Q3 Sees Kenyan Shilling Falling To The Lowest In History

The Kenyan Shilling depreciated against the US Dollar by 2.5 percent in Q3’2022, to close at 120.7 shillings, from 117.8 shillings at the end of Q2’2022.

The depreciation of the shilling was partly attributable to increased dollar demand in the energy, oil, and manufacturing sectors.

Key to note, this is the lowest the Kenyan shilling has traded against the dollar. During the week, the Kenya Shilling depreciated against the US Dollar by 0.1 percent to close at 120.7 shillings, from 120.6 shillings the previous week.

Pressure on the local currency is coming 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 was 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 are currently at USD 7.4 bn (equivalent to 4.2-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover, and,

Sufficient diaspora remittances stand at a cumulative USD 3,992.0 mn as of August 2022, representing a 14.7 percent y/y increase from USD 3,481.0 mn recorded over the same period in 2021.

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

The government is 7.5 percent behind its prorated borrowing target of Kshs 147.0 bn having borrowed Kshs 136.0 bn of the 581.7 billion shillings borrowing targets for the FY’2022/2023.

“We expect sustained gradual economic recovery as evidenced by the revenue collections of 2.0 trillion shillings in the FY’2021/2022, equivalent to a 2.8 percent outperformance,” said Cytonn.

Despite the performance, we believe that the projected budget deficit of 6.2 percent is relatively ambitious given the downside risks and deteriorating business environment occasioned by high inflationary pressures.