Kenya is tomorrow expected to pay an outstanding Sh64.6 billion ($646 million) of the syndicated loan it took in 2015, in what could immediately cut down the mountain of foreign exchange reserves that has been growing in recent weeks and possibly weakening the shilling.
The Central Bank of Kenya (CBK) reserves jumped by nearly $700 million (Sh70 billion) last week to hit an all-time high of $9.5 billion (Sh950 billion), equivalent to 6.35 months of import cover.
The build-up of reserves has since seen the shilling strengthen against major currencies in tandem with rising amounts of dollars in the market.
Kenya struck a $750 million syndicated loan agreement with a consortium of lenders on October 28, 2015 with stated maturities of April 27, 2018.
Kenya’s outstanding indebtedness under the 2015 syndicated loan facility is $646 million, according to the prospectus for the recently raised $2 billion Eurobond.
The Treasury’s Debt Department did not respond to queries on the imminent payment.
Strong reserves
Kenya is, however, sitting on a strong reserves position even with the repayment, which will leave the CBK with five months of import cover that is expected to limit the impact of the transaction on the shilling.
Importers of machinery and fuel have been the major beneficiaries of the recent appreciation of the shilling even as their counterparts exporting tea, coffee and horticultural products feel the pain of a strong currency.
Kenya is a net importer of goods and services that greatly benefits from the positive effect of a stronger shilling through cheaper foreign goods and lower cost of servicing foreign debt.
The CBK and forex dealers said early this week that there was increased build-up of dollars as a result of inflows from foreign investors and the agricultural exports.
“The shilling strengthened against the US dollar supported by flows from [the] agriculture sector and offshore investors,” said the CBK without identifying the foreign investors or the agricultural exports that brought in the inflows.
The central bank did not respond to queries on the looming payment of the syndicated loan.
Analysts, however, said that the build-up of reserves may have arisen from multiple sources, including the CBK purchases from the market, issuance of new debt, sale of an asset in dollars or from a government-to-government deal.
Support Shilling
The build-up of reserves has shored up the local currency lately, putting the mean exchange rate at 99.98 to the dollar compared to 101 units last week. Commercial Bank of Africa said on Monday that foreign inflows coupled with high dollar supply as well as weak demand for the greenback had helped strengthen the shilling, indicating that the CBK — like other market players — could also buy the dollar cheaply from the market.
“The Kenya shilling continued its surge against the US dollar to end the week on a high, helped by increased foreign currency inflows. Increased activity on the dollar supply counter, mainly by corporate players, surpassed weak foreign currency demand, pushing the US dollar-Kenya shilling currency pair below a key psychological barrier,” said CBA.
Last month, the CBK received about $2 billion (Sh200 billion) proceeds of the Eurobond that the Treasury raised from international financial markets — immediately pushing the reserves to $8.8 billion (Sh880 billion).
That saw the shilling rise to about 101 units to the dollar, up from 102-103 units range it had maintained for the preceding 12 months.
The shilling last week made significant gains against the currencies of the major trading partners, including the Uganda and Tanzanian shillings as well as the Euro and the Japanese yen. The local unit, however, weakened against the sterling pound.
The CBA said in its report that the local currency was likely to be on a strengthening streak if the supply of dollars continued.
“Market chatter alludes to further appreciation of the local unit if recent increased activity on the supply counter persists,” said CBA.
One investment bank said that the Treasury was likely to spend less on upcoming loan repayments as a result of the strengthening of the local unit.
Kenya’s foreign-currency denominated debt has risen in the past year to nearly Sh2.5 trillion, with the Eurobond alone adding Sh200 billion to the liabilities.