Kenya’s FX crisis deepens ahead of 3 coupon payments in Q2, maturing bond in 2024.

Francis Kyei, Senior Market Analyst

• Kenya is facing three Eurobond coupon payments between May and June this year and a US$2 billion maturing bond in 2024, as the country’s FX crisis continues to worsen. 

• While exploring options to service the debts, the Kenyan government is heavily drawing on its FX reserve to give the local currency lifeline support against the USD.

• Kenya’s FX crisis will likely linger for a while as current conditions on the international capital market make it difficult for the country to borrow to service its debts. 

Kenya is under intense pressure to service its Eurobond coupons in the second quarter of the year as the country’s foreign exchange crisis continues to deepen.

Since the beginning of the year, the Kenyan government has been drawing its reserves to give the local currency lifeline support against the USD. 

As a result, the country’s reserve has dipped to US$6.5 billion, from US$7.4 billion at the beginning of this year, according to the Central Bank of Kenya’s (CBK) March 17, 2023, weekly bulletin. 

Kenya’s reserve can cover 3.6 months of imports, below the forex reserves policy of a minimum of 4 months of import cover by the East Africa Community (EAC).

Despite the support from the government, the Kenyan Shilling keeps losing value. From Ksh 123 to a dollar at the beginning of the year, the currency now trades at Ksh130 to US$1.

Foreign inflows in February 2023 reduced by 11.5% to US$309.2 million, from US$349.4 million in January, the CBK report said. 

According to local media reports, fx trading on the black market has been on the rise, and some Kenyans have been crossing to neighbouring Tanzania to buy dollars. Black market rates, reports indicate are around Ksh 139 to a dollar.

Cause of FX crunch in Kenya

The lack of USD in Kenya’s economy has been attributed to the repayment of loans to the country’s bilateral and commercial lenders this year.

Demand for foreign currencies by importers has also contributed to the situation in the East African nation. 

The importation of petroleum products, machinery, vehicles, iron, steel, food items, plastic, pharmaceuticals, among other items, has put pressure on the local currency.

Meanwhile, foreign inflows have not fully recovered from the impact of the COVID-19 pandemic three years ago. 

Climate change has also contributed to the low productivity in the country.

Any hope for Kenya’s FX crisis?

The Kenyan government faces three Eurobond coupon payments in May and June this year and a US$2 billion maturing bond in 2024. 

This has put the country in a precarious position, as it struggles to save its local currency with its reserves while exploring ways to raise money to service its debts and the maturing bond.

The current interest rate in the United States (US) also makes it difficult for the East African nation to borrow from the international capital market to service the debts. 

Kenya has intensified its domestic revenue mobilisation to raise revenue to support its development and service the debts. 

The government has introduced an initiative that allows local oil companies to pay for oil imports on credit in Kenya shillings, instead of USD, to address the downward spiral of the local currency. 

Whether these policies will have an immediate impact on the country’s FX crisis remain to be seen. However, the crisis will likely linger into the second and third quarters of the year due to the pressure on the government to service its dollar-denominated debts. 

Disclaimer: This article has been prepared by GFX Prime, an African investment firm with its registered office on the 2nd Floor, PWC Towers, Cantonments City, Accra Ghana. This article has been issued for information purposes only. GFX Prime does not recommend or propose that any security referred to in this article is appropriate or suitable for your investment objectives or financial needs.