National Treasury Cabinet Secretary Ukur Yatani.
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Without new Eurobonds, Kenya risks loan defaults
What you need to know:
- According to IMF, Kenya is walking on a tight rope. Its debt distress has moved from low to high risk.
About half of Kenya’s public loans are from external creditors.
If Kenya fails to secure the new Eurobond loans of Sh781 billion lined up in the next 18 months, it will be facing a potential default risk, even as its debt to GDP breached the 70 per cent mark for the first time in 2020.
According to the International Monetary Fund (IMF), Kenya is walking on a tight rope. Its debt distress has moved from low to high risk.
For middle-income countries, the recommended debt to GDP ratio has always been 50 per cent, but Kenya is rushing ahead towards the 100 per cent mark, which will put it at par with developed nations, who borrow in their currencies.
“Given the assessment of debt-carrying capacity as medium, the mechanical signal indicates sustained breaches of solvency and liquidity indicators under the baseline scenario – the Present Value (PV) of external debt-to-exports and external debt service-to-exports ratios as well as PV of public debt-to-GDP,” the global lender says in the report released this week.
But Kenya will see its biggest debt default risk in 2024 when one of the Eurobond loans matures.
“The larger breach of liquidity indicators in 2024 under the baseline is mainly attributed to a Eurobond repayment,” the report says.
It says the government is hoping to roll this maturity over, given its record of strong global market access and commitment to fiscal consolidation under the proposed programme.
Borrowing plans
According to the borrowing plan of the National Treasury contained in its submissions to the IMF, some Sh528 billion ($4.8 billion) of government external borrowing will be concessional compared to Sh253 billion ($2.3 billion) in commercial borrowing (Eurobond issuance) for project financing.
In total, the Eurobonds alone will net the country Sh781 billion.
IMF says the borrowing plan allows for another Sh550 billion Eurobond issuing to be used exclusively for debt management operations, which could include a refinancing of the 2024 Eurobond and retiring of relatively expensive syndicated loans.
As it goes for new Eurobonds, Kenya is yet to deal with the ghosts of the 2014 issue.
The Parliamentary Accounts Committee in its latest review says the report on the special audit on Eurobond is yet to be formally tabled in the House and therefore the matter remains unresolved.
“The Committee recommended that the Auditor-General should, within seven days of tabling and adoption of this report, submit to the National Assembly a copy the special audit report on Eurobond,” PAC says.
Kenya’s gross public debt increased from 48.6 per cent of the GDP at end-2015 to an estimated 69 per cent at end-2020, reflecting high deficits, partly driven by past spending on large infrastructure projects, and the Covid-19 global shock in 2020.
About half of Kenya’s public loans are from external creditors.
“External commercial debt decreased in 2020, as authorities prioritised concessional borrowing during the pandemic after several years of reliable access to global financial markets,” the IMF says.
Commercial debt – mainly Eurobonds and syndicated loans – accounted for about 26 per cent of external public debt at end-2020, modestly above its share at end-2015.
Commercial debt
Eurobonds account for 70 per cent of commercial debt – Sh671 billion – while syndicated loans represent 27 per cent or Sh275 billion.
“Officials acknowledged that Kenya remains at high risk of debt distress – overall and external. They committed to limit the use of commercial borrowing to the amounts allowed under the IMF supported programme and observe the IMF debt limits policy,” the report says.
A significant share of financing is expected to come in the form of concessional and semi-concessional borrowing, including from the IMF and other multilaterals this year.
Financing from commercial lenders is estimated at Sh121 billion as part of the plan to limit reliance on external commercial borrowing in the coming years and reduce debt-related vulnerabilities.
Having generally enjoyed strong access to the international capital markets, the government is also considering debt management operations if conditions are favourable.
“Kenya is expected to tap global capital markets to roll over Eurobonds as they mature,” it added.
In rolling over, instead of repaying the principal of a loan when it falls due, a country decides to enter into a new agreement with the lender to give it money to repay the first debt.
Though it is a preferred mode of refinancing debt worldwide, it comes with a roll over risk where the new loan can be at a higher rate.
Kenya went for its first Eurobond in June 2014 where Sh280 billion was borrowed in five and 10-year tranches.
The government went back for another Eurobond in 2018 and netted Sh202 billion in 10 and 30-year tranches.
In 2019, Kenya was back at the international markets where it raised its Sh210 billion in its third Eurobond named “Kachumbari”.
It also repaid other debts and funded unspecified infrastructure projects.
The loan was issued in a dual tranche, one maturing in seven years and the other after 12 years. In total, the country has raised about Sh692 billion in Eurobonds alone, which started maturing last year all the way to 2024.
Support provided by the G20 under the Debt Service Suspension Initiative, requested by Kenya in January 2021, helped reduce servicing by about Sh70.4 billion.
“Fiscal consolidation efforts under the proposed programme would help reduce gross financing needs below the threshold except in 2024, when rollover of the Eurobond upon maturity will increase financing needs to 14.3 per cent of GDP,” the report said.
This comes as Kenya perfects the art of making promises to the IMF in exchange of bailout loans, only to retreat to doing things as it always does until another cycle comes.
A detailed review of the latest commitments given by Nairobi as it sought the Sh257 billion from the Bretton Woods institution shows that the government is making past pledges that it never implemented.
For instance, the National Treasury says in the document that the Auditor-General will publish a report of coronavirus-related expenditure by the end of May for action.
At the height of the Kenya Medical Supplies Authority (Kemsa) scandal last year, President Uhuru Kenyatta directed State agencies to complete their investigations in 21 days and ensure arrests. More than eight months later, the culprits are still walking free.
An earlier forensic spending report for Kemsa covering the March 13-July period was presented to Parliament in September last year.
It found violations of the Procurement and Public Finance Management Acts and inefficiencies. However, that is where it ended.
Kenya also promised to cut down wastage, reduce the wage bill and stop new projects until the others are completed, a permanent feature in every government economic paper.
Also on the list is a pledge to consolidate wealth declaration by public officials.
The intention of wealth declaration was to allow the public to monitor public servants who were becoming overnight millionaires or those who could not explain their sudden source riches.
The National Treasury is again promising to make operational the access to Information Act.
“Enacted in 2016, this piece of legislation is overdue, and next steps to fully implement it – through the enactment of the regulations and introducing proactive disclosure across ministries – are key to enhancing transparency and accountability,” the IMF says in a document explaining what Kenya signed up for in the exchange for the new loan.
“Standards for digitisation and automation of records will also be developed to ensure compliance with minimum access to information requirements.”
The government has again promised to make public procurement information.
The Treasury says it will ensure comprehensive information on tenders, including beneficial ownership information of the awarded entities, is available on the government portal, and that bidders are subject to dissuasive sanctions for non-compliance.
According to the government, work on the State procurement portal is being speeded up and would be complete by April.
This will be complemented by reforms in addition to strengthening procurement in public investment.
Directives by Mr Kenyatta on the same have not been implemented as procurement entities chose the tenders to upload and when.
Some agencies upload theirs several years down the line, making the information stale.
The government is also committing to implement the 2015 Public Procurement and Asset Disposal Act with the 2020 Public Procurement and Asset Disposal Regulations.
The Public Procurement Information Portal was launched in July 2018. Public entities are to publish information on all tenders. The portal has never published beneficial ownership information.
