The Kenyan shilling is projected to depreciate significantly against the US dollar in 2024, according to a report released today by Cytonn Investments.
The report projects the shilling will trade between KES 183.2 and KES 189.6 to the dollar by end of 2024, representing a potential 16.4% depreciation from current levels.
“We expect the shilling to remain under pressure in 2024 as a result of an ever-present current account deficit which came at 3.5% of GDP in Q3’2023, the need for government debt servicing, and dwindling forex reserves,” the report reads.
Kenya’s persistent trade deficit reflects the country’s reliance on imports, the report explained. With high global commodity prices, this has resulted in increased demand for foreign currency which continues to strain the local shilling.
Additionally, 67.5% of Kenya’s external debt was dollar-denominated as of September 2023, putting pressure on forex reserves. Reserves currently stand at $7 billion, equivalent to just 3.8 months of import cover, below the 4 months minimum requirement.
However, the report noted the shilling will be supported by strong diaspora remittances, which rose 4% in 2023 to $3.8 billion. Tourism receipts also rebounded 82.9% in 2022.
The Cytonn report projects Kenya’s economy will grow 5-5.4% in 2024, supported by agricultural and service sector growth. However, debt concerns remain.
“Kenya is currently at high risk of debt distress with the debt to GDP ratio at 72.6%,” said the report. “Less revenue is available for development spending as significant funds go towards servicing existing debt.”
Inflation is forecast to average 6.9% in 2024, within the government’s 2.5-7.5% target range. But risks persist from high electricity and fuel costs, the report cautioned.
Overall, Cytonn maintains a neutral outlook on Kenya’s business environment for 2024. Significant risks include further shilling depreciation and persistent inflationary pressures.
However, investor sentiment should improve as Kenya makes external debt payments, the report said. Government borrowing is also expected to decline 20.6% in the 2024/2025 fiscal year budget.
In fixed income, Cytonn advises favoring short-term instruments to reduce duration risk from rising yields.
On the fiscal side, Cytonn expects the government to continue aggressive borrowing domestically and abroad in 2024. The fiscal deficit is projected at 3.9% of GDP in the 2024/25 fiscal year budget.
The government intends to plug this fiscal deficit through KES 326.2 billion in external financing and KES 377.7 billion in domestic borrowing, according to the report.
Total public debt stood at $106 billion as of September 2023, up 21.7% year-on-year. The high borrowing has pushed Kenya’s risk of debt distress to “high” according to the International Monetary Fund.
“Despite the projected decline in borrowing by 20.6% to KES 703.9 billion in FY’2024/25 from KES 886.6 billion in FY’2023/24, Kenya still has an ever-present fiscal deficit,” the report noted. “As such, we expect the government to continue borrowing aggressively from both the domestic and foreign markets.”
For equities, Cytonn has a neutral near-term but bullish medium-term outlook. Improved GDP growth and business environment will likely support earnings growth for listed firms.
In real estate, residential demand remains strong but slowed by high mortgage rates and construction costs. Cytonn sees opportunities in satellite towns as infrastructure expands.
The report covers Kenyan and regional economic trends across sectors. Cytonn is a leading Kenyan investment firm and research house.
Access the full report here.
