Kenya’s growing appetite for foreign debt could be the largest risk to the shilling’s stability this year as local factors including drought and prolonged politicking that dominated last year give way to external shocks.
The currency was fairly stable in the past year – barely half a percentage weaker – supported by a central bank that constantly mopped up liquidity and occasionally sold dollars to keep it hemmed in the 102.80-104.00 band to the greenback.
With local risks subsiding, analysts have cautioned that external shocks in rising global oil prices and a stronger greenback could make dollar-denominated debt expensive and weigh on the shilling.
“We are looking at a spike in dollar-denominated assets, which will of course take the dollar with it. As a result the shilling is expected to suffer,” said a trader at one commercial bank.
This could force the Central Bank of Kenya (CBK) to remain vigilant in supporting the local currency. The unit had a bumpy ride last year faced by an uncertain political environment that saw the country go to its first-ever presidential runoff on October 26.
Analysts expect a rebound in tourism and agriculture as the economy recovers to act as a cushion.
While Kenya’s debt is not seen at a critical level, expectations that the country’s Treasury could go for another syndicated loan in the first quarter before tapping a second Eurobond later in the year raises a reputational risk with international investors.
“Kenya has a strong appetite for external borrowing and has remained politically intransigent about its downsides, even in the face of warnings by the IMF and ratings agencies,” said Lucy James, associate consultant at Control Risks in an Africa outlook note.
Aly-Khan Satchu, an independent analyst and CEO of Rich Management, said a further rally in global oil prices at a time Kenya’s import bill for the commodity is rising could also be a challenge to the shilling’s stability.