Kenyan companies that rely on foreign loans and imported goods are facing an uphill task as rising finance costs put significant pressure on their profit margins.

Among the firms grappling with these challenges include Kenya Airways, Unga Group, Kenya Power, and Equity Bank as the impact of these rising costs starts taking a toll on their financial performance.

Kenya Power, the state-owned electricity distributor, is currently in the midst of renegotiating its foreign loans amounting to a substantial Sh6 billion. The company has been grappling with financial challenges in recent times, largely due to the unfavourable exchange rate dynamics, which have significantly increased its debt servicing burden.

Managing director Joseph Siror says the firm is in talks with Independent Power Producers (IPPs) to convince them to accept payment in local currency.

Depreciation of shilling

“One of the things we have been doing is to engage with IPPs to see whether they can allow us to pay in local currency,” said Siror.

The depreciation of the Kenyan shilling by 25 per cent this year to trade at Sh150 against the US dollar has further exacerbated their financial woes. In a similar vein, Kenya Airways (KQ), the nation’s flagship carrier, has raised concerns over its financial outlook.

The airline has projected a staggering Sh5.5 billion in losses by the end of the year if the Kenyan shilling depreciates further to Sh151 against the US dollar. “These forex losses are primarily due to revaluation of US dollar-denominated loans,” KQ CEO Allan Kilavula told a Parliamentary committee.

The currency’s decline has already been a major factor behind the airline’s financial woes, with the price of aviation fuel and aircraft maintenance, which are predominantly priced in US dollars, escalating beyond their budgeted limits.

To mitigate these losses, Kenya Airways is considering various measures, including cost-cutting initiatives and hedging strategies to protect against further currency depreciation. It has also raised a red flag urging the government to step in and cushion it.

Meanwhile, Unga Group, a major player in the Kenyan food processing industry, is feeling the squeeze as well. A significant portion of their raw materials, including wheat and maize, is imported, and the weakening shilling has driven up their production costs.

Financial institutions not spared

The company has been forced to pass some of these increased costs onto consumers, potentially affecting their market competitiveness and consumer demand.

The impact of this situation has been compounded by the increasing cost of borrowing, which has limited the firm’s ability to invest in expanding its operations and improving efficiencies. Even financial institutions such as Equity Bank are not immune to the challenges posed by rising finance costs.

While banks are generally seen as beneficiaries of currency depreciation due to foreign exchange trading, they also face the risk of non-performing loans when their corporate clients struggle to service their debts.

Equity Bank and other financial institutions are closely monitoring their loan portfolios to mitigate potential risks associated with clients facing financial stress due to increased finance costs.

Currency stability

The situation facing these Kenyan companies underscores the importance of currency stability and effective risk management. While the government and financial regulators have taken measures to stabilise the currency, including intervention in the foreign exchange market, these challenges persist.

Companies are left with little choice but to explore strategies such as currency hedging and seeking local sources of funding to reduce their reliance on foreign funding.

The depreciation of the Kenyan shilling and the resulting surge in finance costs have put these companies on the defensive.

It remains to be seen how effectively they can adapt and navigate these challenging financial waters in the coming months, and whether the government’s interventions will lead to a more stable economic environment..