Moreover, the bank has reiterated that its foreign exchange reserves of $6.24bn, or 4.4 months of import cover, “are sufficient to provide adequate cushion against temporary shocks”, while the forthcoming Eurobond will provide further support. The monetary authority expects a normalisation of the situation, but has said that it is ready to act in order to dampen volatility levels. Indeed, over the past few weeks, the CBK has intervened in the local money markets on many occasions in an attempt to reduce domestic liquidity levels and supporting the local unit.
Investor confidence has taken a knock following a maturity extension of a $600m syndicated loan that was due to be repaid by the government on May 15. Due to the delays in issuing its maiden Eurobond – which was supposed to finance repayment of the loan – the government decided to extend the maturity of the loan until August 15. Fitch Ratings has indicated that the loan extension “highlights the refinancing risk that some African countries face as they take on increased amounts of non-concessional market debt”. The rating agency added that, while in some circumstances the rescheduling of a bank loan can constitute a default, this is not the case in this instance since “the creditors had proactively offered this option to the authorities as part of a debt and reserves management operation, and it is not the case that without the extension, a missed interest or principal payment would be likely. It will therefore have no impact on Kenya’s sovereign rating”.
If the Eurobond is not issued by August 2014, Kenyan authorities will repay the syndicated loan out of their reserves. Kenya’s Eurobond issuance has been delayed by both market conditions (rising yields) and technical issues. The latter relates to the payment of $16m for deals undertaken in the 1990s that are believed to have been corrupt; a UK court has ruled that the payment must be made, but it first has to be approved by the Kenyan Parliament, which is in recess until June 2. Kenya cannot issue debt on international markets until the payment has been made. The delay in issuance may come at fiscal and reputational costs, which may heighten refinancing risk and increase the borrowing costs of non-concessional debt.
Meanwhile, while seasonal factors have certainly contributed to pressure on the shilling, the negative effect on Kenya’s tourism sector – an important foreign exchange earner – caused by increased terror risk cannot be denied. In response to a spate of bomb attacks in recent weeks, a number of countries have issued travel advisories against Kenya. The travel warnings by the Western governments and the US Embassy’s decision to move staff out of the country are bad news in this sense, even if the bombings themselves are not more concerning than previous attacks. Terror fears have already hit tourism hard, and the danger now is that other sectors that depend on expatriate staff or foreign businesspeople travelling to Kenya will be affected as executives or their human resources departments decide that the country is too dangerous to work in.
From a political perspective, NKC Independent Economists has considered Kenya a ‘low’-risk country since the success of the 2013 elections under the new constitution, and there has been no reason since then to re-examine that rating. Most recent political news from Kenya has been about insecurity resulting from the terror attacks by members or sympathisers of Somalia’s Al-Shabaab, which have killed more than 100 people over the past 18 months. There definitely has been an increase in terrorism since the beginning of the year, and the tourism business (especially in Coast Province) has already suffered, but it is not yet serious enough to threaten overall political stability.
An uptick in perceived political risk stemming from terrorist activities may filter through to shilling weakness as tourism dollar inflows falter. However, pursuant to its goal of maintaining exchange rate stability, the central bank has in recent weeks illustrated its willingness to absorb excess liquidity in the interbank market in support of the local unit, which we expect to cushion the downside risk to the shilling exchange rate. Nonetheless, stemming from our short-term inflation forecast, government borrowing costs may edge higher during the second half of 2014. On the monetary front, upside risks to inflation in the short term include private sector credit growth as well as an increase in food price inflation stemming from tight regional supply and below-average agricultural production.