The Kenyan shilling (KES) has experienced notable depreciation against the US dollar, currently trading at approximately KES 129.55 to 1 USD as of November 25, 2024. Despite efforts by the Central Bank of Kenya (CBK) to stimulate the economy through rate cuts, the Shilling continues to struggle due to factors such as global economic trends, inflationary pressures, and Kenya's persistent current account deficit. To discuss the Shilling's performance and resilience, CNBC Africa is joined by Ronny Chokaa, Senior Research Analyst at AIB-Axys Africa.
The Kenyan shilling has experienced notable depreciation against the US dollar, currently trading at approximately KES 129.5 to 1 USD as of today, November 25. Despite efforts by the Central Bank of Kenya to stimulate the economy through rate cuts, the Shilling continues to struggle due to factors such as global economic trends, inflationary pressures, and Kenya's persistent current account deficit. To discuss the Shilling's performance and resilience, we are joined by Ronny Chokaa, Senior Research Analyst at AIB-Axys Africa. Ronny, thank you so much for joining us. A very good afternoon to you in Nairobi. So, let us get straight into our conversation. What structural or systemic issues within Kenya's economy are we seeing impacting the depreciation of the Kenyan shilling? Thank you so much, Abibet, for welcoming me on the show. When you talk of the structural nature of Kenya's balance of payments account, we notice a number of trends. Whereas imports have moderated, we know last year imports were actually on a decline, supporting a narrowing of the current account deficit. This year, we have seen a revival of import activity, whereas on the export side, exports continue to accelerate, driven by rebounding of multicultural exports year to date. And I think also when you look at the capital account, we notice that foreign outflows have dissipated compared to last year. And I see this as a result of, first of all, the broader interest rate changes that have come along this year. We also know that Kenya refinanced its euro bond due for June this year, delivering a decisive boost of confidence to investors. And since then, you've started to see some portfolio dollar inflows. If you look at our foreign exchange, we seem to have lost Rony, but he's talking about the foreign exchange impact also on the shillings performance. We'll be getting back to Rony, but also moving on, we are likely to see quite a number of impact looking at the global economic slowdown and also the U.S. Federal Reserve's monetary policy influencing the Kenya-USD exchange rate. Rony, all right, we have you back quite a lot. Maybe we can continue with our conversation. You were talking about the foreign exchange there and the impact it has on the currency. As I was saying, we've really bolstered our reserves level above the minimum four months of import cover required by the CBK. And this has been a function of a receipt of $1.2 billion received from the World Bank, coupled with a recent $606 million disbursement by the IMF as part of the EFF and ECF arrangements. And those factors collectively have bolstered the relative stability on the Kenya shilling. If we really compare the shilling last year vis-à-vis this year, I think the shilling is enjoying relative stability compared to last year when we had over 15% depreciation to the dollar. This year, the Kenya shilling is actually up 17% on a year-to-date basis and has remained at around 129.2 units against the dollar for the past three months running. And yes, Rony, you mentioned the account deficit there. So what measures are we likely to see, or what measures can be taken to address this imbalance? And how significant is the role of Kenya's current account deficit in driving the shilling's depreciation, Rony? Well, the current account deficit is certainly something the central bank ought to look into seriously in order to, you know, anchor the shilling stability. More long-term responses are rooted in import substitution and export promotion initiatives. This includes policies set in place, including tax cuts, in order to encourage or incentivize exporters, while at the same time building capacity for local producers to ramp up domestic production and substitute or gradually phase away importation of items such as machinery, and that you really take up a huge chunk of our current account balance. Yes. And to what extent, Rony, are we now seeing the global economic slowdown and also the US Fed monetary policy influence on the Kenyan shillings and also the USD exchange rate? And also, are there maybe any local buffers to get some of these effects? Well, broadly speaking, we are currently on a kind of shift whereby, compared to the last 20, 24 to 30 months, interest rates were relatively elevated. But right now, as it were, interest rates are now headed lower. You rightly pointed out that the US Fed cut rates for the second time in a row by 25 basis points, sending a forward signal to markets that rates are now headed in a downward direction. And this has spilled over to emerging and frontier markets, such as Kenya, where we sit, where treasury bill rates have really declined by close to or even more than 300 basis points ever since. And now this signals now a new regime of lower interest rates. And a