New funding pledges of nearly $900 million ahead of a Eurobond repayment deadline are failing to defend Kenya’s shilling from fresh lows, with analysts forecasting further weakness as the rising cost of imports heightens demand for dollars.
Africa’s second-worst performing currency for 2024 fell to a record 162.29 against the dollar on Monday, extending losses since the start of 2023 to more than 23%.
The worst-case scenario among five analysts and traders polled by Bloomberg is for the shilling to depreciate to as low as 210 against the US currency by the end of the year, with the mildest forecast at 171.
Further weakness will result in additional increases in the cost of imports and prices of items that include foreign-currency adjustments, such as electricity. Debt-service costs will also rise as the government races to raise funding against a June-deadline for the $2 billion eurobond.
“The government will have to chip in more in terms of repaying that loan,” said Timothy Kiarie, a Nairobi-based financial analyst at foreign-exchange broker Scope Markets. “Given that fundamentals haven’t changed much and that the Central Bank of Kenya is still struggling with dollar reserves, a widespread panic could accelerate the loss on the Kenya shilling.”
The shilling traded 0.2% lower at 162.27 against the dollar at 1:50 p.m. in Nairobi, extending losses for the year to 3.4%. Yields on Kenya’s 2024 Eurobond fell 96 basis points to 13.40%.
Kiarie forecasts that the shilling will weaken to 210 against the dollar by year-end. Rufas Kamau, market analyst at foreign-exchange trading platform FXPesa, sees a level of 200 over the same period while Charles Robertson, head of macro-strategy at Dubai-based Frontier Investment Management Partners Ltd. expects a milder depreciation to 171.
Two other economists, Churchill Ogutu at IC Asset Managers and Nairobi-based Reginald Kadzutu, are expecting a level of as low as 180 against the dollar.
While a weaker shilling will have little benefit for exports, with low elasticity in demand for major items such as tea, more expensive imports in the form of oil will fuel domestic inflation and weigh further on the currency, Kadzutu said.
IMF Support
Still, currency weakness doesn’t only signal bad news as the current flexible exchange-rate policy carries the support of the International Monetary Fund, Robertson said. The Washington-based lender agreed last week to immediately disburse to $684.7 million to Kenya as part of a broader support program, with the country raising an additional $210 million from pan-African lender Trade & Development Bank.
“The weaker shilling is a signal that Kenya’s authorities recognize the need to stay onside with external creditors,” Robertson said. “The 2024 Eurobond will be repaid, the cheaper currency should improve the current-account and the central bank is committed to keeping inflation under control with suitably high interest rates.”