Kenya’s burgeoning public debt poses a significant threat to its economic stability, echoing the perilous paths of Ghana, Greece, and Sri Lanka.
The country is standing at the precipice, with its first Eurobond set to mature in June 2024.
A sobering Debt Distress report, issued by Nairobi-based Faida Investment Bank, highlights that Kenya is perilously reliant on the International Monetary Fund (IMF) as its sole lifeline out of the debt quagmire.
The report issues a stark warning: without the ability to issue a new Eurobond, ostensibly to address existing debt obligations, Kenya faces the looming specter of a severe liquidity and debt crisis in 2024.
Currently, Kenya maintains some breathing room in its fiscal landscape, even as the Kenyan Shilling continues its downward spiral against the US Dollar.
While the depreciation is still within manageable bounds, it relies heavily on dwindling forex reserves. As of September 22, 2023, these reserves stood at $7.0 billion, equivalent to a mere 3.8 months of import cover.
This downward trend in foreign exchange reserves has breached the statutory reserve threshold of 4.0 months of import cover.
This growing disparity between the demand and supply of US dollars is wreaking havoc on businesses and exacerbating the steady depreciation of the Kenyan Shilling, which has accelerated throughout 2023.
In fact, the Kenyan Shilling reached a disconcerting rate of KSh 147.8 against the dollar on September 27, 2023, marking a year-on-year depreciation of 22.0%. Analysts at Faida Investment Bank observe that this persistent weakening of the Kenyan Shilling intensifies inflationary pressures, given Kenya’s heavy reliance on imports, and further amplifies the country’s already substantial debt-servicing costs.
The report issues a sobering prediction: the current foreign reserve crunch could be a prelude to what awaits in 2024 when the Eurobond debt maturities come due. High and rising interest rates on Treasury Bills only compound the pressure on debt maturities in 2024.
Additionally, despite efforts to increase taxes, the government is falling short of revenue targets, and no significant reductions in government spending have been observed. Kenya finds itself in a precarious position.
Nonetheless, the government has the IMF program as a lifeline to facilitate inflows and is actively consulting with lead arrangers to devise solutions and timelines for the impending maturity.
Analysts, however, emphasize that the unsustainable practice of taking on debt to service debt must cease. Kenya must formulate new strategies focused on debt sustainability, especially with the looming maturities of Eurobonds in 2027 and 2028 following the June 2024 deadline.
“The Government has been desperately seeking to cast the 2024 Eurobond maturity shadow to no avail,” the report states.
In June of this year, the government announced its intention, at the New Global Financing Pact in Paris, to repurchase at least 50% of this Eurobond before the end of 2023.
However, this plan was swiftly retracted by the National Treasury after Moody’s Investors Services indicated that it might consider such a buyback as a default.
David Rogovic, Vice President and Senior Credit Officer at Moody’s, explained that redeeming the bonds below their par value would inflict economic losses on investors.
With yields on existing Eurobonds remaining high (at 18.7% on September 27, 2023), and no end in sight to the ongoing US monetary tightening, the prospect of issuing another Eurobond appears bleak.
Should Kenya successfully navigate this challenge and settle the Eurobond, external debt pressures may ease, thanks to increased concessional borrowing. Afterward, a three-year respite awaits before the next cycle of Eurobond maturities in 2027 and 2028.
