Shilling hit on CBK’s Sh40 billion dollar buy plan

The Central Bank of Kenya (CBK) is seeking to buy Sh40.5 billion ($400 million) from banks between this month and June to increase dollar reserves amid rising uncertainties in the global market over the coronavirus outbreak.

The bank has bought dollars in the past through open market operations, but it does not usually disclose the target amount or any other details.

CBK on Tuesday said shifts across the globe, including a significant drop in oil prices that eased pressure on Kenya’s imports, have opened a window for a more formal dollar purchase, arguing that it will purchase a minimum $1 million (Sh100 million) from banks at prevailing rates in each deal.

The CBK announcement saw the shilling weaken by Sh1 a day or the biggest margin in a single session of trading against the dollar since August 2015.

The shilling closed trading at Sh102.36 per dollar- the lowest level in three months- compared with Monday’s trading of Sh101.35.

“This would bolster CBK’s preparedness to deal with the heightened global volatility and uncertainties,” said CBK director for financial markets department William Nyagaka in a circular on the dollar purchases.

“CBK sees an opportunity given the development unfolding in the global markets and economy.” The CBK move comes amid warnings from the Organisation for Economic Co-operation and Development (OECD) that the global economy could grow at its slowest rate since 2009 this year due to the coronavirus outbreak, which has killed over 3,000 people and infected more than 89,000.

A slowing global economy could hurt the flow of dollars into Kenya from reduced remittances and tourists as well as cut demand for Kenyan exports

The banking sector regulator, however, did not mention effects of coronavirus on Kenya.

CBK is turning to banks days after its data showed that usable foreign exchange reserves had dipped to a 41-week low of $8.409 billion (Sh849.3 billion) last week. This is equivalent to 5.11 months’ worth of import cover, well above the required four months. The drop reflected an interest payment to the holders of the outstanding sovereign bonds, market participants told Reuters.

Mr Nyagaka said CBK would buy the dollars at prevailing market rates and at its own discretion while ensuring that the purchases do not introduce instabilities in the foreign exchange market.

Traders said the move by the CBK could have partly been driven by the government’s growing need for dollars to pay interest on the country’s outstanding dollar bonds.

“Looking at the issued Eurobonds, it constitutes about two thirds of current forex reserves. Going forward, reserves adequacy will be quite constrained and they are getting a way to solve this now given our exports are muted and not a key contributor to reserves,” said an analyst who requested anonymity. Kenya has so far issued three Eurobonds distributed in values of Sh275 billion ($2.75 billion), Sh200 billion ($2 billion) and Sh210 billion ($2.1 billion) – which will all require dollars to service.

The $2 billion Eurobond was issued on February 28, 2018 in two equal $1 billion tranches of 10-year at a coupon of 7.25 percent and 30-year at a coupon of 8.25 percent. The interest is payable semi-annually on February 28 and August 28.

On an annual basis, Kenyan taxpayers fork out Sh7.32 billion ($72.5 million) for the 10-year and Sh8.33 billion ($82.5 million) for the 30-year papers in interest payments.

The payments were due at the end of last week amounting to Sh7.82 billion ($77.5 billion), with a similar amount due to be paid at the end of August

Director at Callstreet Investor Relations George Bodo said in an interview that CBK was also signalling that the market has sufficient dollars to buy from without causing turbulence on demand side.

“Picking dollars from the market indicates that the forex market is very stable. CBK also has dollar needs and would want to take advantage of stability window to pile up reserves,” said Mr Bodo.