big elephant in the room now is the Adani $2.6 billion cancellation by President William Ruto. So what impact are we seeing this cancellation have on the markets and also the shillings performance of the currency? And also from an investor's perspective, what influence have we seen so far since the cancellation? Broadly, I was looking at markets ever since the cancellation of the Adani deal. Markets have relatively remained on hold. Broadly speaking, equities markets have remained relatively unchanged since the cancellation. And when you look at the fixed income markets, yields have continued to oscillate within the normal market range ever since. However, when you look at the exchange rates, the exchange rates lead moderately by around 20 basis points from an average of 129.2 units to 129.5 units to the dollar. And also, Rony, let us shift our conversation to the CBK mitigation strategies. So the CBK has lowered rates so far, maybe twice this year, 2024. And we also think the commercial banks have been reluctant to reduce lending rates. So why do we see this reluctance? And what impact are we likely to see? It's a lender-borrower kind of perspective here. Yes, it's true. As you point out, Central Bank has lowered the CBR by more than – by actually 100 basis points since September. However, when you look at the spillover to commercial banking lending rates, they've lapped by, really. They have not really responded in tandem to the changes in the benchmark rate. And this is an ongoing conversation that actually Central Bank is spearheading with a number of banking executives to see how can banks spillover the benefits of downward changes in the CBR onto the lending rates to customers. And it all goes back to when the Central Bank rolled out the risk-based price lending methodology. Which allowed banks to exercise differentiated customer pricing according to their risk profile. So this opened the gateway for, as it were, some sort of subjectivity, if I may, in the pricing. Because banks have their unqualified, or let me put it, their models that they use to price their models that they use to price customers according to their risk profile. And so that is an ongoing conversation that the CBK is looking to see how banks can really extend the same benefits that they envision to spillover into the lending rates by commercial banks. Yes, indeed, Rony. And maybe in terms of the long-term outlook, what are we likely to see in terms of the state of the Kenyan shilling? Well, our outlook on the Kenyan shilling remains moderately stable. We do not anticipate any short-term or medium-term risks that are likely to disrupt the shilling stability for now. If we look at the forest reserves level, they are more than adequate to cover four months of imports. If you look at our risk premium on the inflation side, inflation has really moderated to below three percent levels, which is really, really good. If you look at the exchange rate, or let's say the portfolio inflows in the balance of payments, they are set to even improve now that rates are moving down. We are expecting further portfolio inflows back into our equities markets to chase appetising returns in our frontier markets. Indeed, Rony, thank you so much for those great insights.
Theme: Economic Challenges Facing the Kenyan Shilling
The Kenyan shilling (KES) has experienced a significant depreciation against the US dollar, currently trading at approximately KES 129.55 to 1 USD as of November 25, 2024. Despite efforts by the Central Bank of Kenya (CBK) to stimulate the economy through rate cuts, the shilling continues to struggle due to multiple factors impacting the economy. Ronny Chokaa, Senior Research Analyst at AIB-Axys Africa, sheds light on the structural and systemic issues within Kenya's economy that are contributing to the depreciation of the Kenyan shilling. Structural issues such as the current account deficit and global economic trends are key drivers affecting the exchange rate. In efforts to address this imbalance, measures such as import substitution and export promotion initiatives are being considered. Despite the challenges, the shilling remains relatively stable compared to the previous year, showing resilience in the face of economic headwinds. The interview also delves into the impact of the US Federal Reserve's monetary policy and the recent cancellation of the Adani deal on the Kenyan markets. Additionally, the conversation touches on the Central Bank's mitigation strategies, including rate cuts, and the reluctance of commercial banks to reduce lending rates. Looking ahead, the outlook on the Kenyan shilling remains moderately stable, with no significant short-term or medium-term risks anticipated. With adequate foreign reserves and a favorable inflation rate, the shilling is expected to maintain its stability in the near future. While challenges persist, the Kenyan economy demonstrates resilience and potential for growth amidst a complex global economic landscape.
"Our outlook on the Kenyan shilling remains moderately stable. We do not anticipate any short-term or medium-term risks that are likely to disrupt the shilling stability for now."
['Kenyan shilling', 'USD', 'Central Bank of Kenya', 'economy', 'exchange rate', 'Global economic trends', 'current account deficit', 'inflation', 'rate cuts']