Kenyan shilling to remain under pressure

By Esther Mulwa

Kenyan shilling is expected to remain under pressure for the remainder of the year, according to latest findings by rating agency – Fitch Solutions.

The shilling has weakened to a spot rate of Sh118.90/USD as of July 26, 4.8 percent weaker in the YTD, due to deteriorating terms of trade in H122 and global risk-off sentiment caused by the Russia-Ukraine conflict.

Moreover, domestic firms are facing increasing delays in the processing of FX requests, which is raising fears of a foreign-currency shortage.

Because of Kenya’s exposure to high commodity prices and its large twin deficits, investors are assigning the country a risk premium over regional peers.

We expect that these factors, along with risks related to Kenya’s August 2022 general elections, will cause the shilling to depreciate further to Sh119.90/USD by end-2022, averaging Sh116.80/USD in 2022.

“In 2023, we forecast that the currency will weaken only by 3.4 percent to an average of KES120.95/USD, as a wide current account deficit is partly offset by a rebound in real GDP growth and investor confidence,” noted Fitch in its assessment.

Widening the trade deficit, which is the difference between the value of a country’s imports and the value of its exports, typically reduces the incomes of domestic workers, pushing many to lower income brackets as has been the case for several months now.

Families with lower incomes generally find it much harder to save. Therefore, increasing trade deficits naturally reduce national savings among the working class.

The Shilling has been hitting new record lows on almost a daily basis since April, largely weighed on by a stronger greenback. Its value continued its downward trend against the USD, hitting a fresh record low of Sh119.15 at the open of trading, largely due to a stronger dollar amid limited domestic supply from the Central Bank.

Accelerating inflation over that period to date and the monetary policy’s increasingly hawkish tone, have raised expectations of another possible rate hike. The CBK lifted the Central Bank Rate (CBR) for the first time in seven years, moving the benchmark lending rate to 7.5 from seven per cent.

The May rate hike was as the reserve bank precluded an inflation rate higher than the upper target of 7.5 per cent. June’s inflation rose to 7.9 percent from 7.1 percent a month earlier, according to Kenya National Bureau of Statistics (Knbs). The annual inflation rate increased to 8.3 percent in July of 2022, the highest reading since June of 2017, from 7.9 percent in June.

The inflationary fires have been well and truly stoked by the twin supply-side shocks of coronavirus and Russia’s invasion of Ukraine, coupled with increased demand driven by counter-pandemic government stimulus packages over the last couple of years.

It is hard to miss inflation in recent economic numbers, and maybe even more so, the fear that the inflationary cycle is going to hang around a lot longer than the CBK’s monetary policy and investors would like.

You have seen it at the pump, in food prices and your favorite supermarket, or in the housing and real estate market, and for those who follow stocks, you definitely hear about it in the lips of millionaire investor talking points.

In March 2022, the global inflation rate for the consumer price index reached 9.22 percent, compared with 7.47 percent in February 2022. Year-on-year inflation in the OECD as measured by the Consumer Price Index (CPI) rose to 9.6 percent in May.