Experts warn of rough times for the shilling
Edwin Dande, CEO of Cytonn Investments. Cytonn Investments Friday announced the establishment of its US based affiliate company to deliver real estate solutions to Kenyans living in the diaspora. PHOTO | FILE |
What you need to know:
- What the future holds
- They said the shilling’s depreciation was worrying, urging authorities to take steps to ensure its stability.
Demand for the dollar from the energy and manufacturing sectors as month end nears continued exerting pressure on the shilling yesterday as analysts predicted it may break the 99-mark in coming days.
At the end of trading on Tueday, forex dealers quoted the local unit weaker at 98.75/98.85 to the dollar compared to Monday’s close of trading of 98.50/98.60, with the trend blamed on increased demand for the greenback to pay for imports.
A forex trader at a commercial bank said end-month demand, especially from importers, had crept back and looked set to push the shilling through hard times.
ACCOUNT DEFICIT
The situation is worsened by prevailing pressure arising from the country’s widening account deficit and lower forex inflows from the tourism sector, which has been battered by insecurity.
“There are also global factors now such as the Greece debt issue that may affect emerging markets if the debt-ridden nation decides to pull out of the Eurozone. This action may lead to a rally in the US dollar in the international market, putting the shilling under more pressure,” said the trader who did not want to be quoted.
The current weakness comes on the back of the Central Bank of Kenya (CBK)’s decision to raise its benchmark by 1.5 percentage points to 10 per cent on June 9, to keep the local currency from weakening. On Tuesday, the CBK is said to have come in the money market ready to absorb up to Sh10 billion in surplus. Mopping up extra liquidity makes it more costly to hold dollars and this consequently keeps the shilling from weakening further.
“We expect further weakening in the shilling driven by end-month demand by importers. However, this will be cushioned by Central Bank’s activity in the market and a weaker dollar, given expectations of a more prolonged rate increase timeframe by the Fed,” said analysts at Cytonn Investments.
They said the shilling’s depreciation was worrying, urging authorities to take steps to ensure its stability.
“With Kenya currently importing majority of capital equipment, the shilling shall only stabilise and stop depreciation in the long-term, once we transform to a manufacturing economy and import less machinery and capital equipment,” said the Cytonn analysts.
