar demand from the oil and energy sectors.

Key to note, this is the lowest the Kenyan shilling has ever depreciated against the dollar. On a year-to-date basis, the shilling has depreciated by 0.9 percent against the dollar, in comparison to the 3.6% depreciation recorded in 2021.

Pressure on the shilling will come from the rising global crude oil prices on the back of supply constraints and geopolitical pressures at a time when demand is picking up with the easing of COVID-19 restrictions and as economies reopen.

The increased demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally.

An ever-present current account deficit due to an imbalance between imports and exports, with Kenya’s current account deficit, estimated to come in at 5.4 percent of GDP in 2021, having expanded by 44.6 percent to 127.6 billion shillings in November 2021, from 88.3 billion shillings.

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 18.4 percent to 8.0 trillion shillings in December 2021, from 1.5 trillion shillings in December 2011 thus putting pressure on forex reserves to service some of the public debt.

The shilling is expected to be supported by high Forex reserves currently at USD 8.0 billion shillings which are 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.

In addition, the reserves were boosted by the USD 1.0 bn proceeds from the Eurobond issued in July 2021 coupled with the USD 972.6 mn IMF disbursement and the USD 130.0 mn World Bank loan financing received in June 2021.

Improving diaspora remittances evidenced by a 21.7 percent y/y increase to USD 338.7 mn in January 2022, from USD 278.3 mn recorded over the same period in 2021, which has continued to cushion the shilling against further depreciation.

Rates in the Fixed Income market have remained stable due to the relatively ample liquidity in the money market.

The government is 11.6 percent ahead of its prorated borrowing target of Kshs 468.5 bn having borrowed Kshs 523.1 bn of the 658.5 billion shillings borrowing target for the FY’2021/2022.

“We expect a gradual economic recovery as evidenced by the revenue collections of 1.1 trillion shillings during the first seven months of the current fiscal year, which was equivalent to 103.8 of the prorated revenue collection target,” said Cytonn Investments.

However, despite the projected high budget deficit of 11.4 percent and the lower credit rating from S&P Global to ‘B’ from ‘B+’, we believe that the support from the IMF and World Bank will mean that the interest rate environment will remain stable since the government is not desperate for cash.

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