NSE firms face costly dollar loans as shilling weakens

Listed firms are facing higher finance costs as a result of the weakening of the shilling against the dollar. FILE PHOTO | NMg

By CHARLES MWANIKI More by this Author

Listed firms are facing higher finance costs as a result of the weakening of the shilling against the dollar, exposing the risk carried by foreign currency loans to local firms.

Companies such as Kenya Power, KenGen, Centum, Safaricom and most large banks carry significant exposure to currency rate risk, owing to significant dollar borrowings from external lenders and development finance institutions (DFIs) to finance capital expenditure, and in the case of banks for on-lending to customers.

These loans are repaid and serviced through dollars bought from the local market, which is subject to exchange rate fluctuations.

This year, the shilling has depreciated against the US currency by 3.9 percent, exchanging at an average of 117.80 units yesterday from 113.14 at the beginning of the year.

A company servicing a facility of $10 million (Sh1.18 billion) at an interest rate of five percent would therefore see its cost of buying dollars locally to pay interest rise from Sh56.6 million to Sh58.9 million, presuming the shilling doesn’t weaken further.

Local firms, especially the ones in capital-intensive sectors like energy and aviation, have large borrowings in form of dollars.

Kenya Power said in its annual report for the year ending June 2021 that it had Sh78.3 billion worth of dollar-denominated loans, while KenGen held Sh54.3 billion worth of such loans in the same period.

National carrier Kenya Airways also holds significant dollar loans, totalling Sh78.3 billion at the end of 2021.

Investment firm Centum’s dollar loans stood at Sh14.95 billion at the end of March 2021, it said in its annual report for 2021.

Safaricom also announced last November that it had taken up a one-year bridge facility of $400 million (Sh47.1 billion) to finance its Ethiopia entry.

Banks have also borrowed significantly from DFIs such as the International Finance Corporation (IFC) in recent years to fund their SME lending businesses.

By the end of 2021, tier-one Co-operative bank held borrowings worth Sh19.6 billion that were denominated in dollars, while Equity Group’s Kenyan bank had taken up dollar-denominated facilities worth about Sh90 billion.

Firms have also faced problems accessing dollars in the local market to make overseas obligations which include payment to suppliers, dividend remittances and loan repayments.

cmwaniki@ke.nationmedia.com