Shilling may fall to five-year low in the next two months, experts warn

The Kenyan shilling is likely to hit a five-year low in the next two months, on the back of increased security threats and declining forex inflows.

The shilling has come under increasing pressure from terrorism-related incidents that have, in turn, seen key markets for Kenya’s tourism sector issue travel advisories against the country.

Analysts are now warning that further weakening could dampen economic growth, that has been projected at over 6 per cent.

According to Mr Chris Muiga, head of trading at National Bank of Kenya (NBK), escalating insecurity incidents, declining forex inflows from tourism and growing imports against dwindling exports are likely to push the shilling to 96 units against the US dollar.

HISTORICAL LEVEL

This level was last seen in November 2011, a year that also saw the shilling weaken to a historical level of Sh107 to the dollar, with inflation peaking at 19.72 per cent.

Already, the currency is 2.1 per cent weaker this year. It opened the year at 91.5 units against the dollar but closed last Friday at 93.5 units to the greenback.

From the end of last year, the shilling had been largely held up against the dollar by falling crude oil prices, but analysts indicated that it was still vulnerable.

“As an economy, we had hoped to accrue some benefits from falling crude oil prices. But now, with a weak shilling, the benefits are likely to be negated,” said Mr Fred Ikana, a director at Nairobi-based Centsavvy Investments.

Last week, the Central Bank sought to allay fears over the weakening of the shilling against the dollar. The regulator said the pressure the local currency is facing is a reflection of a strong dollar in the global market, coupled with an elevated but seasonal demand for foreign exchange from the local corporate sector, characteristically witnessed at this time of the year.

“The Central Bank is closely monitoring developments in the foreign exchange market and will continue to use appropriate monetary policy instruments to minimise volatility of the Kenya shilling exchange,” the regulator said last month.

As the CBK sought to assure the market of adequate foreign exchange reserves — in excess of 4.5 months of imports — to cushion the exchange rate against short-term shocks and volatility, increased importation of machinery, especially by suppliers and contractors working on major infrastructure projects in the country, is expected to pile more pressure on the shilling.

Shrinking forex inflows following a decline in tea, coffee and tourism earnings are not helping matters. Tea, Kenya’s largest export earner, has been hit by poor global prices, with the dry weather expected to cut output this year.

PREVAILING INSECURITY

Tourism, a leading foreign exchange earner, is already being crippled by prevailing insecurity.

“We are net importers, so the weaker the shilling, the higher the cost of our imports. The higher the cost of our imports, the higher the cost of production, leading to a higher inflation rate. If our inflation rate increases, the cost of living will go up,” Mr Ikana said.

News of the recent terrorist attack on Garissa University College that left 148 people dead saw the shilling surpass the 93-mark against the dollar — lows seen three years ago due to negative investor sentiment.

This, analysts say, if not addressed, could slow down economic growth as foreign investors may get jittery about the country.

“Unless insecurity is quickly and aggressively contained, we are of the opinion that a downward revision of the economic growth forecast for the country from IMF’s prediction of 7 per cent may be imminent.

“In the coming weeks, however, the Central Bank’s activity in the market in support of the shilling should help stabilise it against the dollar,” analysts at Cytonn Investments noted.