Global market economists see mild pressure on shilling in 2025

Kenya and US currencies

The shilling has hovered around 129 levels against the greenback, but some pressure could start creeping in next year as risk-averse investors look to move investments to dollar-denominated assets.

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Research analysts at leading global banks, consultancies and think-tanks see the shilling weakening modestly against the US dollar next year on mounting investor jitters after collapse of Finance Bill 2024.

The Kenyan currency has remained steady for large parts of this year largely on increased dollar inflows from Kenyans living abroad, export earnings, and foreign loans from institutions such as the World Bank Group.

The shilling has hovered around 129 levels against the greenback, but some pressure could start creeping in next year as risk-averse investors look to move investments to dollar-denominated assets.

A report by Barcelona-based FocusEconomics says panelists drawn from nine global institutions have forecast the shilling to exchange between 135 and 150 units against the dollar by end-2025, with a consensus of 140.

“Our panel expects the shilling to lose ground on the USD by end-2025 on a narrowing positive interest rate differential with the US and deteriorating investor sentiment; since the new tax bill was scrapped, fears of a wider-than-previously-expected fiscal deficit have mounted,” analysts at FocusEconomics wrote in November 2024 outlook report.

Analysts at HSBC, the largest bank in Europe, see the Kenyan shilling weakening to 150 units against US dollar bye end of 2025, the most projected depreciation amongst researchers from leading global banks, consultancies and think-tanks.

Researchers at the UK's Euromonitor International expect the Kenyan currency to trade at 149 units followed by Oxford Economics (142 units) and Standard Chartered Bank of UK (140 units).

America’s Citigroup Global Markets has forecast the dollar to exchange for Sh138 per unit, Fitch Solutions at Sh137, Fitch Ratings at Sh136, while Moody's Analytics and Capital Economics see the rate at Sh135 per unit of US dollar.

The shilling has gained about 22 percent since Kenya in mid-February repaid $1.44 billion of the $2 billion of the debut 10-year issue ahead of maturity in June, cooling fears of sovereign debt default which had swelled since 2023.

High interest rates, which the Central Bank of Kenya employed to battle inflation, helped attract inflows from foreign investors, in addition to growing cash sent home by Kenyans in foreign countries and exports earnings from tea and fruits such as avocado helped boost dollar supply.

This has helped the CBK build official foreign exchange reserves by $1.14 billion (about Sh147.52 billion) to $8.49 billion (nearly Sh1.1 trillion), or 4.4 months of import cover, last week from $7.35 billion (Sh949.47 billion), or 3.8 months of import cover, last week of August.

“We have had a significant increase in foreign exchange, both from banks and diaspora remittances. In order to moderate the fluctuations and volatility in the exchange rate, we have indeed been buying forex and that is part of our role and business,” CBK Governor Kamau Thugge said on October 9.

“The same can be said when there is a need to intervene on the other side when the exchange rate starts to weaken.”

A depreciating shilling generally raises the cost of goods in a net import economy, putting pressure on overall inflation. Inflation in September fell to its lowest level since December 2012 at 3.6 percent, keeping the cost of living measure within the government targets of between 2.5 percent and 7.5 percent in the medium term.

“Kenyan motorists have benefited from a drop in Brent crude prices in recent months, which has filtered through to domestic pump prices,” Shani Smit-Lengton, an analyst at Oxford Economics was quoted in the in the FocusEconomics outlook report.

“Given that we forecast global oil prices to remain on a downward trajectory in the near term, we expect fuel price inflation to remain subdued.”

Pump prices have a big effect on inflation in an economy that relies heavily on diesel for transport, power generation, and agriculture, while motorists largely use petrol.Fuel prices have fallen to lowest levels in 19 months.

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