Kenya shilling on a downward spiral

The Kenya shilling is currently facing significant challenges, as it finds itself at a record low and is the second worst performer in Africa so far in 2024, trailing only the naira at 162 shillings against the dollar. The Monetary Policy Committee (MPC) in its recent meeting highlighted the ongoing exchange rate depreciation that is putting upward pressure on domestic prices, leading to increased living costs and reduced purchasing power. The situation raises questions about the strength of the shilling and its implications for the Kenyan economy both locally and globally. CNBC Africa recently spoke with Ronny Chokaa, a Research Analyst at AIB-AXYS Africa, to gain insights into the current economic landscape in Kenya. Chokaa acknowledged the positive outlook presented by the central bank regarding the economic trajectory, citing the impressive Q3 GDP growth numbers and the expected reversal from a historical deficit to a surplus in the balance of payments by the end of 2023, extending into 2024. Despite these encouraging signs, the volatility of the Kenya shilling remains a pressing concern. The persistent exchange rate fluctuations are attributed to fiscal sustainability risks, including a debt to GDP ratio exceeding recommended levels and challenges in maintaining an adequate level of forex reserves. The uncertainty surrounding the availability of foreign currency has led to increased demand for dollars and contributed to the current state of the shilling. Furthermore, factors such as accelerated dollar outflows to developed markets due to rising interest rates have added to the pressure on the currency. One of the key challenges facing Kenya is the repayment of its Eurobond debt, with a deadline set for June 2024. While Chokaa expressed confidence in the government's ability to meet its repayment obligations, concerns linger around the adequacy of forex reserves post-repayment. The current reserve levels fall below the recommended threshold of four months import cover, raising questions about potential volatility in the exchange rate if adequate dollar supply is not maintained. The partial buyback of the Eurobond, initially announced at $500 million and subsequently revised to $300 million, has introduced further uncertainties into the market. The fluctuating buyback price has been perceived as a sign of inconsistency in the government's approach, leading to market apprehensions about the country's financial stability. Amidst these challenges, the National Treasury is exploring alternative financing options, including concessional funding from international institutions and climate change financing instruments. Looking ahead, Chokaa noted that the Kenya shilling has shown signs of stabilizing around the 160 mark in recent days. While volatility is expected to subside in the medium term, structural improvements in the balance of payments, particularly through export growth, will be crucial in addressing the underlying deficits. Overall, achieving a stable and sustainable exchange rate by the end of the year will depend on the country's ability to navigate these complex economic challenges effectively.