Oil dollar swap deals pile pressure on shilling

A large batch of dollar-denominated loans sourced from banks by oil marketers last year have fallen due, piling pressure on the shilling in spite of the government-backed deal to import fuel on credit.

Bank executives told the Business Daily that oil dealers were currently settling their loan obligations made last year amid forex shortages, keeping the dollar demand high within the oil industry and eating into the gains of the fuel importation deal.

In transactions known as currency swaps, the oil marketers exchanged Kenya shillings for equivalent amounts of dollars with local lenders.

Read: Vivo takes dollar loans amid forex shortage

The parties essentially loaned each other money on an agreement to repay the amounts at a specified date and exchange rate.

At the end of the agreement, they will swap again at either the original exchange rate or another pre-agreed rate, closing out the deal.

“The oil dealers have swaps that need to be settled. Remember they took lots of them last year because of the availability hitches. We see that a significant amount is being used to pay these swaps,” a top bank executive said.

Oil firms ramped up material foreign exchange (US dollar) borrowings and currency swaps last year, highlighting the adverse impact of the dollar shortage that was straining their ability to pay for fuel imports.

Kenya started a government-backed importation of fuel on credit with the United Arab Emirates and Saudi Arabia in a bid to reduce the monthly demand for dollars and tame the runaway depreciation of the shilling.

Currency swaps

But while the deal has eased the hurdles in accessing dollars, the shilling has remained on the drop against the dollar, albeit at a slower rate, and closed trading at 146.7 units against the dollar on Wednesday, compared to 135.33 units in April.

In the four months to April before the start of the deal, the shilling depreciated at an average rate of two percent per month but this dropped to 1.6 percent in the first four months since the start of the importation cycle.

Oil marketers turned to cross-currency swaps to shield themselves against future depreciation against the dollar as the economy struggled with a shortage of the greenback that threatened the ability to pay for imports.

Vivo Energy, TotalEnergies Marketing, and Rubis— the top three oil firms in Kenya— had in their annual reports for the year ended December disclosed that forex shortages posed a significant risk to their local operations.

“Due to the liquidity constraints in Kenya during the year, Vivo Energy Kenya Ltd had to enter into material foreign exchange (USD) borrowings and swaps that remain outstanding at year-end,” Vivo Energy disclosed in its annual report in March.

Vivo Energy added the borrowings included a $603 million bridge loan contracted in October last year and additional bank borrowings of $233 million taken up during the year.

“The group’s exposure is mainly concentrated on the Ringardas (Nigeria), Rubis Energy Kenya, and Dinasa (Haiti) subsidiaries due to difficulties in sourcing USD,” Rubis said in its annual report.

State officials have remained bullish over the impact of the deal even as the shilling plunged to fresh lows against the dollar, making imports costlier.

The State had hailed credit fuel as key in propping up the shilling and restoring the interbank rate that had since last year been heavily distorted amid price speculation on the dollar shortage.

Kenya signed the deal with the United Arab Emirates and Saudi Arabia governments for the supply of fuel on a 180-day credit period in a deal that will lapse in December.

Saudi Aramco, Emirates National Oil Corporation (Enoc), and the Abu Dhabi National Oil Corporation Global Trading (Adnoc) picked Oryx Energies, Galana Oil, and Gulf Energy to supply Kenya with the fuel.

Read: Dollar shortage hits operations of Kenya-based oil marketers

Biggest winners

The State will make a decision on whether to extend the deal but at renegotiated terms from January next year even as opinion remains split on whether the arrangement has had the intended impact.

Oil firms have emerged as the biggest winners in this deal with other importers holding that they are easily getting dollars but adding that more needs to be done to save the shilling from the continued drop.

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