The Kenya shilling posted its strongest intra-day gain against the US dollar in the last 12 years on Wednesday, reaping from a tide of investor confidence after the government received significant inflows to pay off the $2 billion Eurobond.

The dramatic gain on Wednesday lifted the local unit to its strongest level since November last year while wiping out all the losses this year. This means that the shilling has now appreciated for 11 straight days to trade below Sh153.75 at some commercial banks.

For instance, Equity Bank quoted the dollar on Wednesday at Sh153.75, while KCB had a quote of Sh157.5, the highest among eight banks tracked by the Business Daily. For their part, forex bureaus were selling the dollar at between Sh152 and Sh157.

On Tuesday, the CBK had quoted the local unit at Sh156.7 against the dollar. The record appreciation of the shilling is set to lower import costs in local currency terms as importers are required to part with less for the same volume of goods ordered.

For the government, a stronger shilling will lower debt service costs, with the Treasury equating the movement of the currency by a single unit to impact debt service costs by Sh40 billion.

With the shilling gaining by 3.62 units against the dollar in the past week to Tuesday, Kenya’s debt service costs have been trimmed by Sh144.8 billion in just seven days. Holders and earners in dollars have nevertheless realised paper losses, with $10,000, for instance, falling from Sh1.6 million to Sh1.5 million over the same period, representing paper losses of Sh100,000.

Kenya’s move to buy back part of its Sh313 billion ($2 billion) Eurobond notes maturing in June has settled investor nerves, anchoring the multi-day shilling rally by propping up foreign currency inflows.

Last week, Kenya finally made good on its promise to buy back part of the Sh313 billion Eurobond notes maturing in June 2024 as part of a liability management operation that seeks to reduce the outsized redemption of the country’s inaugural Eurobond.

The country, through lead managers Citi and Standard Bank, concurrently issued a new Eurobond that has since raised Sh235.05 billion ($1.05 billion) and whose proceeds are expected to meet payments from the early Eurobond buyback.

According to analysts, the expected partial buyback whose outcome will be known this Friday has calmed investor nerves. The June maturity had been seen as an Achilles heel to the Kenyan economy and a drag on potential portfolio flows from foreign investors.

Foreign investors have subsequently responded with a reallocation of capital back to the domestic market with the substantive inflows being seen in bids to the February infrastructure bond auction which closed on Wednesday, raising Sh240.9 billion for the exchequer.

“There is a general increase in the supply of dollars which I view as a sentiment-driven phenomenon. This follows the partial Eurobond buyback which ratings agency S&P Global noted as an action in distress,” Standard Investment Bank Senior Research Associate Stellar Swakei told the Business Daily on Wednesday.

Clarity from the early buyback, which largely discounts the chance of distress leading up to June, has been seen as a cushion to the return of interest by large institutional investors in the Kenyan market.

Shilling to USD exchange rate

“What’s happening is there are a lot of institutional investors coming back. This is going to increase the supply of dollars which will beat the demand for the same,” noted an analyst on condition of anonymity.

Last week, the CBK doubled down on its stance that the local currency had overshot the depreciation, hinting it could step in defence of the shilling which it noted had reached equilibrium.

“It’s my view now that the exchange rate has overshot the equilibrium rate and that there could be scope to support the exchange rate going forward,” CBK governor Kamau Thugge noted.

The market, however, lacks consensus as to where the exchange rate equilibrium lies even as analysts hold a bias for further gains for the shilling in the coming days.

“The current market conditions are noisy. It is difficult to tell where the shilling is likely to stabilise, especially if the CBK opts to intervene,” added Ms Swakei.