Kenya to pay heavily for expensive loans
National Treasury Cabinet Secretary Henry Rotich gives a press briefing on the State of the country's economy, at Intercontinental Hotel in Nairobi on November 9, 2017. Jubilee government may not be able to fix economic woes in 2019 if internal strife continues. PHOTO | FILE | NATION MEDIA GROUP
What you need to know:
- Mr Rotich said Sh818.02 billion of the nearly Sh2.17 trillion domestic debt at the end of June will be due for payment within 12 months.
- Moody’s on Tuesday cited rising debt repayment pressures in downgrading the government’s credit score to B2 from B1.
Kenya will spend Sh5.4 for every Sh10 it generates in revenue to repay fast-maturing debt in the next financial year from July, reflecting the impact of heavy intake of short-term expensive loans in recent years.
Treasury data shows debt payments will reach a record Sh1 trillion in financial year 2018/19 from Sh658.23 billion budgeted in the current year, which ends in June, and Sh435.7 billion in the previous year ended June 2017.
“Refinancing risk is significant as debt maturing in one year (from June 2018) as a percentage of revenue is 54.4 per cent,” Treasury Cabinet Secretary Henry Rotich says in the Medium Term Debt Management Strategy tabled at the National Assembly on Wednesday.
“The debt management strategy strives to reduce refinancing risk, while being mindful of exchange rate (shilling) risk exposures, mainly on external commercial debt.”
SYNDICATED LOANS
Repayments of domestic debt will account for 81.48 per cent of the $9.72 billion (about Sh972 billion) debt payment obligations in the next financial year, with foreign loans making up the remaining 18.5 per cent.
Mr Rotich said 37.7 per cent, or Sh818.02 billion, of the nearly Sh2.17 trillion ($21.17 billion) domestic debt at the end of June will be due for payment within 12 months, while Sh182.18 billion of the Sh2.21 trillion external debt will also mature.
Foreign loans obligations will however rise to Sh445.32 billion on June 2024 upon maturity of the $1.5 billion 10-year Eurobond and other external repayments such as syndicated and commercial loans.
“Most syndicated loans carry an acceleration clause in case the government settles for an international debt capital market issuance during or after the fiscal year (2018/19).
"This has the implication of repaying syndicated amounts in full before their full term,” Mr Rotich said.
DEBT REPAYMENT
The budget for debt repayments will be nearly three times the Sh372.7 billion allocated to the counties in 2018/19 and also dwarfs the Sh612.9 billion to be spent on development projects.
US credit rating firm Moody’s on Tuesday cited rising debt repayment pressures in downgrading the government’s credit score to B2 from B1.
Moody’s however assigned Kenya a stable outlook.
“The fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody’s expects to continue,” the firm said.
REFINANCING
Mr Rotich expects outstanding total debt to slow to Sh4.38 trillion in June from Sh4.57 trillion last December with average time to maturity of 7.1 years (4.4 years for domestic debt and 9.7 years for external loans).
“Approximately 50 per cent of the total government debt portfolio is exposed to exchange rate risk,” the CS said.
“The main exposure is to US dollar (67.3 per cent), followed by Euro (16.6 per cent), then JPY (Japanese Yen) and GBP (sterling pound) at 6.3 per cent and 2.9 per cent, respectively.”
To ease high refinancing and exchange rate risk, the Treasury plans to cut the share of Treasury bills in domestic debt to 13 per cent from 35 per cent and contract medium- to long-term bonds of 15 to 30 years in the next three years.
INFRASTRUCTURE
The strategy, he says, will increase “quantum on external debt while the domestic issuance concentrates on the medium to long-term tenors”.
“This is aimed at reducing the refinancing risks associated with the short-term debt and also improve trading in secondary market through increased volumes.”
The Jubilee administration has ramped up spending since 2013 to build a modern railway, new roads, bridges and electricity plants, driving up borrowing to plug the budget deficit.
The Treasury in the Budget Policy Statement 2018, projects fiscal deficit to slow to Sh587.7 billion next financial year from Sh620.8 billion in the current year.
That is an equivalent of six per cent of gross domestic product (GDP) from 7.2 per cent in the 2017/18 year.
“When you consistently start crossing five per cent (fiscal deficit) for a number of years, you start running into problems meeting your financial obligations,” Citibank chief economist for Africa David Cowan said on Tuesday.
