Kenya is reeling from a fresh crisis of investor confidence after deadly protests forced the government to abandon plans for new taxes, raising doubts about the outlook for its public finances.
Anti-finance bill protests in June morphed into broader anti-government demonstrations by July, leading to a significant retreat by investors from the country.
This week, the Central Bank of Kenya (CBK) launched a tap sale on the FXD1/2023/02 bond, targeting Ksh20 billion but receiving bids worth only Ksh487.5 million. This dismal performance, at just 2.44 per cent of the intended amount, highlights the depth of the crisis.
However, the CBK noted that overall sales this week managed to raise 16.973 per cent of the target.
Compounding the economic woes, the value of foreign currency loans and deposits held in local banks fell by Ksh504.9 billion in the three months ending in March, driven by a strengthening Kenya shilling.
This decline has eased concerns about banks’ exposure to external risks. Deposits in foreign currency plummeted to Ksh1.63 trillion from Ksh1.91 trillion in December 2023, as local currency gains eroded the value of offshore notes in Kenya shilling terms.
Similarly, foreign currency loans decreased to Ksh990.2 billion from Ksh1.21 trillion at the end of 2023.
The decline in foreign currency loans and deposits has provided some relief to banks after the International Monetary Fund (IMF) warned of high exposure.
“The share of FX loans declined somewhat in the third quarter of 2023 but remained higher than a year ago. Currently, an unremunerated cash reserve ratio of 4.25 per cent applies to a bank’s total domestic and FX deposit liabilities and is filled in shilling. There are no additional capital requirements on FX loans or exposure caps on FX loans,” the IMF noted in a January report.
The share of Kenya’s total foreign currency liabilities stood at 34.9 per cent as of September 2023, surpassing the median of 31.6 per cent for emerging and developing economies.
The IMF observed that foreign currency deposits were increasing even after accounting for the depreciation of the exchange rate, indicating a nominal rise in hard currency holdings throughout 2023.
Foreign currency liquidity has improved through 2024 due to reforms and interventions aimed at halting the depreciation of the Kenya shilling, which have encouraged new inflows of hard currency into the economy.
However, the problem gets worse as the cost to insure Kenya’s debt against default has surged to approximately 551 basis points, the highest since February 13, and a sharp increase from around 387 basis points a month ago. This uptick reverses the progress made since Kenya refinanced a Eurobond that had previously raised fears of default.
Kenya’s debt issues have been exacerbated by a period of rapid economic expansion in the early 2000s to finance infrastructure projects, including roads and railways.
