Kenya’s $2 Billion airport expansion plan: How it could impact the shilling and FX trading

Kenya recently made a daring move to enhance its aviation industry by announcing a 2 billion USD expansion of the Jomo Kenyatta International Airport (JKIA). The project involves the construction of a new terminal, the redevelopment of the existing cargo facilities, and the construction of the second runway. This proposal will make Kenya one of the leading air transport hubs in Africa. 

Kenya's plan also includes the decision to pursue alternative financing for this project, a move that has been projected to affect the Kenyan shilling, Kenyan bond markets, and FX market dynamics. 

This infrastructure investment promises long-term growth. But what does this mean for the Kenyan shilling (KES), external borrowing, and the forex (FX) trading environment?

The 2 billion USD JKIA expansion project

Kenya is currently seeking financing from global development banks such as the Japan International Cooperation Agency (JICA), China Exim Bank, KfW of Germany, the European Investment Bank, and the African Development Bank to bankroll this expansion project.

According to Transport Minister, Davis Chirchir, the Kenyan Government had “written” to potential financiers, "to basically tell them there's an opportunity to build the airport through the Jomo Kenyatta International Airport, borrowing on its balance sheet.”

This expansion comes several months after Kenya cancelled a 2.5 billion USD deal with India’s Adani Group earlier this year, following the indictment of the founder in the United States. The Adani Group was proposed to invest approximately 1.85 billion USD in Kenya's main airport in exchange for a 30-year lease, and 736 million USD with the energy ministry to construct power lines.[1]

Referring to the previous controversial Adani deal, Chichir noted, saying, “Instead of bringing concessions to build the airport, we build the airport that we can concession later." Kenya is seeking ways to improve JKIA while maintaining its sovereignty and reducing financial dependency. An obvious shift from controversial private partnerships to more traditional development bank funding and Kenya bond options.

In addition to seeking alternative financing, Kenya is also expected to tap into diaspora bonds. The country is targeting Kenyans abroad to raise part of the estimated 300 billion shillings (2B USD), further boosting the Kenya bond market.  [2]    

Effect on the Kenyan shilling and the forex market

After canceling the controversial Adani Group deal, the government has turned to international development banks and securitized bonds, a potential way to strengthen or weaken the currency and attract new forex market participants.

Large-scale infrastructure projects often put pressure on local currencies in the short term due to external borrowing and increased demand for foreign currency.[3] Here is how the expansion could affect the Kenyan shilling and FX:  

Short-term pressure on KESUSD

As Kenya sources loans and Kenyan bond financing in dollars, the demand for USD could temporarily drive the shilling lower. This is because the 2 billion USD project financing is dollar-denominated, so Kenya will need to buy more USD in the FX market. The higher the demand for USD compared to supply, the weaker the KES’ push against the dollar.

Also, if investors perceive Kenya’s debt load as too heavy, it could reduce confidence in the shilling. Traders may start selling KES for USD, causing further depreciation pressure.

Medium-term impact

As soon as the construction process is launched, it is likely to increase trade, investment, and tourism, increasing foreign exchange inflows. This could stabilize the shilling and potentially reverse depreciation. 

Kenya will be able to handle more passengers, airlines, and cargo. More flight capacity means more tourist spending in Kenya, bringing in USD, EUR, and GBP. Improved freight handling also creates more exports and FX inflows. 

Investors and development partners will then begin to feel that Kenya is a more stable country. This trust draws Foreign direct investment (FDI) in aviation, logistics, and hospitality. It also means more portfolio inflows into Kenya bonds and equities. This inflow of foreign currency stabilizes and reduces pressure on the shilling in the medium term. 

Long-term outlook

Considering the long-term impact and with JKIA being a regional aviation hub, Kenya would be able to attract more FDI and aviation revenues, which would put the shilling in a better position in the long term. 

With transport costs reduced and increased efficiency, exporters would enjoy quicker shipping and access to the world markets. 

Over time, this expansion will: 

• Expand export volumes.
• Support a better balance of payments.
• Provide more dollar earnings, which back the shilling.
• Reduce reliance on borrowing.
• Bring in new aviation-related business, such as hospitality and maintenance.

There is also a risk that this project will fail, especially where the cost of borrowing is high and the project performs poorly. Kenya may experience pressure in servicing its debts, and this may weaken the shilling. Once this happens, the FX markets would react negatively if reserves are strained.

The country is already faced with huge debt obligations, with local bond maturities of 495 billion shillings (3.84 billion USD) this year alone. Mostly as a result of an infrastructure construction-driven borrowing stint since 2013.[3]

What traders should do

In light of Kenya's decision, here are steps traders could take: 

• Closely monitor the market.
• Trade with risk management practices. 
• Be patient when trading and set realistic expectations. 
• Look out for further news on financing agreements.
• Track import bill data and CBK’s FX reserves updates.

Conclusion

Kenya’s 2 billion USD airport expansion is more than just an infrastructure project; it is a potential determinant for the Kenyan shilling and FX market. There is a risk of short-term depreciation on the shilling, but in the long run, the economic gains of a larger aviation capacity, trade, and tourism may ultimately pay off in strengthening the currency.

To investors, FX traders, and policy watchers, the months ahead will be an indicator and a testament to whether the country is taking a bold step that will pay off or add to its misery.

One thing is certain: everyone needs to prepare for the shift. One way to do so is by opening a demo account with Exness to practice risk-free in preparation for movements in the Kenyan FX market. 

Visit the Exness blog for further information on the expansion, as well as trading news from other parts of the world.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.