Kenyans are staring at tough economic times and expensive household budgets after a new report said that the shilling which on Thursday hit a historic low against the dollar to trade at Sh124 will continue to face pressure for longer in 2023
Sanlam Investments East Africa 2023 Investment Themes and Outlook Report has said that increased pressure on the Kenyan currency could further exacerbate the pressure on interest rates. This is as global shocks continue to expose Kenya’s vulnerability due to higher debt to GDP ratio, and exposure to foreign currency debt.
“The rise in global interest rates has strengthened the dollar and resulted in capital outflows from emerging and frontier markets back into hard currency assets. This has limited the capacity of developing countries to access international debt markets causing significant challenges and vulnerabilities,” said Sanlam chief investment officer Shritesh Nanji.
Sanlam says that Treasury which is pressured with a Sh7 trillion debt will most likely prioritise debt repayments which will put further pressure on the local currency. Kenya is facing a Eurobond repayment of $2 billion (Sh248 billion) due in June 2024.
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“We expect the CBK to prioritise foreign debt service repayments. The government will increasingly rely on multilateral agency funding, commercial syndicated loans, and the CBK forex reserves to fund foreign debt maturities,” said the report.
Additionally, the rise in global interest rates has caused the US dollar to strengthen resulting to capital outflows from Emerging and Frontier markets, as US Dollar assets have become more attractive. This has limited the capacity of developing countries like Kenya to access international debt markets, causing significant challenges and vulnerabilities to these economies.
“However, US Dollar strength and elevated yields in local government bonds could still dampen investors participation at the securities exchange,” said the report.
This continued depreciation of the local currency is expected to push up living costs and hurt households that are already grappling with high fuel and food prices. Main imports into the country include petroleum products, machinery, medicine, vegetable oil, pharmaceuticals, cars, wheat, and clothing.
A recent report from the International Monetary Fund (IMF) stated that Kenya is experiencing a tight period of forex demand coupled with reduced liquidity in the interbank foreign exchange market as well as a depreciation of the local currency following the war in Ukraine.
“Liquidity in the interbank forex market has dried up and shifted to the bank-client market where forex transactions are executed at a more depreciated rate, “said IMF.