Kenya Shilling hits new low of 132.5 against the US Dollar amidst protests

In the past one month, the Kenya Shilling has lost at least 100 basis points of its value to the US dollar, undoing some of the gains made over the last three months.

By close of business Thursday, the shilling's value against the US dollar stood at 132.5, marking the quickest depreciation since February when the Kenyan currency gained against the greenback.

In February, the shilling rapidly appreciated against the dollar from a point where it had depreciated to Ksh. 160 per dollar to as low as Ksh. 125 by the end of the first quarter. The stability brought certainty to the exchange rate however the rejection of the Finance Bill due to nationwide protests was followed by a Moody's rating downgrade.

According to data from the Central Bank, as of 18th June, the first day of the protests, the shilling stood at 128.77 to the dollar. This later dropped to 129.52 by June 27, and further to 130.46 by July 19, exactly one month after the protests began. The next drop occurred only five days later, on July 24, when the shilling hit 131.05 before moving to 132.21 a day later.

Experts are now warning that the shilling could slide further and shed more value following the rejection of the controversial Finance Bill, which has made investors jittery over Kenya's ability to meet its fiscal obligations.

"The protests did contribute to disruption in areas such as tourism and trade, so we do expect that these are some of the reasons contributing to the weakening of the shilling," Economist, Ken Gichinga, told Citizen TV.

"This basically demonstrates a lack of confidence in the Kenya shilling's performance as a result of the protest that we have seen. So one thing is quite clear: the finance bill didn't pass, so the government may not be able to meet the projected revenue," Rufus Kamau, a Research & Markets Analyst at EGM Securities, added.

Further, the shilling continues to face additional pressures due to a reduction in diaspora inflows into the country, which experts say puts Kenya at risk of depleting its forex reserves to meet the demand for the US dollar. Additional challenges include maturing debt and under-subscription of government securities by investors.

"We have seen investors under-subscribe to government bonds basically because they are not very confident that the government will be able to pay when the bonds mature," said Kamau.

"We are seeing diaspora remittances coming down. If you look at the June numbers, they are significantly below what we saw in May, so that is definitely affecting the supply side. And by the fact that Kenya is a net importer means our currency is almost necessarily under pressure," Gichinga added.

But, what solutions does the government have to mitigate against further haemorrhaging by the currency?

"One possible way forward in the next one to two years could be an increase in M2 money supply, meaning we could see an increase in Kenya shillings in circulation, which would weaken the Kenyan shilling further," said Kamau.

The experts, however, agree that the shilling could slide further to trade at 140 and above by the end of the year.

"We expect it to move to the 138 to around 140, but it will be mitigated by the Fed cutting rates so FDI will be coming back," said Gichinga.

"In the informal sector, you find that the Kenya shilling adopts much faster. CBK rate today is 132, but forex bureaus are at 134, 135. This is usually a leading indicator. So as for the outlook, I expect that we should be seeing 140 by the end of the year," Kamau added.