Kenya’s currency weakened by the most in four months after Fitch Ratings said it may downgrade the nation’s credit rating depending on the portion of foreign reserves it uses to settle payments on a $2 billion eurobond due in June.
“Deploying reserves to redeem the eurobond would reduce import cover, which could still contribute to a downgrade of Kenya’s rating depending on the extent of the drawdown and outlook for other sources of external financing,” Fitch said in a statement published Tuesday. “However, we believe some of the government’s planned additional external financing will also materialize.”
Fitch in July revised the outlook on the country’s debt to negative while affirming its credit rating at B, or highly speculative.
The shilling fell as much as 1% to trade at a record low of 152.80 per dollar on Wednesday. The yield on Kenya’s 2024 debt fell 14 basis points to 14.98% by 1:11 p.m. in Nairobi, after jumping 55 basis points yesterday.
The 2024 bond has been a focal point for investors worrying about the nation’s debt burden as it faces elevated energy and food import bills, with limited foreign exchange to fund the shortfalls.
Foreign-exchange reserves have been dwindling because of raising debt service costs and import bills. At $6.8 billion, they are sufficient to pay for 3.7 months of imports.
The East African nation has been reluctant to consider refinancing the debt in capital markets because of high interest rates. In an interview with Bloomberg last month, Treasury Secretary Njuguna Ndung’u said Kenya is weighing borrowing from multilateral and bilateral lenders to help repay the eurobond.
It is in talks for more funding with the International Monetary Fund, World Bank, Trade and Development Bank, and African Export-Import Bank, along with bilateral lenders such as those in China, including the Export-Import Bank of China and the China Development Bank, which are the primary holders of Chinese loans to the country.
The government’s target to secure 1 trillion shillings ($6.6 billion), or 6.3% of gross domestic product, in foreign financing, including 467 billion shillings in commercial financing, is ambitious, Fitch said. The ratings company’s baseline assumes Kenya will get around $4 billion of external funding, it said.
Source:norvanreports