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By Njiraini Muchira

First Published December 26, 2018

 

Kenya is planning to ease the pressure on debt servicing by borrowing in the local currency at the international market.

With all indications that Kenya will maintain its unbridled appetite for accumulating debt, the National Treasury is developing a policy to obtain international credit using local currency.

Currently, Kenya’s public debt stands at $50 billion and is projected to hit $60 billion by 2020 and $70 billion in 2022.

Benefits

Raising funds using the local currency would reduce Kenya’s dependency on foreign currency and the resultant impacts of external shocks and volatilities that often lead to higher debt servicing costs.

Another key benefit would be reduced need for precautionary reserve holdings: Less foreign currency exposure requires lower precautionary reserve holdings and stabilises the reserve amount, which in return reduces the risk of exchange rate fluctuation of the local currency.

Kenya is hoping to benefit from a strategy by the London Stock Exchange (LSE) to develop offshore local currency bond markets that allow emerging markets countries to tap into international investors using local currencies.

The country’s success in issuing bonds using the shilling at the international markets could be a sign for other East African nations to follow, considering they are also grappling with servicing ballooning debt.

The LSE, which has given African countries a platform to mobilise funds for investing in infrastructure projects, says raising funds in international markets in hard currencies to fund projects in the local currency leaves countries vulnerable to currency risk and impacts debt servicing.

This year, Kenya, Nigeria and Egypt have floated sovereign bonds at the LSE, raising a combined $8.5 billion debt that was accumulated mainly in the US dollar.

“One potential problem with raising capital on international markets is the currency exposure. Borrowing in non-local currency to fund projects that are financed and generate returns in the local currency, creates an unwelcome mismatch.

“This can be costly, particularly when currency movements become volatile,” states an LSE report on developing local currency bond markets for Africa.

Interest

The report adds that one solution that has been generating interest from governments of emerging market economies has been the potential to float bonds in their local currencies, both in onshore markets where governments can tap local institutional investors and in offshore markets where they have greater access to a global investor base.

A local currency bond is one that is denominated in a country’s local currency (such as the Kenyan shilling), instead of being issued in hard currency.

It means that an international investor will take on the currency risk instead of the issuer and will have to convert hard currency to the local currency prior to buying and when selling the security.

Kenya, which has been feeling a heavy burden from servicing loans procured in hard currencies wants to be among the first African nations to benefit from the local currency bond markets.

Treasury Cabinet Secretary Henry Rotich said such a strategy would shield the country from recurring international currencies volatility.

“We are working on a policy that enables us to do this,” he said.

According to the Annual Public Debt Management Report 2018, Kenya’s total external debt, which was $24.9 billion as at the end of June 2018, is dominated in the US dollar, the euro, the Chinese yuan, the Japanese Yen and the pound sterling pound at 71.7 per cent, 14.9 per cent, 6.2 per cent, 4.3 per cent and 2.7 per cent respectively.

Other currencies accounted for a mere 0.3 per cent of the portfolio.

High exposure

The exposure to hard currencies led to the International Monetary Fund has raising the red flag on the country’s vulnerability to currency and interest rate risks.

“The foreign exchange risk is high, since 50.9 per cent of the total debt is denominated in foreign currency,” states the debt management report. Continue reading...

Source: The East African

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