Business Daily (Nairobi)
James Makau
23 April 2008
The Kenya shilling could strengthen further against the dollar following the closure of the Safaricom initial public offering, buoyed by the delivery versus payment (DVP) system for large and foreign investors.
There had been concerns that should foreign investors fail to get their full allocations, the dollar inflows would be quickly withdrawn from the economy after the IPO window closed. This would have caused the shilling to slide against the greenback.
The local currency is set to strengthen further due to the DVP method that allows large investors to pay after they get their allotted shares in the IPO and the trickling in of capital inflows as normalcy returns to the country,
"The strength of the shilling after the Safaricom IPO is likely to be the operation of the DVP system. There might not be a need for repurchasing of US dollars in the event of an under allocation," says Chris Muiga, a dealer at KCB. He said those who did not have access to the DVP option had opted for hedging products.
That removes any IPO-related shocks from influencing the shilling until May 30 when announcement of allocation results is expected. Domestic and international investors making payments on the strength of guarantees should pay for their allocations two days later on June 2.
Allotments to CDS accounts and electronic credit is scheduled for two days later in readiness for the Safaricom shares which start trading at the NSE on June 9. On the same day, electronic refunds and refund cheques will be issued by the receiving banks.
Last year, Kenya Re IPO made history of sorts when the transaction team implemented the Delivery Versus Payment (DVP) method allowing Institutional Investors (QII) and insurance companies to hold off payment until the share allocation had been completed.
The Government is selling a 25 percent stake in Safaricom, the country's largest mobile telephony company and most profitable firm, to raise over Sh50 billion . Analysts expect the offer to be overwhelmingly subscribed and dollar inflows by foreign investors are expected to boost the local currency.
The Kenya shilling strengthened marginally against the dollar on Tuesday, with traders saying the local currency was bound to strengthen toward the 61 level on sentiment created by the ongoing share offer.
By midmorning trading, commercial banks posted the unit at 61.45/55 compared with 61.50/60 at the close of trade on Monday.
"There was a bit of demand below 61.50," said Bethuel Karanja, a senior dealer with I&M Bank, adding that the unit had traded at 61.25/35 earlier. "We are still looking at a stronger shilling. We expect 60.50."
Despite external shocks arising from high oil and raw material prices in the international market, the shilling has continued to hold its own against the dollar on expectations of huge inflows from Safaricom flotation and aid related spending.
The weak dollar and the Central Bank selling its foreign exchange reserves as a check against inflation have also helped to push the shilling from a four year low of about Sh73 in January to the record range prevailing today.
The Government has set aside 35 percent of the 10 billion shares to be floated for foreigners. The safaricom IPO has attracted inflows primarily from regional East African residents and Kenyans in diaspora.
Traders say that the principle driver of any financial market is sentiment, the Kenya Shilling- is no exception. This notwithstanding the local market is now being driven by both actual flows and positive sentiment.
Actual dollar inflows have largely come from the resumption of the Coffee and Tea auctions which are enjoying favourable prices in the world commodity markets. Earlier in the year, the coffee and tea auctions which are usually a source of dollar inflows into the country had been disrupted by to the political unrest in the country.
"Sentiment on the shilling has been fairly bullish because of the IPO," said Jeremiah Kendagor, head of forex trading at the Kenya Commercial Bank. "The shilling will be looking to test 61 flat in a week's time."
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