Investors seek clarity on opaque state dollar deals

Foreign investors are seeking clarity on the state oil import deal and plans to repay the Eurobond which will have a huge impact on Kenya’s currency affecting investments.

Ronak Gadhia, CFA, Director of Frontier Banks for EFG Hermes Research said investors are keen on establishing how Kenya will pay for the oil. Investors note that it may impact dollar reserves in KEnya ahead of a huge Eurobond payment this year.

Kenya signed a State-backed deal with Saudi Aramco, Emirates National Oil Corporation (Enoc) and Abu Dhabi National Oil Corporation Global Trading (Adnoc) in April to buy fuel in credit for up to six months lower demand on forex to stabilize the shilling.

Foreign currency traders cast doubt on the ability of the plan to stem the pressure on the shilling currency. They contest that it merely amounts to a postponement of demand that is now almost maturing.

The government has not given clarity on the deal revealing only they have renegotiated terms on freight and risk premiums. Consequently, investors are jittery that sharp demand for dollars at the end of the period will tip the shilling over.

Very little transparency

“I sense the key issue in the short term is this G to G deal, there is very little transparency on it in terms of how the repayment for that will work and what impact it has on the FX market,” Mr Gadhia said.

“If they can now start making payments for this G-to-G deal without sufficiently dipping into the reserves that they have built up over the last two months with the World Bank loans etc then the Eurobond becomes less of a concern,” he said.

Market perception that the shilling is overpriced has left Kenya struggling in attracting foreign capital. What’s more, dollar shortages are seeing investors struggle repatriating returns.

The government committed to letting the exchange rate float after change of guard at the Central Bank of Kenya. Already, the Kenyan currency has lost ground to an average 141.3 units to the dollar from 123.4 in January 2023.

Kenya will make a huge dollar loan payment amidst high global interest rates. This move might see the country struggle to access international capital markets after Eurobond yields surged last year.

Although Kenya has received syndicated loans from commercial banks, they have remained tight lipped over prices. And with tax collections growing at a slower rate despite hikes, the market is not convinced the country is out of its foreign currency woods yet.

Bear run at the Nairobi bourse

“The secured ($500 million 3-year and 5-year syndicated medium-term loan) facility will be handy in the near term. What needs to be cleared (up) is the opaqueness about our debt situation, and more importantly what steps the government is doing on the tax front,” Reuters quoted a trader.

Foreign investors exit from the domestic market has led to an extended bear run at the NSE. A number of select blue chip counters valuations continue to fall due to low demand. Participation has been declining on the back of a flight to safer assets.

According to the Capital Markets Soundness report for the first quarter, the domestic capital markets registered negative returns with the MSCI Kenya Index declining by 18.73 percent respectively in United States Dollar terms compared to Q4 2022.

Kenya is hiking local rates faster in a bid to attract flows into the economy. The latest five-year paper set a coupon rate of 16.844 percent while short term Treasury Bills trade above 12 percent.

CMA Director, Policy and Market Development Luke Ombara said the domestic debt and equity market remains attractive to investors with a longer-term horizon, as securities at the NSE remain undervalued.

“CMA continues to lead the implementation of a joint industry market deepening and product uptake strategy aimed at rekindling activity in the capital markets, especially by bottom of the pyramid investors. Products targeting the Kenyan Diaspora and Sukuks will also be rolled out in the near future to attract portfolio capital flows into Kenya,” he said.

Read also: Saudi Arabia overtakes UK as Kenya’s second leading dollar source

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