The Kenyan shilling depreciated by 0.1 percent against the US dollar to close the week at Kshs 120.9, from Kshs 120.7 recorded the previous week.
The continuous depreciation of the local currency was partly attributable to increased dollar demand from the oil and energy sectors against a slower supply of hard currency.
On a year-to-date basis, the shilling has depreciated by 6.8% against the dollar, higher than the 3.6% depreciation recorded in 2021.
Pressure on the Kenyan shilling will come from:
High global crude oil prices are on the back of persistent supply chain bottlenecks coupled with high demand as most economies gradually recover.
An ever-present current account deficit estimated at 5.2% of GDP in the 12 months to August 2022, the same as that was recorded in a similar period in 2021.
The aggressively growing government debt continues to put pressure on forex reserves given that 68.1% of Kenya’s debt is US Dollar denominated as of July 2022.
The shilling is however expected to be supported by:
Sufficient Forex reserves currently at USD 7.3 bn (equivalent to 4.1 months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover.
It is important to note that Forex reserves have dropped by 16.5% on YTD from USD 8.8 bn to the current USD 7.3 bn. The chart below summarizes the evolution of Kenya’s months of import cover over the last 10 years.
At the same time, rates in the Fixed Income market have remained relatively stable due to the relatively ample liquidity in the money market.
The government is 3.7% behind its prorated borrowing target of Kshs 158.2 bn having borrowed Kshs 152.4 bn of the Kshs 581.7 bn borrowing target for the FY’2022/2023.
We expect sustained gradual economic recovery as evidenced by the revenue collections of Kshs 2.0 tn in the FY’2021/2022, equivalent to a 2.8% outperformance.
Despite the performance, we believe that the projected budget deficit of 6.2% is relatively ambitious given the downside risks and deteriorating business environment occasioned by high inflationary pressures.
Related Content: Kenyan Shilling Falls The Lowest In History