The Kenyan Shilling gained ground on Wednesday buoyed by foreign exchange inflows from tea exporters that slightly outweighed the usual end-of-month demand from the manufacturing sector.
This modest appreciation comes as the shilling shows resilience despite the economic headwinds thanks in part to the anticipated interest rate cut by the US Federal Reserve, which has injected a sense of optimism into the market.
Kenya, much like other frontier and emerging markets, has been grappling with the effects of sustained foreign investor selling since the US began raising interest rates in March 2020.
The shilling has endured its share of pressures, but recent developments have provided a glimmer of hope. The Fed’s clear indication of a possible rate cut next month has already started to soften the dollar against global currencies, offering some respite to Kenya’s beleaguered currency.
Traders report that the shilling remained stable, with inflows from the Kenyan diaspora complementing the steady demand from fuel importers and manufacturers.
By Wednesday, the shilling was trading at 128.25/129.25 to the US dollar, a slight improvement from the previous day’s 128.50/129.50.
According to market insiders, the agricultural sector remains a significant source of foreign currency, and the Central Bank of Kenya (CBK) has been actively purchasing dollars to prevent excessive volatility in the exchange rate.
This strengthening of the shilling comes despite a muted market reaction to the downgrade of Kenya’s sovereign credit rating by S&P Global.
The downgrade, which pushed Kenya further into "junk" territory, was attributed to the repeal of key provisions in the government’s finance bill, which S&P argued would slow fiscal consolidation.
Despite this, traders noted that market activity was subdued, with many investors choosing to hold their positions rather than make new moves.
The recent trajectory of US monetary policy plays a critical role in the outlook for Kenya’s economy. The US base rate, currently between 5.25 and 5.5 percent, has attracted global investors to safer assets, leading to capital outflows from riskier markets like Kenya.
This trend has put downward pressure on the Kenyan shilling and weighed heavily on the Nairobi Securities Exchange (NSE). However, comments from Fed Chairman Jerome Powell last week have shifted market expectations.
Powell’s indication that the time has come to adjust policy, with potential rate cuts on the horizon, has led to speculation that the Fed will begin easing rates by September.
For Kenya, a US rate cut would have multiple implications. First, it would provide the CBK with the space to continue easing its own monetary policy without fearing a significant devaluation of the shilling against the dollar.
After raising the base rate from 9.5 per cent to 13 per cent between May 2023 and February 2024, the CBK has already taken steps to lower rates, with a reduction to 12.75 percent announced earlier this month.
A lower base rate in Kenya would make the country’s financial assets more attractive to foreign investors, particularly infrastructure bonds, potentially increasing the supply of dollars in the local market. This influx would support the shilling’s exchange rate, which has faced severe pressure in recent years, hitting an all-time low of Ksh161 to the dollar in January 2024.
Moreover, the Kenyan government stands to benefit from reduced borrowing costs on the international stage. With US rates serving as a benchmark for international lenders, a reduction in these rates could lower the cost of borrowing for Kenya, particularly in the Eurobond and syndicated loan markets.
This would ease the government’s external debt burden, allowing for more sustainable fiscal management.
NSE-listed firms could also see a reversal of fortune. The market has been plagued by net sales of blue-chip stocks, as foreign investors sought safer returns in the US. A shift in the global interest rate environment could bring capital back to emerging markets like Kenya, providing much-needed liquidity and stabilising share prices.
CBK Governor Kamau Thugge has expressed optimism that lower interest rates in advanced economies will reduce funding costs for emerging markets. He underscored the potential benefits of easier access to international capital, which could stimulate economic growth and provide a buffer against external shocks.
