NAIROBI, Kenya – Kenya’s economy is bracing for significant challenges in July as political instability and ongoing protests are expected to lead to further depreciation of the Kenyan shilling.
Analysts from Stears, a pan-African market insights firm, have issued a warning that the currency, which has already depreciated by 0.29 percent following the protests from June 18 to June 27, is likely to face continued pressure.
The recent protests, which have disrupted businesses in Nairobi and other major towns, have exacerbated economic woes, leading to reduced capital inflows.
Analysts suggest that these inflows are crucial for maintaining foreign exchange reserves at the central bank, which are essential for supporting the shilling.
The depreciation trend is expected to persist amid ongoing anti-government demonstrations and an upcoming review by the International Monetary Fund (IMF).
Compounding the situation, the dollar is anticipated to remain strong in July as the US Federal Reserve maintains a hawkish stance before expected rate cuts.
This strength further pressures the shilling, making it harder for the Kenyan currency to recover.
Stears projects the shilling to close Q3 2024 at Sh129.42 against the dollar, emphasizing that market sentiment regarding political developments, exchange rate expectations, and investor confidence will be pivotal.
Investor sentiment towards Kenya has already taken a hit, with yields on Kenya’s sovereign dollar bonds declining to a five-month low, marking them as some of the worst-performing emerging market bonds since the protests began.
This decline signals dwindling investor confidence, a situation likely to be scrutinized in the IMF’s July review of Kenya’s economic progress.
Stears highlights that despite potential de-escalation of protests, public discontent remains high, suggesting that investor caution will persist.
“Regardless of the outcome, we expect relatively positive investor sentiments toward the Kenyan economy to wane. Investors will adopt a wait-and-see approach before bringing in capital,” Stears stated in its monthly update.
Kenya’s current participation in the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) conditional loan programs requires significant fiscal adjustments, including spending cuts and improved tax and export revenue.
While the government has made strides in achieving these objectives, the austerity measures have strained income levels and increased the cost of living, particularly for low to middle-income earners who make up over 70pc of Kenya’s consumer market.
The protests and the government’s harsh response are expected to feature prominently in the IMF’s review, with implications for future economic stability and investor confidence.
President Ruto faces the daunting task of balancing domestic pressures with the stringent conditions set by the IMF to ensure debt sustainability.
Stears anticipates that tensions may de-escalate in the coming weeks, but the market sentiment towards Kenya is likely to remain bearish.
Calls for President Ruto’s resignation persist, adding to the uncertainty and potential for continued unrest.
