Treasury renews debt crisis fears as Eurobonds plunge

The government has cautioned yet again that the country's headroom for more public debt is narrowing, even as jittery global investors poked holes into Kenya's plan to refinance upcoming maturing debt.

"We are choked with inherited debt that must be paid," said Treasury Cabinet Secretary Njuguna Ndung'u said.

The situation is compounded by lower-than-expected revenues that could impact the government's ability to deliver on its ambitious bottom-up agenda.

"The economy faces two extreme constraints: financing constraints-tax revenues generated cannot finance the development we wish to have and on the other extreme, we have limited headroom for debt," he said at a banking forum organised by the Diamond Trust Bank (DTB) on Thursday.

"We are choked with inherited debt that must be paid."

Public debt stands at Sh9.6 trillion, according to the latest estimates, as both domestic and external liabilities rise rapidly.

Kenya's public debt grew by nearly Sh700 billion in the six months to March this year under President Ruto's government, pointing to a sustained borrowing appetite.

The latest warning by Ruto's top money man came as Bloomberg reported that Kenya's Eurobonds had plunged after American rating agency Moody's Investors Service said it may treat a planned buyback of some of the debt by Kenya "as a default."

Bloomberg quoted a Moody's' official saying "Redeeming the bonds at a price below par value would constitute an economic loss to investors."

David Rogovic, a vice president and senior credit officer at Moody's, was according to Bloomberg reacting to President William Ruto's plan, announced in June, to buy back half of the country's $2 billion (Sh282 billion) of 2024 Eurobonds before the end of this year.

According to Bloomberg, yields on the notes soared 46 basis points on Wednesday, the most in almost a month, to 13.35 per cent.

"We deem a distressed exchange occurs when there are economic losses to creditors and when the transaction has the effect of allowing the issuer to avoid a likely eventual default," Mr Rogovic was quoted saying. "We need to see the details and the terms of the buyback before we can assess whether it constitutes a distressed exchange, and therefore a default under Moody's definition."

Rising borrowing costs and tougher market conditions could mean that the government will struggle to refinance upcoming maturing debt, the World Bank had earlier said.

"Overall public debt remains sustainable; however, risks persist," said the World Bank in its latest regular Kenya Economic update released in June.

The World Bank singled out the $2 billion (Sh277 billion) bullet repayment of Kenya's debut Eurobond due in June next year.

The upcoming bullet payment of previous commercial loans (Eurobond repayment due in 2024) has created a surge in refinancing risks as the cost of borrowing in the external financial market rises," said the World Bank.

Refinancing risk refers to the possibility that a borrower will not be able to replace a debt obligation with suitable new debt at a critical point.

Factors that are beyond the borrower's control - such as rising interest rates or a shrinking credit market - often play a role in their ability to refinance.

The World Bank's concerns on Kenya's refinancing risks echo mounting concerns that the unrelenting volatility in the global credit market and a slowdown in economic growth threaten to increase pressure on Kenya's ability to refinance maturing debt.

"Kenya's Eurobond yields have been rising as international financial markets remain tight," said the World Bank study.

The World Bank's view, however, bucks the view of other global lenders such as the International Monetary Fund (IMF) and the African Development Bank (AfDB), which say Kenya will not have difficulties to honour the looming maturing debt.

IMF Managing Director Kristalina Georgieva told The Standard in a recent interview that the global lender does not see Kenya facing any difficulties in paying up the Eurobond.

"We do not see Kenya facing difficulties to serve the $2 billion next year. Why? First, because reserves are still quite sound," she said.

"The country has some $6 billion (Sh846 billion) in reserves, and it has been taking very prudent measures both on the fiscal front and on the monetary policy side to make sure that this reserve position remains sound. Second,

Kenya can raise money through syndicated loans or other ways, including from us, the IMF."
Her view was recently echoed by the African Development Bank (AfDB) in a separate interview.

"I don't think President William Ruto and his team would want anything like a default. It would be very catastrophic both financially and politically, and I know they are doing all that is within their power to circumvent that," AfDB

Director-General for East Africa Nnenna Lily Nwabufo told The Standard recently.

The cash-strapped government is banking on the controversial Finance Act 2023, which hikes taxes on fuel, housing and digital content to mobilise additional revenues in the face of rising debt repayments such as the maturing Eurobond.

But the tax proposals in the Act have drawn sharp criticism from ordinary Kenyans and various interest groups as well as the Raila Odinga-led opposition coalition, arguing the cost of living is already too high, leaving no room for additional taxes.

President William Ruto's revenue plan is also yet to gain momentum as tax collection in the just-ended financial year fell short of the government target.

This dealt a major blow to the President's efforts to fund his costly campaign promises and repay mounting public debt at a time his administration's additional taxes is stoking tensions amid the high cost of living.

Parliament however recently acceded to the Treasury's request to raise the ceiling to a percentage of gross domestic product (GDP) rather than a specific number averting a full-blown crisis.

bngugi@standardmedia.co.ke