Kenyan Shilling Yet To Find Favor From The US Dollar

During the week, the Kenyan shilling depreciated by 0.1 percent against the US dollar to close the week at 121.3 shillings from 121.1 shillings recorded the previous week.

The continuous depreciation of the Kenyan shilling was partly attributable to increased dollar demand from importers, especially oil and energy sectors against a slower supply of hard currency.

On a year-to-date basis, the shilling has depreciated by 7.2 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.

Experts and analysts from Cytonn Investments said that “we expect the shilling to remain under pressure in 2022.”

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.

An ever-present current account deficit was estimated at 5.2% of GDP in the 12 months to August 2022, the same as what was recorded in a similar period in 2021.

The need for Government debt servicing continues to put pressure on forex reserves given that 68.1% of Kenya’s External debt was US Dollar denominated as of July 2022.

The shilling is however expected to be supported by:

Improved diaspora remittances standing at a cumulative USD 4.0 bn as of September 2022, representing a 14.3% y/y increase from USD 3.5 bn recorded over the same period in 2021.

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, however, it’s important to note that Forex reserves have dropped by 16.5% YTD from USD 8.8 bn.

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 20.3% behind its prorated borrowing target of Kshs 191.8 bn having borrowed Kshs 152.9 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 486.0 bn in the first quarter of  FY’2022/2023, equivalent to 22.7% of its target of 2.1 tn,” said Cytonn.