CMA backs local currency bond issuance to hedge against volatility


CMA backs local currency bond issuance to hedge against volatility

In Summary

  • The CMA expects local currency issued government debt to guard against Forex Exchange (FX) volatility as global-volatility risks heighten in 2019.
  • Local currency issued debt is expected to ease Kenya's debt servicing obligations while allowing for market-based assessment of the true value of the local unit-the Kenyan shilling. This to likely end speculation on its over-valuation claims by the IMF.
  • Foreign currency denominated debt-servicing is expected to come under pressure from perverse shocks emanating from the world's leading economies

The Capital Markets Authority (CMA) has backed the adoption of local currency in the issuance of government debt in the international market, this to guard against potential foreign exchange volatility during the repayment of principals and interest.

In a special focus exploring the merits of local currency debt financing, the capital markets’ regulator makes note of the impending danger from a potential uptick or plunge in the global economy as the continent’s foreign issued debt remains largely dollar/euro denominated.

“In an environment of tightening financial conditions, a rising dollar and heightened dollar protectionism, foreign currency denominated debt has a pernicious effect on the debt service burden as interest rates tend to rise,” noted the CMA.

The CMA does however advocate for the case of a retainer on foreign currency issued debt by government, noting the significant number of foreign-currency driven projects especially in public-private-partnerships (PPPs).

“Although there is absolute value in managing Forex exchange (FX) volatility by issuing in local currency, there is a spectrum of domestic projects in energy for instance where revenues are dollar denominated. When you are funding such projects, the risks around foreign currency issuance’s can be managed to some extent,” CMA Chief Executive Officer Paul Muthaura said.

For the CMA, the local currency issued government debt will do more than just shield the economy from potential volatility but also give a market based perception of the performance of the local unit-the Kenyan shilling, shedding light on the currently held notions on its true valuation.

Central Bank of Kenya (CBK) governor Patrick Njoroge has for instance, in the recent past faced off against his former employer- the International Monetary Fund (IMF) for claiming the unit is under the management of the lender of last resort.

“The perception of the stability of the currency will have an effect on uptake but from our perspective, the offshore issuances will create an alternative environment in which the pricing of the shilling-dominated debt in the international market will reflect on market based perceptions rather than from the perceived management,” Mr. Muthaura added.

African states, among them Kenya, are expected to come under pressure in meeting their debt-servicing obligations, this as volatility on the global front heightens.

China and the United States are for instance projected to witness a slow-down in growth in 2019 with the latter being largely tipped to fall into recession.

In the Euro zone, Italy has already sunk into recession after successive quarters of drawbacks in growth. Moreover, Uncertainties around Brexit persist while industrial Germany is expected to witness a retraction in growth across 2019.

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Story By Kepha Muiruri
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