G2G Oil deal was a great idea but it also demonstrates why CEOs need CROs (Chief Risk Officers). The idea should have been stress tested for worst-case scenarios which unfortunately may be unfolding before our eyes. Worst Case Scenario ——————————— Let us consider an increasing USD / KES. Because the product (Oil) is being bought on credit in USD, this creates something called an Mismatch Risk. Everytime the Oil marketer gets the product on credit, someone immediately starts making a loss due to the USD / KES devaluation. In fact, assuming a monthly consignment of $500m worth of product and a 25% annual currency devaluation, the someone, I am guessing Oil marketers, starts losing KES 25m every day as long as the the product remains unpaid in USD. If you take three months of unpaid product that is KES 75m a day. Unfortunately this is not the worst case scenario, you need some risk imagination for that:- - The buyer balance sheet thins out, leading to default. [EPRA unable to pass FX losses to consumer]. - Bank issuing Letters of Credit pays the liability to the Single Obligor. Last time I checked liability was material - half a trillion shillings. Counterparty guaranteeing this, GoK, says they are broke. Pending bills are already 1.5x this value. - Liability is too high for the Bank meaning shareholder fund wipeout + Bail In (Bank uses Deposits, Your Money in the Bank, to pay the LC) - Large Banks affected first meaning Contagion Risks and Bank Runs - etc…… Netflix movie…. Current Observations ———————————- - Market Capitalizations of Banks falling due to Selling Posture (investors don’t want the stock, why?). In other words, Shareholders might not want their wealth caught up in this. - General appetite for Cash conversion : KES / USD (take advantage of FX upside which unfortunately creating a vicious cycle for the oil deal - more fx risks) - Taxman oil revenues are already dropping meaning lower sales. In other words, as the consumer is increasingly becoming unable to pay the fx devaluation cost, at this point, the default risk starts to crystallize. My Thoughts ———————- Inadvertently, the #GoK has entered into a derivative contract which Warren Buffet called “Weapons of Mass Destruction” and these contracts cannot be managed by Civil Servants - KQ problems started here. The risk of worst case scenario may by 1% but that is 1% too high, this need to unwound - ASAP. #derivatives #insurance #kenbright #economy #africa