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Kenyan Currency Declines Following Fitch Warning

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Kenya's Currency Weakens Amid Fitch Warning

Kenya's currency experienced a significant decline, the most in four months, following a warning from Fitch Ratings. The credit rating agency stated that it may downgrade Kenya's credit rating based on the amount of foreign reserves the country uses to settle payments on a $2 billion eurobond due in June. The potential deployment of reserves to redeem the eurobond could reduce import cover and contribute to a downgrade, depending on the extent of the drawdown and the outlook for other external financing sources. Fitch also noted that the government's planned additional external financing is expected to materialize. The Kenyan shilling fell by as much as 1% to reach a record low of 152.80 per dollar. Concerns about the nation's debt burden have centered around the 2024 bond, as Kenya faces elevated energy and food import bills with limited foreign exchange to cover the shortfalls. The country's foreign-exchange reserves have been declining due to rising debt service costs and import bills. While Kenya has been hesitant to refinance the debt in capital markets due to high interest rates, it is considering borrowing from multilateral and bilateral lenders to help repay the eurobond. The government is in talks with various institutions, including the International Monetary Fund, World Bank, and bilateral lenders such as China's Export-Import Bank and China Development Bank. However, Fitch notes that the government's target for foreign financing is ambitious, and the ratings company's baseline assumes around $4 billion of external funding for Kenya.

Implications of Kenya's Weakening Currency on New Businesses

The significant decline in Kenya's currency, following a warning from Fitch Ratings, could have a profound impact on new businesses in the country. The potential downgrade of Kenya's credit rating, based on the use of foreign reserves to settle payments on a $2 billion eurobond due in June, could create a challenging economic environment for startups.

Increased Costs and Limited Resources

As the Kenyan shilling reaches a record low, businesses may face increased costs for imported goods and services, potentially straining their finances. Additionally, the country's declining foreign-exchange reserves could limit access to foreign capital, making it more difficult for new businesses to secure funding.
Navigating a Challenging Economic Environment
In such an environment, new businesses must navigate carefully. The government's ambitious target for foreign financing, coupled with the potential reduction in import cover, could lead to increased economic instability. Businesses may need to explore alternative funding sources or adjust their business models to mitigate potential risks. In conclusion, while the weakening of Kenya's currency presents significant challenges, it also underscores the importance of strategic planning and adaptability for new businesses. By closely monitoring economic trends and being prepared to pivot as necessary, businesses can better navigate these uncertain times.
Story First Published at: https://financialpost.com/pmn/business-pmn/kenya-currency-falls-after-fitch-warning
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