Shilling predicted to strengthen further

The shilling is predicted to undergo market correction giving consumers more spending power.

An analysis by Stears attributes the correction to tightening fiscal measures by the Central Bank of Kenya (CBK) and liquidity from the International Monetary Fund injected into the National Treasury as loans.

 “The money market foresees the currency undergoing a correction, gravitating towards its fair value after substantial interventions by the Central Bank, supported by IMF funds to stabilise the foreign exchange rate,” the analysis states.

Compared to March the shilling appreciated in April by 4.4 percent to trade at Sh131.57 against the US dollar.

Based on the latest Purchasing Managers’ Index (PMI) data, Sears notes that firms anticipate a continued appreciation trend in the shilling.

“Consumer spending will likely increase as wallets reopen, driving up demand and consumption levels,” the Sears report says.

The report released this month also tracks the country’s inflation and interest rate risk.

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“The monthly inflation rate declined on anchored inflation expectations as the CBK maintained its tightening stance.

‘‘All sub-indices, including food, energy, housing and transportation, declined month-on-month,” says Stears.

The firm predicts that CBK may later slow down on the fiscal measures tightening which should increase consumer spending.

Analysts at the firm note that there were fewer interventions to support the currency despite the two per cent increase in foreign exchange reserves to Sh940 billion ($7.23 billion) from Sh921.7 billion ($7.09 billion) in March.

The country’s foreign reserves are expected to improve due to dollar inflows and export earnings.

Data from the Kenya National Bureau of Statistics shows export earnings in the third quarter of 2023  increased because of improved tea, horticulture and coffee production.

“Export revenues from the three commodities contributed more than 30 percent to total exports leading to the current account deficit narrowing by 42 percent,” the Stears report notes.

Additionally, it adds, that remittance inflows have increased by 36 percentage points between 2022 and 2023 as the US economy rebounded.

 “Inflows from the US account for more than 50 per cent of Kenya’s remittance inflows.’’

The market intelligence firm forecasts that inflation risks are higher with the country’s current mildly elevated currency risks.

The current situation is however less aggressive than the past year even as the recent flooding events are likely to impact food production.

‘’Kenya’s optimistic outlook from the IMF and World Bank and stabilising macroeconomic fundamentals will further support CBK’s exchange rate stabilisation efforts,” the firm states.

 It adds: “The IMF and World Bank funds and positive outlook on the country are expected to keep incentivising investment into Kenya, increasing dollar inflows and aiding the shilling’s value in the short term.”

 The slowdown in inflation has played a role in this outlook with the latest figures showing the cost of living has slowed to five per cent which is within the CBK target.

This is from 5.7 percent in March and 6.3 per cent in February leading to decreased import expenses on food and energy items.

With inflationary pressures subsiding, the firm notes consumer spending is expected to rebound gradually.

While inflation risks are dampened, CBK is unlikely to cut rates and the CBK’s Monetary Policy Committee (MPC) will continue monitoring Kenya’s vulnerability to global economic shocks.

In its latest review of the Central Bank Rate, MPC  retained the cost of credit at 13 per cent despite inflation having gone down. 

 “The bank will factor in April’s downward exchange rate trend and prioritise maintaining high rates to curb exchange rate expectations.

‘‘This strategy will uphold favourable rates of return, ensuring Kenya’s exchange rates remain attractive to investors,” it says.