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Shilling forecast to take a beating on debt sentiment



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The Kenyan shilling looks set to lose its appreciation streak against major world currencies as negative sentiment persists over Treasury’s plan to raise additional cash from domestic market to plug a revenue collection shortfall, analysts at financial services firm Sanlam predict.

The government has indicated in the draft budget its intention to raise its domestic debt target from Sh272 billion to Sh319 billion in 2018/19 as public expenditure rises by 15 per cent this financial year.

Sanlam analysts expect the shilling, which was generally immune to volatility in 2018 when it appreciated 1.3 per cent against the US dollar, to lose ground this year.

“In our view, the Kenya shilling is susceptible to downward pressure from negative sentiment due to persistent fiscal concerns,” the analysts say in an outlook brief.

“In the longer term, the cost of debt from increased external borrowing could exert further downward pressure on the Kenya shilling.”

The Kenya Revenue Authority missed the collection target by Sh60 billion, the Sanlam analysts say, citing the National Treasury’s target of Sh381 billion against the taxman’s actual collection of Sh320 billion in the three months ended September.

Last year, the shilling, backed by sufficient foreign exchange reserves and open market operations, generally exchange against the dollar between 99.9778 and 103.4 in a period of 12 months.

The country enjoyed relatively robust foreign exchange reserves, despite declining marginally in 2018 to $8bn billion (5.2 months of import cover), from $8.45 billion.

In spite of the negative sentiments about the country’s fiscal pressures, the Sanlam analysts expect the extension of tax amnesty inflows and diaspora remittances to mitigate pressure on the shilling.

“However, we believe the authorities (Central Bank of Kenya) will likely seek to limit significant shilling volatility given its rising external debt,” the Sanlam brief concludes.

The analysts project a rebound of gross domestic product growth to 5.8 per cent in 2018 (from 4.9 per cent the previous year) supported by a pickup in agriculture, construction, and electricity.

Their forecast for growth in 2019 is, however, a modest 5.3-5.5percent “ due to the interest rate cap that will continue to limit the availability of private sector credit.”