Depreciation of the shilling and slow economic growth will pose the biggest risk to sustainability of Kenya’s rising debt, economists have cautioned, as taxpayers stare at record high repayments this financial year ending June 2019.
Analysts at Capital Economics, a London-based macroeconomic research firm, argue the country should sustain an annual growth of between five and six percent and iron out any volatility in the shilling against the US dollar to avert an external debt crisis in the foreseeable future.
“Kenya should continue to be able to service its debt. However, the risks are weighted to the downside,” the consultancy said via email.
“Indeed, a fall in the currency would increase debt servicing costs while a domestic shock (such as a drought) could cause growth to fall sharply. In these situations the debt position would become a big problem relatively quickly.”
Increased procurement of costly external commercial loans in recent years has raised Kenya’s refinancing risks, prompting firms such the International Monetary Fund (IMF) to raise the country’s risk of defaulting on loans to moderate from low.
Foreign commercial loans have been rising steadily since June 2014 when Kenya first accessed international (Eurobond) markets, borrowing a cumulative $2.75 billion (Sh282.07 billion) in two portions of five and 10 years and a tap sale in December that year.
Commercial portion of Kenya’s external debt has, for example, doubled to Sh898.35 billion as at September 2018, the latest statistics from the National Treasury shows, from nearly Sh452.50 billion in September 2016.
The rise in the costly foreign commercial loans, largely driven by syndicated loans and the $2 billion Eurobond the Treasury contracted on February 22 this year, has pushed external debt share to 34.48 per cent from 24.40 per cent two years ago.
That is higher than the portion of largely concessional multilateral debt which constituted 33.69 per cent of the external debt at the end of September compared with 45.29 per cent two years ago.
“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers,” the IMF said on October 23 when it raised Kenya’s debt distress risk.
Nearly Sh870.62 billion is set to be paid to creditors in form of interest and principal debt sums this financial year ending June 2019, Treasury statistics show, more than half the Sh1.69 trillion in projected tax receipts.
That comprises Sh505.96 billion in domestic obligations and Sh364.66 billion to foreign creditors.
About 52.03 of the Sh5 trillion total government debt portfolio (external debt) was exposed to exchange rate risk in September 2018, slightly up from 50 per cent two years earlier.
Huge payments to creditors abroad may pile up pressure on the shilling if the country’s top foreign exchange earners such as agricultural exports, tourist receipts and remittances from Kenyan immigrants underperform.
This will be a concern to the Central Bank of Kenya (CBK) which is charged with maintaining price stability, including the value of the shilling.
The CBK said in the quarterly Economic Review for the period ended June, published on November 26, that the ratio of external debt service to revenue and exports, which are used to gauge the level of indebtedness, were nearing a worrying territory.
Some of the major external debt repayments due between July 2018 and June 2019 include the debut Eurobond, whose first five-year tranche will be maturing, at Sh98.15 billion, Citi Bank syndicated loan (Sh86.64 billion) and Trade Development Bank (Sh50.29 billion), the Treasury data shows.
Others are the SGR financier Export-Import (Exim) Bank of China (Sh31.08 billion), World Bank’s IDA (Sh20.90 billion), second Eurobond floated last February (Sh15.51 billion), France (Sh9.08 billion), Japan (Sh6.13 billion) and China Development Bank (Sh5.18 billion).
Repayments to the Asian Development Bank/Asian Development Fund (ADB/ADF) will amount to Sh4.46 billion, while Italy, Germany, Belgium, Spain and Saudi Fund will get Sh3.43 billion, Sh2.67 billion, Sh2.37 billion, Sh1.94 billion and Sh1.60 billion, respectively.
“Almost all the increase in public external debt has come from commercial lenders, who demand higher interest rates than multilateral and bilateral lenders,” Capital Economics researchers said in a note on November 5.
“This shift towards borrowing from external commercial creditors is a key reason why Kenya’s, and other African nations’, debt positions looks increasingly fragile.”
President Uhuru Kenyatta’s administration has been contracting short-term debt since September 2014 to build infrastructure.
“The emerging concern is that the government’s appetite for borrowing seems unlikely to wane any time soon and this could eventually push debt towards unsustainable levels,” said the Budget Office, a professional unit within the National Assembly which advises legislators on financial, budgetary and economic matters, in a report last August.
Indeed, Sh298.9 billion, or 53.11 per cent, of the Sh562.75 billion that the Treasury plans to borrow this financial year to fill the hole in the budget will be commercial. The Treasury has indicated it was likely to borrow much of this amount through sale of Eurobond which it sees as the cheapest option.
“The international interest rates are going up, but they are still lower than in our part of the world,” Dr Geoffrey Mwau, the director-general for budget, fiscal and economic affairs.