The fiscal and current account deficits as well as the lower foreign exchange reserves are likely to continue to exert pressure on the Kenyan shilling in 2019.
Analysts at Citi Global Markets, the investment banking arm of multinational bank Citigroup, say the shilling is more likely to be influenced by the value of imports as opposed to that of exports which has normally been much lower.
The local currency traded at an average of 101.80 units to the dollar as at 12.20pm last December 24, according to Reuters data, up nearly three per cent compared to the start of the year. It traded at 101.70/101.90 units on Wednesday.
The nominal stability of the currency, even when other market watchers believe it should be weaker, is also reason to forecast its depreciation, say the Citi analysts.
The IMF and the World Bank have maintained the shilling is stronger than it should be. “Ongoing nominal shilling stability, inflation differentials and the twin deficits in Kenya all mean that most economic forecasts will continue to point to further Kenyan shilling weakness in 2019,” says Citi.
Most analysts have predicted the Treasury will be unable to meet the targeted fiscal deficit of 6.0 percent in 2018/19 fiscal year while imports are likely to keep the current account deficit elevated. Higher domestic borrowing will increase the supply of local currency while imports will also increase demand for the dollar.
“So perhaps one way of thinking about the Kenya shilling is that once the market starts to assume stability, then that is the time to be concerned about the outlook,” adds Citi.
The investment bank points out that the current levels of foreign exchange reserves are an indicator of the direction the shilling could take, if it were to take it.