Kenyan Shilling Continues To Fall, Now At The Lowest In History

During the week, the Kenya Shilling depreciated by 0.4% against the US dollar to close the week at Kshs 147.4, from Kshs 146.8 recorded the previous week.

On a year-to-date basis, the shilling has depreciated by 19.4% against the dollar, adding to the 9.0% depreciation recorded in 2022.

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Pressure on the Kenyan shilling will continue coming from:

1. An ever-present current account deficit, which came at 2.3% of GDP in Q1’2023 from 4.2% recorded in a similar period last year.
2. The need for government debt servicing, continues to put pressure on forex reserves given that 66.8% of Kenya’s external debt is US dollar-denominated as of April 2023.
3. Dwindling forex reserves are currently at USD 7.0 bn (equivalent to 3.8 months of import cover), which is below the statutory requirement of maintaining at least 4.0 months of import cover.

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The shilling is however expected to be supported by:

1. Diaspora remittances stood at a cumulative USD 2,766.3 mn in 2023 as of August 2023, 3.4% higher than the USD 2,674.5 mn recorded over the same period in 2022, and,
2. The tourism inflow receipts which came in at Kshs 268.1 bn in 2022, a significant 82.9% increase from Kshs 146.5 bn inflow receipts recorded in 2021.

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Fixed Income

Rates in the Fixed Income market have been on an upward trend given the continued high demand for cash by the government and the occasional liquidity tightness in the money market.

The government is 2.2% ahead of its prorated net domestic borrowing target of Kshs 68.1 bn, having a net borrowing position of Kshs 69.6 bn of the domestic net borrowing target of Kshs 313.6 bn for the FY’2023/2024.

Therefore, we expect a continued upward readjustment of the yield curve in the short and medium term, with the government looking to bridge the fiscal deficit through the domestic market. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk.

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