- The Kenya Shilling depreciated by 0.9% against the US Dollar to close the month of November at KSh 122.4, from KSh 121.3 recorded at the end of October 2022
- A Cytonn Investments report has partly attributed the depreciation to increased dollar demand from importers, especially oil and energy sectors, against a slower supply of hard currency
- The report said it expects the Kenya shilling to remain under pressure for the rest of the year owing to several factors, such as rising oil prices
The Kenya Shilling depreciated by 0.9% against the US Dollar to close the month of November at KSh 122.4, from KSh 121.3 recorded at the end of October 2022.
A report by Cytonn Investments has partly attributed the depreciation to increased dollar demand from importers, especially oil and energy sectors, against a slower supply of hard currency.
For instance, in the last week of the month, the Kenyan shilling depreciated by 0.2% against the US dollar to close at KSh 122.5, from KSh 122.3 recorded the previous week. On a year-to-date basis, the shilling has depreciated by 8.3% against the dollar, higher than the 3.6% depreciation recorded in 2021.
Cytonn said they expect the Kenya shilling to remain under pressure for the rest of the year owing to several factors, such as rising oil prices. “We expect the shilling to remain under pressure because of high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand,” the firm said in their weekly report.
Factors leading to the depreciation of the Kenyan shilling
The shilling’s performance will also be impacted by an ever-present current account deficit estimated at 5.5% of GDP in the 12 months to October 2022, the same as what was recorded in a similar period in 2021.
It will also be affected by the need for government debt servicing, which continues to put pressure on forex reserves given that 69.7% of Kenya’s external debt was US Dollar denominated as of September 2022.
Another factor that will contribute to the Kenya shilling’s performance is a continued hike in the USA Fed interest rates in 2022 to a range of 3.75%-4.00% in November 2022, which has strengthened the dollar against other currencies by causing capital outflows from other global emerging markets.
Factors supporting the performance of the Kenyan shilling
The report said it still expects the Kenya shilling to receive some support, mostly from improved diaspora remittances which are standing at a cumulative USD 3.3 billion as of October 2022, representing a 9.1% y/y increase from USD 3.1 billion recorded over the same period in 2021.
The performance of the Kenya shilling will also be supported by sufficient Forex reserves, which currently stand at USD 7.1 billion (equivalent to 4 months of import cover), which is at par with the statutory requirement of maintaining at least 4 months of import cover.
“However, it’s important to note that Forex reserves have dropped by 19.8% YTD from USD 8.8 billion,” Cytonn said.
Kenya’s inflation declines marginally
The finding on the performance of the Kenya shilling comes when the country’s inflation has declined.
In November 2022, the country’s year-on-year dropped to 9.5%, from the 9.6% recorded in October 2022, mainly driven by the elevated food and fuel prices.
During the month, Food and Non-Alcoholic Beverages rose by 15.4% year on year and 0.6% from October. According to Cytonn, the month-on-month increase was mainly driven by an increase in the price of commodities such as cabbages, potatoes, Kales and beans. The increase was, however, mitigated by a drop in prices of commodities such as cooking oil, tomatoes and fortified maize flour.
The housing, Water, Electricity, Gas and another Fuel index also impacted inflation. The index increased by 0.4% month on month due to a drop in prices of 50 Kilowatts electricity units, 200 Kilowatts electricity units, gas and Kerosene.
“Despite the slight decline in the inflation rate, we expect the inflationary pressures to remain elevated in the short term, mainly on the back of high fuel prices, which despite a decline of 0.7% in Kerosene and 0.6% for both diesel and Super petrol prices for the period between 15th November and 14th December 2022, the prices remain elevated.”
They added that with fuel being a significant input in most businesses, they expect the high fuel prices to continue contributing to the elevated production cost, consequently elevating commodities’ prices.