Kenya’s financial landscape took a hit last week as the Kenyan shilling continued to depreciate and the Nairobi Securities Exchange (NSE) experienced a heavy wave of selling.

These events have raised concerns about the country’s economic outlook and the implications for the upcoming $2 billion Eurobond redemption in June 2024.

The exchange rate deteriorated further, with the Kenyan shilling trading at Sh149.1 to one US dollar, compared to Sh148.5 on October 5, 2023. This 0.4 per cent depreciation highlights the ongoing pressure on the national currency.

“The Kenya shilling remained relatively stable against major regional and international currencies during the week ending October 12, it exchanged at Sh149.1 per US dollar,” CBK said in a statement.

A weaker shilling can lead to higher import costs and increased inflation, which could negatively impact consumers and businesses in Kenya. This can be seen in ever rising oil prices.

Simultaneously, the country’s foreign exchange reserves took a hit, falling to a record low of 3.6 months of import cover, compared to 3.8 months on September 23, 2023. 

Alarming reserve levels

This decrease in foreign exchange reserves is alarming, as it signifies Kenya’s reduced capacity to finance its imports and repay foreign debt obligations. 

It also weakens the central bank’s ability to stabilise the shilling by intervening in the foreign exchange market.

The NSE also suffered a significant blow, with the market capitalisation dropping by 1.5 per cent. This decline in market value was driven by a broad-based sell-off, affecting all the NSE indexes. 

Investors seemed to be fleeing the market, likely driven by concerns over the weakening currency and broader economic instability.

The bond witnessed a sustained over subscription of Treasury Bills and under subscription of medium term and long term bonds.

Meanwhile yields on Kenya’s Eurobond declined sharply with the 2024 Eurobond also declining.

“On the international market yields on Kenya’s Eurobond declined by an average of 137 basis points,” said CBK it’s weekly markets update.

The heavy selling is reflective of investor sentiment, as they become increasingly risk-averse due to the deteriorating economic conditions. 

This situation may lead to a vicious cycle, as a weak stock market can further erode investor confidence and deter foreign investment.

The government and the central bank are now faced with the daunting task of stabilizing both the currency and the stock market. 

Maintaining a strong balance of payments and rebuilding foreign exchange reserves are key priorities to prevent further currency depreciation. 

Impact on import bill

Government data shows that the weakening shilling worsened the overall import bill. In the first half of the year, Kenya witnessed a significant decline in forex reserves which triggered a hike in demand of the dollar – the major currency used in global trade – pushing the shilling to new lows against the greenback.

To this end, implementing effective monetary and fiscal policies is crucial for restoring investor confidence in the NSE.

Investors and policymakers will be closely watching developments in the coming weeks as they work to restore financial stability in Kenya.