Kenyan shilling recorded its most robust intraday surge against the dollar in the past 12 years

Kenyan shilling recorded its most robust intraday surge against the dollar in the past 12 years

Kenyan shilling recorded its most robust intraday surge against the dollar in the past 12 years

On Wednesday, the Kenyan shilling recorded its most robust intraday surge against the US dollar in the past 12 years, benefitting from a surge in investor confidence following significant inflows to settle the $2 billion Eurobond by the government.

This remarkable surge propelled the local currency to its highest level since November of the previous year, erasing all losses incurred in the current year. Notably, the shilling has experienced an uninterrupted appreciation for 11 consecutive days, trading below Ksh153.75 at select commercial banks.

For instance, Equity Bank quoted the dollar at Ksh153.75 on Wednesday, while KCB posted a rate of Ksh157.5, the highest among eight banks monitored by the Business Daily. Concurrently, forex bureaus were selling the dollar at prices ranging from Ksh152 to Ksh157.

In contrast, the Central Bank of Kenya (CBK) had quoted the local unit at Ksh156.7 against the dollar just a day prior. The substantial appreciation of the shilling is expected to reduce import costs in local currency terms, benefiting importers by requiring less expenditure for the same volume of ordered goods.

A stronger shilling holds additional advantages for the government, as it will lead to lower debt service costs. The Treasury estimates that a one-unit movement in the currency can impact debt service costs by Ksh40 billion.

With the shilling gaining 3.62 units against the dollar in the past week until Tuesday, Kenya’s debt service costs have decreased by Ksh144.8 billion ($965.3 million) within just seven days. However, holders and earners in dollars have experienced paper losses, with, for example, $10,000 decreasing from Ksh1.6 million to Ksh1.5 million over the same period, reflecting paper losses of Ksh100,000.

Kenya’s strategic move to repurchase a portion of its maturing Ksh313 billion ($2 billion) Eurobond notes, due in June, has restored investor confidence, fueling the multi-day rally of the shilling through increased foreign currency inflows.

In line with its commitment, Kenya successfully repurchased a portion of the Ksh313 billion Eurobond notes maturing in June 2024. This operation, part of a liability management strategy to reduce the outsized redemption of the country’s inaugural Eurobond, was facilitated by lead managers Citi and Standard Bank. Simultaneously, Kenya issued a new Eurobond, raising Ksh235.05 billion ($1.05 billion), with the proceeds expected to cover payments from the early Eurobond.

Analysts suggest that the anticipated outcome of the partial buyback, to be revealed on Friday, has assuaged investor concerns. The June maturity had been viewed as a vulnerability for the Kenyan economy and a deterrent to potential portfolio flows from foreign investors.

Responding to the positive developments, foreign investors have reallocated capital back to the domestic market, notably contributing to the substantial inflows observed in bids for the February infrastructure bond auction, which concluded on Wednesday, raising Ksh240.9 billion for the national treasury.

“There is a general increase in the supply of dollars, which I view as a sentiment-driven phenomenon. This follows the partial Eurobond buyback, which ratings agency S&P Global noted as an action in distress,” commented Stellar Swakei, Senior Research Associate at Standard Investment Bank.

The clarity provided by the early buyback, minimizing the likelihood of distress leading up to June, has been perceived as a catalyst for the return of interest by large institutional investors in the Kenyan market.

Despite the Central Bank’s assertion that the local currency has overshot depreciation and could be defended, the market lacks consensus on the exchange rate equilibrium. Analysts, however, maintain a bias for further gains for the shilling in the coming days.

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