International market economists see shilling weakening to 145 levels

Kenya and US currencies

Analysts now project the Kenyan currency will close the year at an average of 144 units against the greenback.

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Economists working with leading global banks, consultancies, and think tanks now see the shilling weakening at a slower pace than earlier projected on improved investor sentiment.

The analysts now project the Kenyan currency will close the year at an average of 144 units against the greenback, stronger than 162 levels three months earlier.

The shilling has since mid-February benefitted from the successful issuance of $1.44 billion (about Sh185.8 billion under prevailing conversion rates) Eurobond to pay a large portion of largely $2 billion (Sh258 billion) debt maturing today (June 24), helping calm nerves of foreign investors over a sovereign default.

Further support has come from elevated base interest rates, currently at 13 percent, raising returns for Kenya’s asset classes such as Treasury bonds, hence attracting foreign portfolio investors who bring in dollars.

The country has also benefitted from increased flows from diaspora wiring cash back home, besides new external debt from multilateral lenders such as the World Bank Group.

Central Bank of Kenya Governor Kamau Thugge, for example, announced earlier in the months that East Africa’s most advanced economy would tap part of the World Bank’s $1.2 billion (Sh154.8 billion) to pay back the last batch of the debut Eurobond, estimated at $500 million (Sh64.5 billion).

“The successful sale of foreign-currency-denominated bonds in mid-February has lessened the risk of default and supported the shilling against the USD recently,” analysts at Barcelona-based FocusEconomics wrote in a June 2024 outlook report based on feedback from panellists drawn from nine firms.

The shilling has gained about 20 percent over the US dollar since hitting record levels of 160.75 levels and has oscillated between 133 and 128 levels on average since April.

The currency is, however, forecasted to come under some fresh pressure in the coming months on the expected narrowing of the gap between interest rates in Kenya and the US.

“The KES [shilling] will weaken from current levels by year-end on a narrowing positive interest rate differential with the US Fed (Federal Reserve or the central bank of the US),” FocusEconomics analysts wrote in the June report. “FocusEconomics panellists see the shilling ending 2024 at KES 144 per USD and ending 2025 at Sh 150 per USD.”

If the forecast comes to pass, the shilling could depreciate by about 11 percent from last week’s average levels of about 129 by the end of the year.

Economists at Standard Chartered Bank [of UK] are the most bullish about the shilling among the panelists covered by FocusEconomics. StanChart sees the shilling exchanging at 134 units against the greenback, followed by America’s Citigroup Global Markets at 135 levels.

Analysts at Oxford Economics expect the local unit to trade at 136 units by end of the year, Fitch Solutions at Sh140 per US dollar, Capital Economics (145 units), HSBC of London (150 units), Economist Intelligence Unit (150 units), Nigeria’s Vetiva Capital (152 units)and Fitch Ratings (156 units).

A depreciating shilling raises the cost of goods in a net import economy, putting pressure on overall inflation.

Kenya’s inflation, a measure of the increase in the cost of goods and services over the previous year, edged up slightly in May to 5.1 percent from 5.0 percent a month earlier.

Inflation has averaged 5.8 percent in the first five months of the year.

FocusEconomics panelists expect some slight pressure on prices to average 6.1 percent by the end of the year, a softer growth than the 7.7 percent average for last year.

“Kenya is benefiting from an increase in rainfall, which has helped replenish domestic food stocks and, in turn, lower food prices,” Shani Smit-Lengton, an analyst with Oxford Economics, was quoted in the report. “The East African nation is also gaining from a smaller import bill for food due to a strengthening in the Kenyan shilling and a decline in key commodity prices, notably for wheat.”

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