The Treasury has flagged the risk of further weakening of the Kenya shilling, dollar shortages and increased debt as Kenya struggles to raise an extra Sh160 billion to clear the outstanding Eurobond debt.
In a preliminary circular offered, the Treasury says its options of tapping local forex reserves or issuing a dollar-denominated domestic bond to repay the Eurobond balance look set to trigger a shortage and further depreciation of the shilling.
Kenya plans to issue a new Eurobond of an indicative figure of $1 billion, with the proceeds used to buy back the bonds held by the investors of the $2 billion (Sh317 billion) Eurobond maturing in June.
But the balance, should Kenya only raise half of the total repayment amount as indicated in the circular, will be settled using the government’s own reserve of foreign currencies, reviving the dollar shortage crisis that was rife in 2022.
“Payment through existing dollar reserves, if used, could exacerbate exchange rate depreciation due to fewer reserves remaining to cover imports,” says the circular which came out on Wednesday last week.
The Treasury through joint bookmakers Citigroup and Standard Bank noted that the proceeds raised from the new Eurobond will be used to repay the 2024 Bonds.
“The government intends to repay the remainder of the 2024 Bonds through a combination of its own existing funds and financing from Kenya’s development partners,” reads the circular.
The Kenya shilling has been losing ground against the dollar, shedding 14.1 units in the period to trade at 159 units currently by end of Tuesday.
A combination of poor export earnings and increased import costs due to the war in Ukraine, and the increase in interest rates by Central Banks in rich countries have been blamed for the depreciation of the local currency.
An aggressive draw down on the country’s reserve of dollar currencies to repay part of the Eurobond is likely to reignite the dollar shortage crisis.
Kenya’s own reserve of dollars currently stands at $7.13 billion (Sh1.13 trillion), or 3.81 months of import cover.
In 2022, a dollar shortage made it difficult for traders to buy critical inputs such as fuel, fertilisers and cooking oil from the global market. There were complaints of banks rationing the dollars, even as the then CBK Governor Patrick Njoroge insisted the economy had sufficient supply of the greenback.
Besides funds from development partners such as the International Monetary Fund (IMF) and the World Bank, the borrowed funds might also include sovereign bonds such as the Eurobond as well as domestic bonds.
“Additionally, any government borrowing in the domestic debt markets to repay the 2024 bonds if required, may also impact dollar liquidity.”
Last year, the then Central Bank of Kenya (CBK) governor nominee, Kamau Thugge told MPs that he would float a local dollar-denominated bond to get rich Kenyans holding over Sh1 trillion in deposits to release the greenback.
“If we can get Kenyans holding dollars in deposit accounts to release them by buying into the bond, then we will have the possibility of increasing liquidity of dollars in the system and this will help us in building up foreign exchange reserves at the CBK.”
The CBK has since gone silent on plans to issue dollar–denominated domestic bonds.
By the end of November last year, the stockpile of foreign currency deposits had surged to a record high of Sh1.5 trillion as more Kenyans converted their wealth into dollars to hedge against a weaker shilling. Higher foreign currency deposits might also be the result of a weaker shilling.
The Dr William Ruto administration also has the option of contracting commercial loans, including returning to the international capital market, to retire the Eurobond loan that was raised in 2014.
Churchill Ogutu, an economist at IC Asset Managers (Mauritius), said the success of the offer for the buyback and the new Eurobond issuance will be critical in determining how Kenya will settle the outstanding debt after the buyback.
“It (payment of outstanding amounts) is pegged on how successful this issuance is. Because the risk was that Kenya has lost market access. So depending on the coupon that they will be able to achieve, will give them the confidence to go back to the market to finance,” said Mr Ogutu.
“If the tender offer is lower than the new Eurobond, we will have excess money so the balance will now go to budget support,” he added.
Kenya was expected to announce the maximum amount it intends to buy back from the investors of the $2 billion Eurobond by the end of Wednesday.
The maximum amount to be bought back will depend on the amount Kenya will raise through the new Eurobonds, a process that was to be finalised by the end of Tuesday.
Should the amount to be offered in the buyback exceed the proceeds of the new issuance, then Kenya might be forced to draw down from its own reserves, piling pressure on the exchange rate.
