The Worst Probably Isn't Over for Kenya's Shilling. Here's Why

(Bloomberg) -- Even though Kenya’s shilling depreciated for the last six weeks to the weakest since January, the worst may be yet to come.

High government spending may heap pressure on the shilling. Kenya’s fiscal deficit this year is forecast by the International Monetary Fund to be 6.6 percent of gross domestic product. Among the region’s Eurobond nations, only Zambia’s is higher.

The Worst Probably Isn't Over for Kenya's Shilling. Here's Why

If the deficit widens, Kenya’s relatively low interest rates won’t help, especially given the sporadic appetite for emerging-market risk these days. The rate in the local interbank market fell to the lowest level in more than seven years last month. It has since risen to almost 3 percent, but that’s barely half Kenya’s inflation rate of 5.5 percent.

At the end of last year, the IMF reckoned that Kenya had the priciest exchange rate among sub-Saharan Africa’s Eurobond issuers bar Ethiopia and Angola. And since then, both those currencies have depreciated more against the dollar.

The Worst Probably Isn't Over for Kenya's Shilling. Here's Why

The shilling, meanwhile, is Africa’s best-performing unit in 2018, even after its recent pain. But there’s excess liquidity in the market. The central bank on Monday said it issued 9 billion shillings ($88 million) of debt via a seven-day repo transaction to “mop” up shillings, which may help raise raise the interbank rate.

©2018 Bloomberg L.P.