Kenyan shilling strengthens after Eurobond issuance

The Kenyan shilling (KES) has strengthened substantially against the US dollar in recent trading sessions, following several years of near-constant declines.

The shilling’s gains on foreign exchange markets follow the issuance of a $1.5bn Eurobond last week, which was met with strong demand from both foreign and domestic investors. Investors and traders expect that these newly raised funds will help to ensure Kenya avoids defaulting on a debt repayment of $2bn that is due in June, removing a major risk from Kenyan markets. As a result of this, the Kenyan shilling has increased in value by more than 15% against the greenback.

Muthoni Mutonyi, a financial professional based in Nairobi and former official at the National Bank of Kenya, explains that “Kenya’s efforts to repay the $2bn bond have triggered a wave of investor confidence, leading to foreign exchange inflows that have bolstered the KES.”

She also points to other factors that have helped strengthened the Kenyan shilling relative to the US dollar, including declines in demand for the greenback.

“Lower oil prices, for example, have reduced the need for dollar-denominated imports, easing pressure on the KES and allowing it to appreciate,” Mutonyi tells African Business.

“The Central Bank of Kenya has also been subtly intervening in the market, contributing to exchange rate stability and potential appreciation.”

A stronger currency would be useful for Kenya, particularly given its large pile of dollar-denominated debt, which was estimated at $38.3bn in September 2023. A stronger shilling would make debt repayments less expensive in shilling terms and thereby ease debt-related financial burdens. Further gains to the shilling would also make imported goods priced in dollars cheaper in local terms, helping to ease inflation and cost of living pressures.

However, Jared Osoro, an economist in Nairobi, suspects that the shilling’s recent rally may not be sustained. He argues that the reaction of foreign exchange markets to the Eurobond issuance is overly optimistic because there remain several risks, even if a debt default is now less likely in the short-term.

“There is nothing materially different in terms of Kenya’s economic fundamentals,” Osoro tells African Business.

“The economy is weak. We have a current account deficit that is closing,  not because we are exporting more, but because we are importing less. This suggests that the only reason for the shilling’s appreciation is because of the market reaction to the Eurobond – part of which is simply going towards retiring the already existing bond.”

Osoro also notes that, while foreign exchange traders appear to have seen the successful Eurobond issuance as a mark of confidence in the Kenyan economy, the true measure of confidence is the yields foreign investors have demanded.

With yields hovering around 10%, it is clearly still expensive for Kenya to access capital markets. This suggests that investors are still cautious about the economic outlook for Nairobi and therefore require elevated yields to compensate them for higher perceived risk levels.

“The yield of the new Eurobond has surpassed 10% – to me, that is not a sign of confidence at all,” Osoro says.

“There appears to have been a huge overreaction on foreign exchange markets. I think the market will have to correct itself at some point.”