Kenya’s currency weakens by most in months after Fitch warning
After recently hitting a record low of Ksh150 to the US dollar, Kenya's currency experienced its most significant depreciation in four months following Fitch Ratings' announcement that it might lower the country's credit rating. This potential downgrade hinges on the proportion of foreign reserves allocated to meet obligations related to a $2 billion Eurobond maturing in June.
Fitch expressed its concern in a statement released on Tuesday, stating, "Utilizing reserves for the redemption of the Eurobond could diminish import cover, potentially contributing to a credit rating downgrade for Kenya, depending on the extent of the reserve drawdown and the outlook for other external financing sources."
Nevertheless, Fitch remains optimistic that some of the government's planned additional external financing will materialize, which could mitigate this risk.
The recent movements in the exchange rate can be attributed to the strengthening of the US dollar, driven by the ongoing crisis in the Middle East, which has led investors to seek safe-haven assets. This trend is further bolstered by the high US treasury yields. Kenya faces a set of economic challenges exacerbated by its substantial debt burden, which had ballooned to over Ksh10.1 trillion shillings (around $67 billion) by the end of June, accounting for about two-thirds of the country's GDP. Servicing this debt, much of which is owed to China, has become more expensive as Kenya's currency has depreciated. Adding to these challenges, the government is also confronted with the maturity of a $2 billion Eurobond in the coming June. Furthermore, Kenya's economic growth has slowed down, dropping from 7.6% in 2021 to 4.8% in the past year. This deceleration can be attributed to global repercussions stemming from Russia's invasion of Ukraine and a severe regional drought that significantly impacted the crucial agriculture sector.