By Africa Links 24
Published on 2024-02-21 16:34:52
The Kenyan shilling (KES) has experienced a remarkable strengthening against the US dollar in recent trading sessions, after years of almost continuous decline. This surge in the shilling’s value on foreign exchange markets comes in the wake of the issuance of a $1.5bn Eurobond last week. The strong demand from both foreign and domestic investors in this bond offering has raised hopes among traders and investors that the newly raised funds will help Kenya avoid defaulting on a $2bn debt repayment due in June. As a result, the Kenyan shilling has appreciated by more than 15% against the US dollar.
Muthoni Mutonyi, a financial professional based in Nairobi and former official at the National Bank of Kenya, attributes the recent strengthening of the Kenyan shilling to the efforts made to repay the $2bn bond, which have generated a wave of investor confidence and foreign exchange inflows. She also points to factors such as decreased demand for the US dollar, including lower oil prices, which have reduced the need for dollar-denominated imports and alleviated pressure on the KES, allowing it to appreciate.
In addition to these factors, Mutonyi highlights the subtle interventions by the Central Bank of Kenya in the foreign exchange market, contributing to exchange rate stability and potential appreciation of the shilling. A stronger currency would benefit Kenya, given its substantial pile of dollar-denominated debt, estimated at $38.3bn in September 2023. A stronger shilling would make debt repayments less expensive in local currency terms, easing financial burdens related to debt. It would also make imported goods priced in dollars cheaper in local terms, helping to alleviate inflation and cost of living pressures.
However, economist Jared Osoro in Nairobi suggests that the recent rally of the shilling may not be sustained. He believes that the reaction of foreign exchange markets to the Eurobond issuance is overly optimistic, as several risks remain, even if a debt default is now less likely in the short-term. Osoro emphasizes that there is no material change in Kenya’s economic fundamentals and that the economy is weak. While the current account deficit is narrowing, it is not due to increased exports but rather decreased imports, indicating that the shilling’s appreciation may be driven by market reaction to the Eurobond, part of which is being used to retire existing bonds.
Furthermore, Osoro notes that foreign exchange traders’ perception of the successful Eurobond issuance as a vote of confidence in the Kenyan economy does not necessarily reflect the true measure of confidence, which is indicated by the yields foreign investors have demanded. With yields around 10%, it remains expensive for Kenya to access capital markets, suggesting that investors are still cautious about the economic outlook and therefore require elevated yields to compensate them for perceived higher risk levels.
“The yield of the new Eurobond has surpassed 10% – to me, that is not a sign of confidence at all,” Osoro comments. “There appears to have been a huge overreaction on foreign exchange markets. I think the market will have to correct itself at some point.”
In conclusion, the recent appreciation of the Kenyan shilling against the US dollar has been driven by various factors, including the successful issuance of the Eurobond and decreased demand for the US dollar. However, economists like Osoro caution that these developments may not be indicative of a sustained strengthening of the shilling, as underlying economic fundamentals and investor confidence levels continue to pose risks. As the situation unfolds, it will be important to closely monitor the impact of these developments on Kenya’s foreign exchange markets and economic stability.
