The Kenyan currency is expected to remain under pressure in 2021 as largely driven by external factors says Cytonn Investments, an independent investments management firm.
Cytonn’s latest Q1’2021 Markets Review, strengthening of the dollar, and rising uncertainties in the global market due to the Coronavirus pandemic will continue to impart depreciation pressures on the shilling.
“Investors continue to prefer holding their investments in dollars, other hard currencies and commodities and continued strengthening of the US Dollar against major currencies as evidenced by the 3.7% gain in the ICE U.S. Dollar Index as compared to a 6.7% decline in 2020,” Cytonn cites as the major challenges to the currency.
The ICE U.S. Dollar Index is a benchmark index that measures the international value of the US Dollar where investors can monitor the value of the US Dollar relative to a basket of six other world currencies.
The shilling depreciated against the US Dollar by 0.3% in Q1’2021, to close at Kshs 109.5, from Kshs 109.2 at the end of Q4’2020, attributable to the importer dollar demands outweighing inflows from sectors such as agriculture and remittances.
The Central Bank of Kenya, besides the depreciating currency, noted that its foreign exchange reserves, which currently stand at USD7,348 million (4.51months of import cover), continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.
“The improving current account position which narrowed to 4.6% of GDP in the 12 months to February 2021 compared to 5.8% of GDP during a similar period in 2020, and improving diaspora remittances evidenced by an 18.9% y/y increase to USD 260.3 mn in February 2021, from USD 219.0 mn recorded over the same period in 2020, has cushioned the shilling against further depreciation,” adds Cytonn.
However, “The Forex reserves have been declining and this may mean that the government of Kenya will struggle to support the local currency when it depreciates if the trend continues,” notes Cytonn.
During the week, the shilling appreciated against the US Dollar by 0.4% to close at 109.5, from 109.8 the previous week.