Kenya‘s net international assets decreased $ 763 million in the year through September, the largest decrease ever, suggesting local financial institutions liquidated some of their overseas portfolios.
The net external assets (NFA) refer to the total external assets of the banks and the Central Bank of Kenya (CBK) minus the external liabilities of the institutions.
“The net international assets fell from 6.58 billion US dollars at the end of September 2020 to 5.81 billion US dollars at the end of September 2021,” said the Kenyan Statistics Office (KNBS) in its GDP report for the third quarter.
Stable or growing net international assets are likely to increase the relative value of the Kenyan shilling, while the opposite could lead to a depreciation of the local currency.
A stronger shilling helps lower import costs as Kenya supplies a wide range of consumer and capital goods such as petroleum products and industrial machinery. A weaker shilling contributes to inflation, but it can benefit certain actors such as exporters whose goods become cheaper for foreign buyers.
Assets indicate whether a country is a net creditor or a net debtor. Kenya was a debtor country between 1982 and 1992 when, according to the World Bank, its financial institutions owed foreigners more money than they owned overseas.
The most recent drop is the largest drop in assets, rising from a low of $ 262.8 million in 1993 to a high of $ 7.75 billion in the first half of 2021.
The Ministry of Finance has attributed the decline in external assets to a decline in the foreign exchange reserves of the CBK, in addition to a decline in banks’ deposits abroad. The CBK’s foreign exchange reserves are usually issued when the institution intervenes to support the shilling or as the government’s fiscal agent makes payments to foreign lenders.
Kenya’s growing appetite for international borrowing through the issuance of dollar-denominated bonds has increased in recent years, making debt servicing a major contributor to changes in net international assets.
The weakening of the schilling is also likely to erode assets through inflation in financial institutions’ foreign currency debt.
The local currency lost value in February 2020, trading from 100 units to the dollar at 113 units per dollar – a month before the country registered its first case of coronavirus.
The pandemic resulted in a significant weakening of the local currency due to lower exports and widespread disruption to economic activity, including severe restrictions on sectors such as tourism and transport.
The schilling devaluation continued even after the corona-related restrictions were lifted.
However, KNBS reported that Kenya’s real GDP grew 9.9 percent in the third quarter of 2021, compared to a 2.1 percent decline in the same quarter of 2020, driven by a significant recovery in most economic activity.