KES Outlook
The Kenyan shilling declined by 22% against the US dollar from March 2022 to January 2024. Several global factors contributed to this depreciation including the US Federal Reserve’s FOMC (US Fed) monetary policy tightening to combat record-high inflation, the Russia-Ukraine war which subsequently led to sanctions against Russia affected global food supply chain and energy prices.
Additionally, Kenya’s heavy debt burden and drought led to its reserves falling below the required level. Like most global economies the impact of the COVID-19 pandemic also had an adverse impact on the Kenyan economy.
However, the Kenyan shilling has made an impressive recovery, appreciating to KSh134.5/$ on March 15 from a record high of KSh163.0/$ on January 25. This strong appreciation can be attributed to the upsized packages provided by both the IMF and World Bank, as well as the issuance of a new Eurobond worth $1.5bn.
According to Oxford Economics, the agriculture, manufacturing, and services sectors are expected to buoy the economy. With a forecast of an economic expansion of 4.7% in 2024, Kenyan Real GDP is predicted to outperform its Sub Saharan counterparts. The Kenyan agricultural sector, which contributes almost 20% of Kenya’s real GDP, is expected to recover further in 2024, contributing to the bullish outlook on the Kenyan shilling.
Source: Oxford Economics Africa, From: Kenya: A new dawn for the shilling, 2024
One of the positive factors is President William Ruto’s recent announcement of plans to cut government expenditure by 12.0% to KSh3.7trn in the upcoming 2024/25 fiscal year (FY, July to June). President Ruto emphasized the need to “live within the means and shed off fat”.
Additionally, Kenya’s inflation is expected to ease on the back of a stronger shilling amongst other favorable developments. Predictions are that headline inflation will ease to an average of 5.0% in 2024, owing to disinflation in the food and fuel sub-indices, which contributed to high price pressures in 2023.
Source: Oxford Economics Africa, From: Kenya: A new dawn for the shilling, 2024
On April 3 the Monetary Policy Committee (MPC) of the Central Bank of Kenya made the decision to maintain the central bank rate at 13.0% in order to ensure a stable trend towards the 5.0% midpoint of the central bank’s target range of 2.5% to 7.5%. The committee took note of the fact that consumer price inflation had eased for a second-consecutive month to 5.7% y/y in March, from 6.3% y/y in February.
This decline can be attributed to disinflation in the food & non-alcoholic beverages, transport, and housing & utilities sub-indices. Moreover, the MPC is of the view that inflation will continue to ease as a result of the decline in both food and fuel prices and a stronger Kenyan shilling (USDKES).
ZAR Outlook
It is an election year in South Africa and 2024 has been a turbulent year for the South African Rand (ZAR) thus far. The upcoming elections are expected to result in volatility of the ZAR. Furthermore, there has been a notable increase in international oil prices since the beginning of the year, and the El Niño weather pattern may lead to a shortage of white maize in Southern Africa, which could result in higher food prices.
Additionally, South Africa has experienced consecutive fuel price increases since February 2024, and the rand has been depreciating lately. All these factors could contribute to the potential risks of inflation, which could continue to rise towards the end of 2024.
Source:Oxford Economics Africa, From South Africa: El Niño, weak rand and high oil prices bite, 2024
The upcoming elections in South Africa, to be held on May 29th, are likely to trigger a range of reactions in the value of the rand. Although the African National Congress is expected to remain the largest party, it is predicted to lose its majority, requiring the formation of coalition partnerships. However, despite the positive interest rate differentials with advanced economies such as the US Dollar, Euro and British Pound Sterling, the ZARs gains are liable to be limited due to the country’s elevated risk premium.
The chart below taken from leading multi-asset brokerage firm Exness’s web terminal highlights the significant swing in the US Dollar vs South African Rand exchange rate since January 2024. Over a period of 53 days (Jan 1st – Feb 23rd ) the Rand lost 6.5% value against the US Dollar. Over a period of 13 days (Mar 28th – Apr 10th) the Rand gained 3.89% against the US Dollar highlighting the volatility in the Rand.
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Source: Exness Web terminal, Apr 2024
As a trader, you should always keep an eye on key calendar dates and economic data releases, especially with the much-anticipated South Africa Election Day on Wednesday 29th May. In today’s geopolitical environment, local and global macroeconomic factors can change rapidly, and it’s crucial to stay informed to make effective trades.
Risk management is key, and carefully considering the trade size is essential. Additionally, it’s important to exercise caution and avoid keeping trades open over high volatility times, such as going into the weekend. By staying informed and managing risks carefully, you can make well-informed trades that will help you achieve your financial goals.
