Kenya risks going the way of Ghana Greece and Sri Lanka if its current public debt load is not lessened, ahead of the first Eurobond it issued, which matures in June next year.
According to a Debt Distress report by Nairobi headquartered Faida Investment Bank, Kenya is left with the International Monetary Fund(IMF) as the only rescue out of its debt hole. The report warns that with Kenya now unable to issue a new Eurobond, ostensibly to settle old debt, the country risks plunging into a more serious liquidity and debt crisis in 2024.
At the moment, the country still enjoys some headroom even as the Kenya Shilling maintains its downward spiral against the US Dollar, the depreciation is still sustainable and supported by forex reserves, which are fast depleting and stood at US$ 7.0 billion as of 22 September 2023, which represents 3.8 months of import cover.
At current levels, the foreign exchange reserves have fallen below the statutory reserve threshold of 4.0 months of import cover and this growing mismatch between the demand and the supply of US dollars is disrupting business and fuelling steady the Kenya Shilling depreciation, which has accelerated in 2023.
The Kenya Shilling exchange rate slumped to KSh 147.8 against the dollar on 27th September 2023 which is a 22.0% depreciation year-on-year.
Analysts at Faida Investment Bank noted that this continued weakening of the Kenya Shilling has added to inflationary pressures in line with Kenya’s heavy import dependence and has increased Kenya’s already-high debt-servicing costs.
“It can be argued that the current crunch in foreign reserves is a forewarning of what could happen in 2024 when the Eurobond debt maturities fall due. Interest rates on T-Bills are still high and rising, and this adds to the debt maturity pressure in 2024. Moreover, despite increasing taxes, the government is still not meeting its revenue targets and no cuts in government expenditure have been witnessed so far. This leaves Kenya in a perilous position.” Reads the report in part.
However, the government does have the IMF program as a crutch to assist with inflows and is actively consulting lead arrangers to find solutions and timelines for the upcoming maturity.
The analysts, however, maintain that the practice of taking on debt to pay debt is unsustainable, and going forward, Kenya should devise new strategies centered on debt sustainability with Eurobond 2027 and 2028 maturities coming soon after the June 2024 one.
“The Government has been desperately seeking to cast the 2024 Eurobond maturity shadow to no avail.”
In June this year, the Government announced at the New Global Financing Pact in Paris that Kenya planned to buy back at least 50% of this Eurobond before the end of 2023. However, the National Treasury was fast to pull back from the plan after Moody’s Investors Services said it may treat a planned buyback of some of the country’s debt as a default.
Moody’s vice president and senior credit officer David Rogovic said that redeeming the bonds at a price below the par value would constitute an economic loss to investors. With yields on existing Eurobonds still high (at 18.7 percent on 27 September 2023) and no end in sight to the current US monetary-tightening cycle, the prospects of issuing another Eurobond remain low.
However, should Kenya manage to jump this hurdle and settle the Eurobond, external debt pressures could ease because of increased concessional borrowing and after that a 3-year pause until the next cycle of Eurobond maturities in 2027 and 2028.