- According to Fitch Solutions Q1 2022 Country Risk Report on Kenya, the country’s widening trade deficit will weaken demand for the currency.
- The shilling hit a 10-month high of Sh111.20 to the dollar last week on high importer demand, and has remained above the 111 level since then.
Image: Eric Thuo
Kenya's huge trade deficit occasioned by high import demand will further weaken the shilling next year, according to a global rating firm.
The Fitch Solutions Q1 2022 Country Risk Report on Kenya says this will worsen the impact of fragile global risk appetite.
The shilling hit a 10-month high of Sh111.20 to the dollar last week on high importer demand and has since remained above the 111 level.
It was last at such high levels on December 22 last year when it hit 111.03 before strengthening at the 110 mark.
After remaining stable in the first quarter of 2021, the shilling appreciated from Sh109.75 to the dollar on March 26 to Sh106.56 on May 10.
This as the new lockdown dampened imports and domestic demand for the US dollar, Fitch notes.
Since the lifting of the lockdown in early May, the currency resumed a depreciation trend, reflecting both a rebound in imports and weakening global risk appetite.
While trade data for the third quarter of 2021 are unavailable, Fitch highlighted that imports likely rebounded strongly following the lifting of the lockdown.
The financial services agency expects the Kenyan shilling to depreciate from a year-to-date average of Sh108.68 per dollar to Sh112.80 per dollar by the end of the year, averaging Sh109.60 in 2021 as a whole.
As the economy continues to re-open, the agency expects that imports will rise further over H2 21, boosting dollar demand. Meanwhile, exports will face headwinds.
The increase in imports is expected to widen the country's trade deficit from $8.3billion in 2020 to $10.0bn in 2021, weighing on the shilling.
According to Fitch, fragile investor sentiment is likely to be another source of short-term currency weakness.
The agency notes that there remains uncertainty tied to the potential emergence of vaccine-resistant variants of Covid-19 that could threaten the global economy.
Kenya’s vaccine rollout has been very sluggish, with just 4.6 per cent of the population having received at least one vaccine dose as of September 21.
According to Fitch, this has likely contributed to preventing a substantial recovery in capital inflows.
The agency, expects global investor risk appetite to remain fragile in the short term , especially towards countries with low vaccination rates and large budget deficits, like Kenya.
This also has a negative impact on demand for the shilling.
According to financial analyst Mihr Thakar, the upcoming election will affect inflows of dollars, which could be negative in the light of higher outflows, ranging from importer demand all the way to exits.
Thakar also noted that low cost concessional loans, such as those from IMF, come with the requirement that the currency rate should be market-determined.
"This means that the Central Bank will have to minimise its intervention in maintaining a "preferred range" of the shilling, only participating in curbing rapid moves," said Thakar.
Analysts at AIB-AXYS Africa have also noted that the country's widening deficit in goods trade piles some pressure on the shilling as the demand for dollars remains elevated.
The agency however expects the shilling to strengthen slightly in 2022, from end-2021 levels, to an average of 111.65 to the dollar.
Rebounding tourism receipts and Kenya’s growth premium over the US are expected to help ease the downward pressure on the shilling next year.
Investor appetite for Kenyan assets has also been projected to increase as the domestic Covid-19 vaccine rollout gathers speed, particularly in the second half of 2022.
The progress of the vaccination campaign is also likely to result in higher tourism receipts, narrowing the current account deficit and easing downward pressures on the shilling.
Further, Kenya’s growth premium over the US will also support the currency.
Fitch Solutions expects that after stronger real GDP growth in the US in 2021 (they forecast growth of 6.0 per cent in the US and 4.4 per cent in Kenya), Kenya’s growth premium will return in 2022.
“We forecast growth in Kenya in 2022 to accelerate to 5.2 per cent and US growth to slow to 3.7 per cent, which should improve the shilling’s long-term appeal,” the agency said.