Treasury renews debt crisis fears as Eurobonds plunge

President William Ruto with IMF Managing Director Kristalina Georgieva during the COP27 conference in Sharma El-Sheikh, Egypt in November last year. [Hiram Omondi, PPS].

"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.

Azimio la Umoja One Kenya Alliance leaders Martha Karua, Raila Odinga, Kalonzo Musyoka at Kenyatta Market in Nairobi on July 11, 2023. They are leading the charge against the high cost of living. [Edward Kiplimo, Standard]

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.

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