Against the backdrop of persistent forex scarcity, businesses and individuals with dollar-denominated loans are grappling with a mounting crisis. Unable to access US dollars, borrowers in sectors such as real estate, transport, communication, and construction are resorting to repaying their debts in local currency, a move that is technically defaulting and contributing to the surge in non-performing loans (NPLs).
According to Treasury disclosures to the International Monetary Fund (IMF), these sectors, particularly vulnerable due to their limited dollar-earning avenues, have become the epicenter of the crisis. Exporters, with a natural hedge, are not facing the same challenges.
Central Bank of Kenya data paints a grim picture, revealing gross NPLs of Sh615.54 billion at the end of September, marking three consecutive months of escalating defaults. The NPL ratio, standing at 15%, mirrors the troubling scenario of June 2007 at 15.4%. This trend persisted, reaching 15.3% in October, underscoring the ongoing challenges with loan defaults.
Banks, expressing their concerns to the IMF, cite exposure to interest rate and FX risks stemming from rising interest rates and exchange rate depreciation pressures. The complexity of the situation is acknowledged by the IMF, emphasizing that the oil supply deal signed with three State-owned Gulf companies last year has failed to alleviate the pressure on the FX market.
The Treasury has communicated its intention to exit the oil import arrangement, recognizing the distortions it has introduced to the FX market. Despite these efforts, the struggle to access US dollars persists. Recent data shows Kenya’s share of FX liabilities at 34.9% at the end of the third quarter of the previous year, surpassing the median of 31.6% for emerging and developing economies.
Stakeholders are closely monitoring for potential interventions to stabilize the FX market and address the root causes behind the rising tide of dollar loan defaults. The situation calls for strategic measures to restore confidence in the financial system, navigating the complexities of the current economic landscape.
By: Montel Kamau
Serrari Financial Analyst
24th January, 2024
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