The shilling remained resilient to the dollar last year depreciating by just 0.1 per cent as peer currencies of key trading partners in the region depreciated more sharply, making Kenyan exports relatively expensive.
The shilling is, however, expected to come under pressure this year as the price of oil edges up amid higher spending ahead of the elections this year.
A number of economists had projected the shilling would depreciate to the dollar in 2016, but strong support from Central Bank of Kenya (CBK) and diaspora remittances offered support keeping the currency flat even as regional currencies ceded ground to the greenback.
“The shilling remained resilient, depreciating slightly by 0.1 per cent for the year 2016 against the dollar. However, after having appreciated by 1.2 per cent against the dollar during the first half of 2016, the shilling depreciated towards the end of the year driven by global dollar strength driven by the Fed raising rates,” said Cytonn Investments in its end of year markets report.
“We have seen the Central Bank support the shilling leading to a decline in forex reserves to $7 billion from $7.8 billion in October, which has led to the decline in the months of import cover below the one-year average of 4.9 months, to 4.6 months, down from 5.2 months at the start of October.”
In addition to the CBK support, the shilling has also benefited from strong diaspora remittances, which rose by 15 per cent year-on-year to $156 million (Sh15.9 billion) in June 2016, as per the latest data available from the CBK.
In comparison, the currencies of other Eat Africa Community (EAC) countries dropped more significantly than the shilling in 2016, and given that they are all oil importing countries, they may still face more depreciation this year.
The Uganda and Tanzania shillings closed 2016 6.3 and 1.4 per cent down to the dollar in exchange rate, while the Rwandan franc depreciated by 8.5 per cent.
In the other key African economies, currencies returned a mixed performance. While the South African rand ended the year 11.4 per cent higher to the dollar, the Nigeria naira was down by 37 per cent and the Egypt pound down 58 per cent.
The higher depreciation among key export markets does not bode well for Kenyan exporters since it makes their goods more expensive in those markets.
Exports to the region have been falling lately. Going into 2017, however, the shilling is likely to face some headwinds, which include the possibility of a rise in capital outflows from emerging economies like Kenya should the US persist with raising the Federal Reserve rate.
The Monetary Policy Committee meets at the end of this month when factors such as the exchange rate and prevailing inflation will determine whether it will continue with the easing cycle seen last year or return to a tightening policy.
Analysts say the latter is more likely given the recent rebound in oil prices, which will automatically increase the country’s import bill and rising food prices.
“Recent rebound in oil and other commodity prices are likely to increase pressure on the Kenya shilling, prompting the CBK to maintain a tight policy stance.
“Inflation is still within the five per cent plus or minus 250 basis points target; however, price pressures and strong import demand will maintain pressure on the shilling,” says Ecobank Africa in its latest note on the shilling.