Experts foresee weaker shilling in 2016

January 6, 2016
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Commercial Bank of Africa (CBA) Senior Trader John Njenga says ranges for the first three months will hit Sh103 mark against the dollar and Sh106 at the close of the year/FILE
Commercial Bank of Africa (CBA) Senior Trader John Njenga says ranges for the first three months will hit Sh103 mark against the dollar and Sh106 at the close of the year/FILE
NAIROBI, Kenya, Jan 6 – Fundamentals points a weaker shilling in 2016 with the Central Bank of Kenya (CBK) being the main driver of its performance, according to economic experts.

Commercial Bank of Africa (CBA) Senior Trader John Njenga says ranges for the first three months will hit Sh103 mark against the dollar and Sh106 at the close of the year.

Njenga attributes the depreciation of the shilling in 2016 to the weakening China economy, higher inflation an anticipated rise in oil prices.

“Inflation is expected to remain above the upper bound given the rising oil prices and the hesitation by the CBK to raise rates to stem inflation, as raising rates will be detrimental to the economy,” Njenga to Capital FM Business.

In 2015, the Kenya shilling lost ground against the US dollar, declining by 13 percent with 9.5 percent being in the first half of the year.

The shilling opened the year 2015 at Sh90.5 against Sh90.6 to the US dollar; it touched a high of Sh106.1 against Sh106.2 and closed the year at Sh102.25 against Sh102.35 to the dollar.

“The decline is attributed to a strong global dollar in the international markets, a wide current account deficit as well as a hike in the United States interest rates that saw foreign investors invest back in their markets, shying away from emerging markets,” he said.

The US Federal Reserve raised interest rates by a quarter percentage point and pledged a gradual pace of increases.
Inflation has increased gradually over the year from 6 percent in December 2014, to 7 percent in June, and at 8 percent in December 2015.

At the beginning of the year, lower oil prices led to a slight decline in the inflation rate, however the weakening shilling, effects of the El-Nino rains on agricultural food prices, and price increases in beer and cigarettes due to the Excise Duty Bill have eroded all the gains made, with inflation now past the upper barrier of the 2.5 percent to 7.5 percent CBK target.

Genghis Capital Research Analyst Vinita Kotedia expects the shilling to trade relatively steady in the first quarter of 2016 – the US Dollar and Kenya shilling exchange rate is expected to be backed by dollar inflows from Non-Governmental Organisations, this month in particular.

“For the remaining part of the year, the shilling may be subjected to volatility if the US Federal Reserve decides to raise rates for a subsequent time at the end of the first quarter,” Kotedia added.

The move she says carries potential to dwindle the local exchange rate as a result of capital outflows from the local markets as well as global strengthening of the US dollar.

“In this respect, the CBK may need to prudently manage liquidity in order to control the supply of the shilling in the local markets,” she concluded.

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