East Africa will struggle to pay off international debt post-2020

Thursday October 11 2018

Kenya, Rwanda and Tanzania are among 14 sub-Saharan countries that will struggle to pay their loans post 2021, owing to rising currency risk.

According to the World Bank Pulse report released last week Wednesday, these three regional economies, which have debt maturities starting in 2020, are currently facing rising currency risk that could jeopardise their loan repayments.

“Large Eurobond repayments from 2021 could pose significant refinancing risks in the region. Sharper than anticipated currency declines could make the servicing of foreign currency denominated debt, already a rising concern in the region, more challenging,” the Bank said, adding that financial market pressures have intensified in some emerging markets and concern about their dollar-denominated debt has risen as the dollar strengthens.

The latest data from Bloomberg shows that Kenya will have its first Eurobond repayment obligations next year, with its second one coming in 2021. Nairobi is also expected to pay $4 billion in the second tranche of the first Eurobond issue in 2024.


Rwanda, which issued its $400 million bond in 2013 will have its debts repayment obligations due in May 2023, while Tanzania will have its turn in March 2020, on the $600 million seven-year private placement obligations that it issued in 2013.


Albert Zeufack, the World Bank’s chief economist for Africa, said policymakers in the region must equip themselves to manage new risks arising from changes in the composition of capital flows and debt.

“To accelerate and sustain an inclusive growth momentum, policy makers must continue to focus on investments that foster human capital, reduce resource misallocation and boost productivity,” Mr Zeufack said.

According to the report, the region's public debt continues to rise in some countries, and rising interest rates associated with the changing composition of debt may put the region’s public debt sustainability further at risk.

“Other domestic risks include fiscal slippage, conflicts, and weather shocks. Consequently, policies and reforms are needed that can strengthen resilience to risks and raise medium-term potential growth Reforms should include policies that encourage investments in non-resource sectors, generate jobs and improve the efficiency of firms and workers,” Cesar Calderon, the lead author of the report said.

The World Bank says a faster than expected normalisation of monetary policy in the US could result in sharp reductions in capital inflows, higher financing costs, and rapid exchange rate depreciations, especially in countries with weaker fundamentals or higher political risks.

Of oil prices policy

“We need to see governments in the region stop wasting funds and instead boost productivity to support the region’s economic recovery. High public debt in some countries in the region, combined with weakening currencies and rising interest rates, could endanger their ability to service those debts. Policymakers in the region must equip themselves to manage new risks arising from changes in the composition of capital flows and debt,” Mr Zeufack said.

The World Bank economists are also calling on African central banks to prioritise the management of currency risks amid rising foreign currency-denominated debt.

“Policies should foster the development of local currency debt markets to reduce currency risks and mismatches. Financial openness would attract all types of capital inflows, suggesting that a priority for sub-Saharan Africa would be to develop domestic financial markets. Fostering the development of local currency bond markets in sub-Saharan Africa would also require a stable macroeconomic environment,” Mr Calderon said.


The report came as the continent's economic growth for the year was revised downward to 2.7 per cent, down from the June forecast of 3.1 per cent, even though the East African countries are expected to fare better than their sub-Saharan counterparts.

The bank says the external environment is less favourable amid mounting global trade risks and weakening demand for the Africa’s products, as the main reasons for the dampened outlook.

“Political uncertainty and the weakening of economic reforms will continue to weigh on the economic outlook in many countries in the region,” it says.

The slower pace of the recovery in sub-Saharan Africa (0.4 percentage points lower than the April forecast) is explained by the sluggish expansion in the region’s three largest economies, Nigeria, Angola, and South Africa.

Lower oil production in Angola and Nigeria offset higher oil prices, and in South Africa, weak household consumption growth was compounded by a contraction in agriculture.

“Growth in the region — excluding Angola, Nigeria and South Africa — was steady. Several oil exporters in Central Africa were helped by higher oil prices and an increase in oil production. Economic activity remained solid in the fast-growing non-resource-rich countries, such as Côte d’Ivoire, Kenya, and Rwanda, supported by agricultural production and services on the production side, and household consumption and public investment on the demand side,” the reports says.

“The road ahead is bumpy. The tightness of oil supply suggests that oil prices are likely to remain elevated through the rest of the year and into 2019. Metals prices have been lower than previously forecast and may remain subdued in 2019 and 2020 amid muted demand, particularly in China,” the report adds.