Massive uptake of infrastructure bond boosts shilling’s value

The shilling exchange rate strengthened last week following the decision by the United States Federal Reserve not to taper its bond buying stimulus programme. FILE 

By CHARLES MWANIKI

In Summary

• The shilling strengthened against the dollar Thursday, with the Central Bank mean-rating it at 87.22 to the dollar compared to 87.40 on Wednesday.

Massive subscription of the 12-year Sh20 billion infrastructure bond has increased dollar inflows, boosting the shilling’s value.

The bond, whose auction results were released on Wednesday, attracted bids of Sh37.63 billion against the Sh20 billion on offer, representing a 188 per cent subscription rate.

The domestic currency strengthened against the dollar Thursday, with the Central Bank mean-rating it at 87.22 to the dollar compared to 87.40 on Wednesday.

Commercial banks quoted the shilling at close of trading on Thursday at 87.05 with indications that the local currency could break into the 86 band for the first time since mid-July.

Commercial Bank of Africa quoted the shilling as opening at 87.15/25, while at ABC Bank the local unit was quoted opening at an average of 87.20 in the morning.

“The Kenya shilling firmed in anticipation that an oversubscribed 12-year bond will increase dollar inflows,” said ABC Bank in a note to clients on Thursday morning.

The proceeds are earmarked to finance infrastructure projects in transport, energy, sewerage, irrigation and water sectors. “Bids accepted were 597 totalling Sh19.92 billion.

(READ: Treasury eyes Sh20bn for infrastructure)

The auction registered a weighted average rate for successful bids of 12.363 per cent,” said CBK director financial markets Gerald Nyaoma in a statement. CBA dealer Joshua Anene said that the secondary bond market will be a likely destination of investor dollars.

“The dollars may not be repatriated immediately, as investors may seek to buy the bonds from the secondary market. We should see an uptick in bond trading at the NSE,” said Mr Anene.

He however said other market factors will also determine the shillings ability to break below the psychological 87 barrier.

Lower than usual end-month dollar demand has helped the local currency keep gaining against the dollar this week in the wake of the terror attack on Nairobi’s Westgate mall.

The shilling exchange rate strengthened last week following the decision by the United States Federal Reserve not to taper its bond buying stimulus programme, a decision which prevented the flight of capital back to the US from emerging and developing markets.

The overflow of funds from the infrastructure bond is likely to also increase appetite for other government securities, whose high subscription rate has seen interest rates go down in September.

According to Genghis Capital research, the interest rates on the government papers could fall further on account of high demand.