Citi Africa predicts Kenya shilling to hit 95 to dollar

The shilling is likely to weaken further this year to as low as 94.50 against the dollar, Citi says in a new report.

Citi Africa economist David Cowan says a widening current account deficit and rising debt level could herald a weaker shilling, helped by the strengthening US dollar against other world currencies.

According to Mr Cowan, falling inflation supported by lower oil prices this year will allow the Central Bank of Kenya to loosen its monetary policy, mainly to support growth.

But easing the monetary policy too quickly or aggressively while fiscal spending remains high—with limited reduction in the current account deficit—would weaken the shilling, Mr Cowan said.

READ: Dollar returns at NSE decline as weak shilling spurs exchange-related losses

“After two years plus of stability and against the background of the twin deficits, there is an argument that the (shilling) adjustment of the last six months is long overdue and is reversing the real appreciation seen in recent years,” said Mr Cowan in the Citi forecast report.

“In the light of these trends, and the fact that we think that there will be limited fiscal and current account consolidation in the coming few years, the obvious outcome would be to project further gradual shilling depreciation.”

The shilling is currently exchanging at 91.66 to the dollar per the official mean indicative rates.

Citi also cites a similar forecast on the shilling performance by Consensus Economics Forecast which sees the currency weakening to exchange at 93.81 to the dollar by the end of this year, and 95.95 by end of 2016.

Fundamentally the shilling has been affected by reduced inflows from tourism and agriculture, combined with the rising import bill especially on capital goods necessary for the increased infrastructure development.

However, with fuel imports comprising about a quarter of total imports, the lower oil prices in the international market should provide a measure of relief on the import-export deficit.

A weaker shilling would also encourage exporters to produce more due to the exchange gain they get once paid using dollars while making imports more expensive which could curb the appetite for imported consumer goods.

“The shilling was expected to benefit from cheaper oil. However going forward we still see some depreciation since this movement has been driven by other fundamentals,” said Commercial Bank of Africa senior dealer Joshua Anene.

The shilling has in the past one year gone down 6.8 per cent to the dollar. In the preceding two years, the currency enjoyed a prolonged period of stability with the exchange rate rarely shifting outside a narrow band of 85 and 86 to the dollar.

According to Mr Cowan, the stability was due to a cautious monetary policy to keep a lid on shilling volatility and avoid increasing the deficit.

The macroeconomic equation has been upset by huge imports for projects including the standard gauge railway and the port of Mombasa.