The Effect of Foreign Exchange Rate Fluctuation on the Financial Risk Profile of the Government of Kenya

Abstract

The purpose of this study is to determine the effect of exchange rate fluctuation on the financial risk profile of the government of Kenya. The study was guided by different theoretical literature which included fiscal theory of sovereign risk and default, the theory of sovereign debt and default, the theory of sovereign default risk assessment from the bottom-up and micro-macro relationships. The methodology was both descriptive and inferential. Secondary data was used and was obtained from the debt department of the National Treasury, Central Bank of Kenya and Kenya National Bureau of Statistics. The data was analyzed using Statistical Package for Social Science (SPSS V. 21). Descriptive statistics was presented in mean and standard deviation while inferential statistics was presented using multicolinerality. The findings of the study on different currency on the effect of the exchange rate fluctuation and risk profile indicated that there are some currency that are volatile than others. They include the EUR and USD currencies. There exists a relationship between the variables that is exchange rate fluctuation, interest rate and principal amount issued (0.01) and there exist no relationship between the amount repaid in the Kenya shillings and foreign exchange rate at 0.07. The study recommends that the exchange rate fluctuation faced by the government of Kenya forms a significant component of the risk profile. It is therefore imperative for the state of Kenya with and without international operations to effectively manage its foreign exchange fluctuation.