Markets tense as Rotich drops IMF backup loan

Financial markets were tense Thursday after it emerged that the National Treasury had failed to renew the Sh100 billion ($989.8 million) standby facility with the International Monetary Fund (IMF), injecting a huge measure of uncertainty in the economy.

The tension, which came one day ahead of today’s deadline, saw the shilling open the day weaker and the Nairobi Securities Exchange’s (NSE) #ticker:NSE main index lose 30 points.

Treasury secretary Henry Rotich said Kenya would not seek an extension of the precautionary loan from the Fund, arguing that the country had kept its macroeconomic fundamentals such as inflation and currency stable over the period without drawing down on the facility.

“IMF programmes, especially standby (facilities), are short-term, with a maximum of two years. After that you are supposed to graduate and get out of it. But we can still engage and get back to it if we feel it’s necessary,” Mr Rotich said.

Market analysts, however, argued that the worst-case scenario would be a recall of the sovereign bond issues that would mean a default on existing foreign credit facilities due to the uncertainty arising from the virtual loss of IMF support.

“Expiry of the Standby Arrangement facility would have an impact on the issued sovereign debt in international markets as investors view the precautionary facility as a safety net. In the event that Kenya is not eligible, this will be deemed as a default trigger on the Eurobond,” said investment bank Genghis Capital in its update on the fixed-income markets. The original standby facility was $1.5 billion, but $500 million expired in March.

Central Bank of Kenya (CBK) data Thursday showed that the shilling had lost 0.17 per cent against the dollar, 0.30 per cent against the sterling pound and 0.33 per cent versus the euro compared to the previous day. The NSE 20-share index closed the day 30 points lower, breaching the 3000 points psychological barrier to stand at 2990.02 points.

Early morning trading data from Reuters showed the shilling breached the 101 units to the dollar mark. But the CBK immediately intervened stopping the slide. It was not possible to find out the extent of the CBK’s intervention, but this is likely to be seen in the change of the weekly record of the official foreign exchange reserves.

“Kenya’s central bank pumped in dollars into the market late in Thursday’s trading session after the shilling weakened due to the expiry of a standby loan facility with the International Monetary Fund. The shilling rose to 100.85/101.05 per dollar after the intervention from 101.02/101.22 where it was trading before the intervention. It had closed Wednesday’s session at 100.75/95,” Reuters reported.

Raymond Kipchumba, a research analyst with ABC Capital, said Kenya’s failure to reach a deal with the IMF raised the prospect of foreign Eurobond lenders recalling their cash, a move that would severely strain state coffers.

“The chance remains that with the expiry of the IMF precautionary facility without a new one being agreed on, the noteholders will recall the bonds, including the interest, which would only make things worse for the Treasury,” he said.

Mr Kipchumba referred to the IMF prospectus — for the 10- and 30-year Sh200 billion notes issued early this year — that provides that a severance of relations would be considered a default, triggering a recall of the credit if the noteholders hold at least 25 per cent of the value in total.

“Condition 10 (Events of Default) provides that holders of the 2028 Notes or the 2048 Notes, as the case may be, who hold at least 25 per cent in aggregate principal amount of the relevant Notes then outstanding may declare such Notes to be immediately due and payable at their principal amount together with accrued interest if, inter alia … the Issuer ceases to be a member of the IMF or ceases to be eligible to use the general resources of the IMF,” says the provision in the prospectus. But Mr Rotich appeared unfazed by the provisions insisting that Kenya has reached a point when it should be relying less on IMF support.

“Countries that have graduated and are beginning to strengthen their balance of payments enter into various types of arrangements (with the IMF) through article four of consultations only like in many medium and developed countries … So as a country that is entering into the medium and developed countries, we should be relying less and less on IMF facilities, especially if you have come of age in our macroeconomic management,” Mr Rotich said.

Genghis Capital also pointed out that there was a possibility of the expiry of the facility having no impact on markets on account of the existing huge foreign exchange reserves, but the intervention by the CBK showed that the initial fears were not baseless. Genghis Capital said that the Treasury could be forced to raise money at high rates in the event that it wanted to tap the international markets to meet the redemption needs of the five-year Eurobond issued in 2014 and expiring in June next year. “This would also dent Treasury’s prospect of tapping the international markets to refinance the Eurobond that is maturing at the tail end of the fiscal year,” said Genghis Capital.

The analysts noted that the yields have risen 105 basis points (bps) to-date on both the 10-year and 30-year Eurobonds issued in the year. “For Eurobond I, yields have risen 144 bps and 177 bps on a year-to-date basis on the five-year and 10-year tenors, respectively,” the analysts said.

Investment analyst Aly-Khan Satchu, who runs Rich Management, said the move was ill-advised, citing countries such as Turkey whose currency is on a free fall after enjoying a benign environment for years.

“I appreciate that we are sitting at a record high in regard to forex reserves. However, if you look around the world today, what was once a benign environment [for emerging and the frontier markets which were surfing a golden wave of practically free dollar liquidity] has become dark, turbulent and violent.

“You are throwing over an insurance policy just when you need it most. So I for one think that the macho talk is poorly advised. Therefore, we should be prudent and not cavalier at this juncture,” said Mr Satchu.