Kenyan firms with US dollar-denominated loans, as well as imported raw materials, have seen a sharp rise in their finance costs, eroding their profit margins and investments, as the Kenya Shilling exchange rate against the greenback continues on its downward spiral.
According to the latest Central Bank of Kenya (CBK) Weekly statistical bulletin, the Kenya Shilling exchanged at KSh 147.94 per US dollar on September 28, compared to KSh 147.26 per US dollar on September 21. When the forex markets opened this Monday, 2nd October 2023, the local unit had depreciated further to KSh 148.20 against the US Dollar.
On the list of Kenyan companies that have been worst hit by a rapidly depreciating Kenya Shilling exchange rate against the US Dollar and other hard world currencies include Old Mutual East Africa Group which recently published financial results showing that its finance costs increased from KSh937 million in 2022 to KSh1.8 billion in 2023, an increase of 96%In its financial results, Kenyan-based Old Mutual said it faced the significant challenge of a substantial rise in finance costs on borrowings which were up due to increased interest rates and forex losses on the portion of the US dollar-denominated debt as a result of a weakening Kenya Shilling.
Nation Media Group (NMG) Kenyan regional media powerhouse posted a significant decline in Net Earnings to KSh 2.9 Million at the end of the half-year period ended 30th June 2023. This is compared to net profit of KSh 247.8 Million in H1 2022. The NMG Board attributes the Group’s decline in profitability to the drastic rise in the cost of imported raw materials, particularly newsprint, and the depreciation of the Kenya Shilling against the US Dollar. NMG Group said the resultant incremental direct costs of KSh 179 million were absorbed by the Group.
Kenya Airways, a perennial loss-maker, on its part, blamed the huge pre-tax loss in HY 2023 partly to among others a huge KSh 17 billion forex losses. According to Allan Kilavuka, KQ Group Managing Director and CEO, the devaluation of the Kenya Shilling against major currencies is one of the concerns that continue to hold back KQ.
“We are working to resolve the issue of the legacy debt in collaboration with our stakeholders and the Kenyan Government. The debt is worsened by the 14% devaluation of the Kenyan Shilling against the US Dollar since January, which we have had to book as foreign exchange losses. The devaluation of the Kenya Shilling has a significant negative impact on our financials as a majority of our transactions are carried out in the major foreign currencies. This has, in turn, an impact on our overhead costs, which have increased by 22%.” said Kilavuka.
Unga group, the only listed miller at the Nairobi Securities Exchange disclosed that its finance costs nearly tripled from KSh 267 million to KSh 784 million at the end of the 2023 financial year.
Car & General, a listed auto dealer had its dollar borrowing rate increase to 9.5% in 2022, up from 6.22% in 2021.
Equity Group, one of the most profitable banks in Kenya and a big regional player, had its dollar borrowing costs increase from KSh570 million in 2021 to KSh814 million in 2022, severely hurting its profit margins.
According to analysts, the foreign exchange reserves at the Central Bank of Kenya(CBK) are rapidly depleting to below the statutory reserve threshold of 4.0 months of import cover and this growing mismatch between the demand and the supply of US dollars is disrupting business and fuelling steady shilling depreciation, which has accelerated in 2023.
The exchange rate slumped to KSh 147.8 against the dollar on 27 September 2023 which is a 22.0% depreciation year on-year. This continued weakening of the shilling has added to inflationary pressures in line with Kenya’s heavy import dependence and has increased Kenya’s already-high debt-servicing costs.