Shilling drops to lowest level in five months over coronavirus fears

The Kenya shilling touched a five-month low in its trading against the US dollar on Tuesday as concerns on the impact of the coronavirus outbreak continued to penetrate the market.

The shilling was quoted at Ksh.103.85 at Tuesday’s close with the unit having traded at a Ksh.103.55 average across the day to register a low seen last in mid-October 2019.

Concerns over a global recession in 2020 owing in part to the ongoing outbreak of the covid-2019 has seen the downward revision of global output as global supply chains face an unprecedented disruption.

According to a report published last week by the Organization for Economic Cooperation and Development (OECD), global growth is set to come down to 2.4 per cent for the year from an initial projected of 2.9 percent to represent the slowest pace of growth seen last across the 2008/2009 financial crisis.

Kenya remains juxtaposed in the global pandemic with the local economy being on the path for notable dislocation.

While the extent of impact is still unfolding, disruption is seen hitting sectors such as tourism, agriculture and health even as business temporary read the impact as low to moderate as per the Kenya Private Sector Alliance (KEPSA) recent study on the state of business confidence.

Among the presently highlighted effects include the reduced demand for Kenyan exports, the increased cost of goods, and reduction in capital flows credit constrains and slow investment appetite.

Researchers at Cytonn Investment expect to see an increased demand for the US dollars to pack the pressure on the shilling as Kenya’s sources of foreign currency dwindles under the cloud of slower global growth.

“The outbreak of the virus is likely to exert pressure on the shilling due to the lockdown in the global supply chains. The shortage of imports from China for instance, which accounts for an estimated 21 per cent of the country’s imports, is likely to force legal importers to look for alternative import markets, which may maybe more expensive and such higher demand for the dollar merchandise importers,” noted the researchers.

“The high demand for the dollar from foreigners exiting the market is also likely to cause the depreciation of the shilling, which we anticipate could be a 2.4 per cent decline in the value of the shilling.”

The Central Bank of Kenya (CBK) Monetary Policy Committee (MPC) is expected to meet on Monday to readjust economic growth setting metrics to guide the potential recovery of output amidst the partial shutdown to activity.

The reserve bank will have at its disposal tools to cut interest rates and improve liquidity to industry players while it may opt for stimulus to support growth.

Developed economies have resulted to cutting base lending rates to near zero and fiscal stimulus to pump in cheap credit into economies to include countries such as the United States, UK, China, Korea, Italy, Germany and Korea.

In emerging economies, Nigeria’s Central Bank has announced the creation of a Ksh.16.9 billion (50 billion Naira) fund to combat the coronavirus pandemic while Uganda’s reserve bank has sold dollars to support its dwindling currency.

Previously, CBK has announced plans to accumulate its usable foreign currency reserves above normal levels by making purchases of at least $400 million (Ksh.41.4 billion) across four months to the end of June.