Increased importation of oil and industrial supplies pulled the shilling to nearly 10-month low against the US dollar, signalling a looming rise in the cost of consumer goods in the coming months.
The Kenyan currency Tuesday traded at 102.70 units to the dollar, having touched an intra-day low of 102.75, compared with the opening price of 102.34/54 to the dollar.
That drift means the shilling now stands at a low point that was last seen on January 18 when it closed at 102.80 to the dollar.
Currency dealers said the demand for dollars by companies, largely in manufacturing and energy sectors, to close end-year orders ahead of the December holidays and the recent gradual strengthening of the dollar had offset portfolio inflows and diaspora remittances.
The dealers said they expect the shilling to touch 103 to the greenback, before stabilising at around 102.50 towards the end of the year driven by a slowdown in demand for dollars from importers and inflows from Kenyans living abroad.
“It (weakening) is all driven by (dollar) flows and if we see good flows later on, we should see it easing back,” said a trader at a tier-one bank.
Weaken in 12 months
Three quarters of the 40 commercial banks polled by the Central Bank of Kenya (CBK) in September projected the shilling would weaken in the 12 months to August 2019, citing the gradual recovery of economic activities and increased imports.
Fixed-income securities traders said dollar inflows from investors eyeing the 20-year Sh50 billion infrastructure bond, whose auction opens today, have been very low because of the longer tenure, a shorter bidding period (Monday and Tuesday) and the relatively low 11.95 per cent return on offer.
“Offshores are not very keen on it because of the tenure, coupon on it and even the number of days given to apply were too short for them to fund their accounts,” a trader with a leading fund manager said.
“I think the CBK target is more of setting the price than attracting foreign inflows. Once they set a price, they can then come back to the market to tap.”
A persistently weaker shilling may push up the cost of living because Kenya remains a net importer of petroleum products and raw materials for the manufacturing sector.
Imports in nine months through September, for example, hit Sh1.33 trillion against Sh470.57 billion in exports earnings, the Kenya National Bureau of Statistics (KNBS) data released last Friday show.
A weaker shilling against major world currencies also implies increased income for exporters of farm produce such as tea, horticulture and coffee who largely earn dollars and euros but are paid in shillings.
External debt repayments
National Treasury secretary Henry Rotich will, however, be keen to see the shilling remain stable, as it has been over the past two years or so, to avoid further bumping up external debt repayments, which are projected at Sh364.66 billion this financial year ending June 2019.
“As Kenyan authorities have turned to international markets to borrow, their exposure to currency risks have increased.
“Indeed, almost half of public sector debt is now denominated in foreign currency,” economists at London-based research consultancy Capital Economics said in a note on Kenya last week.
“As long as the Kenyan authorities have the ability to support the currency – the shilling has been kept broadly stable at around 100 KES/US$ since July 2015 – and growth remains strong, repayments should be manageable.”