Dyer & Blair predicts shilling to hit 110 by Dec on market forces, imports

The Kenya shilling could hit 110 units to the dollar by year-end in view of the speculative market tendencies and a rising current account deficit, an investment bank says.

Analysts at Dyer & Blair say in a report that a bear trend in the value of the shilling could push it to between Sh105 and Sh110 to the greenback. Already, some of the foreign exchange bureaus are selling the US currency at Sh105.

The investment bankers, concerned about the foreign investors in the stock market, say the accelerated imports for infrastructure development are only likely to push the shilling further down. A weaker shilling enables investors to buy more shares, but leads to lower returns when they sell on exit.

READ: Shilling on the back-heel against dollar on high mid-month demand

“The key spending have gone towards funding the standard gauge railway and several energy generation projects.

“These projects take a medium to long term frame to complete, thereby creating further pressure on the local shilling as dollar demands continue rising to fund the said projects,” said Dyer & Blair analysts.

Hitting 110 units to the greenback would mean the local currency weakens beyond the 107 level reached at the height of the shilling crisis in late 2011.

The analysts pointed out that there could be speculation at play in the currency’s depreciation. “Local traders have continued to hold dollar positions speculatively, in anticipation of further gain against the local shilling. This trend will continue adding pressure to the local shilling as dollar demand rises,” said the researchers at Dyer & Blair.

READ: Shilling feels the pressure as trade deficit rises 59pc

Currently, the shilling is being supported by high interest rates and regular injection of forex into the market — showing that it could be weaker if it were left to purely market forces. Analysts appear to have even under-estimated the shilling’s potential to depreciate.

Earlier in the year, investment bankers at Citigroup had estimated the shilling would close the year at 95 units.

Dyer & Blair said in its analysis that Kenya’s export market was facing challenges in the sense there were increased regulations in the European Union for agricultural goods.

Taking account also of the poor performance in the tourism sector, the flow of foreign exchange has dwindled in recent times.

“Kenya’s export market still remains subdued by increased regulations from the EU markets in regard to Kenyan agricultural produce.

“The slump in tourism in the last three years has offered more pressure on the local shilling by reducing dollar inflows, a main source for forex in Kenyan market,” said the analysts.

The other major factors the analysts cited as leading to an increasingly weaker local unit is the strength of the dollar globally. With the recovery of the US economy and the talk of a possible increase by the Federal Reserve in the bench mark rate this year, the greenback has rallied.

“The dollar has gained ground across the global driven by a recovery and upswing in the US market,” said the analysts.

“The Asian markets have remained under downward momentum, while the Eurozone still mulls around the Greece stalemate. This has positioned the dollar as a safer currency, driving up its performance.”