The Kenyan shilling yesterday weakened to an eight-month low
against the US dollar in what market watchers attributed to excess
liquidity in the money markets and demand for the dollar from
manufacturers and oil importers.
Analysts, however,
said Monday’s announcement that the Treasury is about to issue a new
Eurobond is causing a recasting of positions as markets prepare for a
looming jump in external debt.
The shilling exchanged
at an average of 101.73 units to the dollar in the interbank market, a
level last seen at the end of February, having weakened against the
dollar by nearly one per cent this month.
The
shilling’s performance in the market is being seen as resulting from the
negative sentiments on Kenya’s debt position and the ongoing flight of
foreign capital back to the US where rates are rising.
The
International Monetary Fund (IMF) last week downgraded Kenya’s risk of
debt distress from low to moderate, and many observers see the looming
Eurobond issue as having the potential to spook the market even further.
Treasury
principal secretary Kamau Thugge told Bloomberg on Monday that the
external financing bit of the budget deficit will comprise of up to
Sh250 billion worth of Eurobonds, and Sh37 billion in syndicated loans.
“The
shilling may be further undermined by weaker debt metrics after the
IMF’s downgrade of the country risk of external debt distress from low
to moderate,” said economists at Commercial Bank of Africa in a note.
The
bank said the government’s plan to return to the Eurobond market for
the bulk of external debt financing this fiscal year risks aggravating
debt sustainability concerns given the potential for higher debt
servicing costs.
The shilling’s depreciation in recent weeks has, however, not
been characterised by volatility, suggesting that it is an issue of
underlying fundamentals rather than speculative actions in the currency
trading markets.
The Central Bank of Kenya (CBK) has
the option of deploying its sizeable foreign exchange reserves to
support the shilling, but this action is likely to be limited as the
regulator keeps an eye on growing external debt servicing demands that
are drawn out of the same reserve basket.
“Whereas
strong foreign exchange reserves have supported recent stability,
continuous depletion amid rising external risks highlights its
unsustainability as an exchange rate stabiliser,” said CBA.
In
the 2018/19 fiscal year, the Treasury expects to spend Sh364.7 billion
on external debt servicing, of which Sh250 billion will cover principal
repayments, including the maturing Sh75 billion five-year tranche of the
Eurobond issued in 2014.
Indications from the market
are that the proposed Eurobond issue will attract higher interest
compared to the existing ones, going by the higher yields in the
secondary market of the bonds that have gone up to nine per cent.
Latest
data shows that the secondary market rates on the four tranches of
Eurobond ( the five-year issue maturing next year, the $2 billion
10-year 2024 paper, $1 billion 10-year 2028 paper and $1 billion 30-year
paper maturing in 2048) have risen by between 70 and 180 basis points
this year.
These yields inform investors of how to
price new bond issues, and analysts say they will likely factor in the
debt sustainability downgrade as well as the lack of the IMF cover for
the shilling when pricing risk on new debt.
“The
failure to make headway on the previous IMF stand-by arrangement
targets, resulting in the Fund not extending a new programme in
September, combined with the downgrade in terms of external debt
sustainability further supports our concerns and will likely lead to
increased market scrutiny,” said Exotix Partners senior economist
Christopher Dielmann on Monday.
The Treasury may well
opt for another long-term bond to ease refinancing worries in the near
term, when the country will also be servicing the hefty Chinese loans
for the construction of the standard gauge railway.
Treasury
secretary Henry Rotich has moved to cut the fiscal deficit by effecting
tax changes geared towards raising more revenue, as well as introducing
budget cuts, which he hopes will result in the narrowing of the deficit
as a percentage of GDP to 5.7 per cent in 2018/19 from 7.2 per cent in
the 2017/18 fiscal year.
The IMF, which had strongly
called for the tax changes to remove VAT exemptions, said in its report
on Kenya last week that further reforms are needed.
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