Why is the Kenyan shilling dipping against the Uganda shilling?

Why is the Kenyan shilling dipping against the Uganda shilling?
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The Uganda shilling has had an incredibly strong performance this year against the Kenyan shilling  gaining as much as 0.71% this year alone.

Financial experts believe that this is due to a number of reasons.

The Ug shs /KES currency pair has reached 15-year highs, touching areas not seen since 2008.

The move higher has also been seen with several other currencies like the US dollar reaching soaring fresh all-time highs against the KES, the USD is up as much as 24% against the KES.

The KESUgshs pair has declined by over 21.2% from a rate of UGX 30 to 24.91, levels not seen since October 2008.

According to Nobert Kiiza a financial analyst at FXPesa, this reasons underlying the weaker Kenyan Shilling against an Ugandan shilling are many Uganda's declining inflation that has provided gains to the real value of the UGX allowing it gain strongly against the KES .

"Kenya's rising debt burden as well as impending maturities coupled with a stifled political crisis has dampened investor sentiment in 2023 .Furthermore, USA's tightening regime as well as in other economies like UK, Eurozone has kept regional currencies from rising as portfolio outflows increase in higher interest-bearing environments.”

Hawkish Federal Reserve through 2023

The impact from foreign currency specifically the USD has been felt more by the Kenyan shilling than the Uganda shilling.

The Federal Reserve Bank in the United States raised their benchmark target interest rate range to record 20-year highs peaking at 5.2% - 5.5%, after their 'likely' final rate hike was taken in July 2023.

The intensified outflows to higher interest-bearing USD denominated assets has severely reduced availability of the USD in the region weakening the value of the local currency (KES) coupled by a decline in foreign inflows as well as a heavier burden for importers.

It is expected that the 'higher rates for longer' guidance provided the US central bank will continue to keep the USD trading at lofty levels pressuring any gains to the Kenya Shilling.

Despite similar monetary policy action by the Central Bank of Kenya that raised its benchmark rate from 7% to as high as 10.5%.

“The United States raised the fed funds rate from 0.25% to 5.5%, an increase of 5.25% as compared to the 3.5% increase taken by the Central Bank of Kenya."

Uganda's central bank raised their benchmark rate from 6.5% to 9.5%.

The central banks collectively had rate hikes to curb the persistent inflation to deal with the persistently high inflation that plagued several economies in 2022 and part of H1 2023, this is in line with their mandate of maintaining price stability.

The same trend has also been seen by several global economies; emerging, developing and advanced.

As of November 2023, the Kenyan shilling has made new lows against the USD losing as much as 23% YTD.

The Uganda shilling has remained relatively unchanged trading only 3% lower against the USD so far this year.

The anticipated and far from possible rate cut cycle in the USA could allow the KES to stabilize and gain ground against the UGshs possibly in H2 2024.

Kenya's increasing debt burden

With a weakening shilling & an increasing debt servicing burden, the Kenyan shilling is between a rock and hard place.

The same has also affected the value of the Uganda shilling against the Euro and the United States Dollar.

Kenya’s USD external debt increased by 1.48 billion in 2023 from USD 37.12 billion to USD 38.6 billion.

Uganda's   external debt stands at $23.22 billion as of June 2023 according to data from Ministry of Finance. Central Bank of Kenya data indicates that Kenya's external debt % in USD stands at 67.1% compared to Uganda's 52.9%.

“Listen, the impact on the Kenya shilling with more debt servicing in USD for Kenya than Uganda allowed the currency to weaken gradually. For the two countries, external debt servicing has been more in USD and EUR,“ Kiiza said in an interview with Nilepost .

The EUR has performed relatively lower than the USD, up only 0.92% as of November 2023.

The recent halt of lending by the World Bank to Uganda in August 2023 weakened the Uganda Shilling however this did not weaken it for too long as alternative debt solutions such as China's Exim Bank that is expected to provide up to $150million stabilized UGshsweakness.

It is also still not clear the extent of the halt as Uganda's parliament is currently seeking an approval of USD 320m (UGX 1.219 trillion) from World Bank, debt arrangements that will stifle a much weaker UGX.

Foreign exchange reserves & foreign direct investment(inflows)

Surprisingly, Kenya's foreign exchange reserves increased by 22% YTD from USD 11.4 billion to 13.7 billion much higher than Uganda's 5% gain YTD having increased from USD 3.67 billion to USD 3.89billion.

This however could change gradually as maturing debt payments could pressure the reserves likely pressuring any KES gains amidst a higher fiscal burden and debt strain.

According to data from Central Bank of Kenya, Kenya's foreign investment inflows have deteriorated at a faster pace in 2023 amidst tighter financial conditions as well as business climate.

The KES has declined on this premise allowing the UGX to benefit gradually through 2023. The subdued strength of the KES is likely to continue and could further strength for the UGX into 2024.

Uganda’s declining inflation trend

Uganda’s headline YoY inflation rate greatly declined by over 76% in 2023 reaching 3-year lows of 2.4%, from 10.4% in January 2023 to 2.4% in September 2023.

Levels not seen since before the Covid pandemic.

The real value of the UGX benefited greatly in the UGXKES pair due to this as it outpaced the inflation decline observed in the Kenyan shilling that also declined by a mere 30% YTD.

Kenya’s headline inflation is still higher than it was before the Covid pandemic and a higher supply of the KES has suppressed upside gains so far this year.

The subdued strength of the KES is likely to continue and could further strength for the UGX into 2024.

Article written in part by AI

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