Kenya faces higher cost of foreign loans as liquidity tightens

Kenya and other African countries are set to pay high premiums on foreign loans as liquidity in the global financial markets tightens due to risk aversion, the International Monetary Fund (IMF) has warned.

Kenya is among the African countries planning to raise cash from the international markets this year by way of issuing another Eurobond estimated at Sh60 billion.

International investors are currently fleeing from emerging and frontier markets to “safe harbours,” IMF first deputy managing director David Lipton said in a speech to students at the Strathmore Business School on Monday.

“Tighter financial conditions are also going to be a continuing fact of life. There is a degree of uncertainty about financial market developments that is bound to make money harder to come by for African borrowers,” said Mr Lipton.

Kenya recently raised over Sh280 billion ($2.8 billion) through a Eurobond.

In January the yields on the country’s 10-year Eurobond portion had shot to nearly 10 per cent but has since fallen to below eight per cent. The bond had an average yield of below seven per cent at the time of issuance.

Mr Lipton noted that emerging markets as a whole lost $200 billion in net capital outflows last year compared to net inflows of $125 billion in the previous year.

Despite global concerns, the IMF executive said, Kenya was still likely to have a healthy economy on the whole growing at above the average for Africa as would be the case for the east African region.

The global economic jitters are likely to affect commodity exporters most as has happened already. However the Kenyan economy on the other hand will benefit from lower oil prices unlike the commodity exporters in Africa.

Mr Lipton urged policy action on the part of commodity-exporting African countries including reduction of fiscal deficits.

“The need for action is most urgent among natural resource exporters whose policy response so far has tended to be behind the curve. With rising fiscal deficits, falling international reserves, and severe financing constraints, adjustment is now unavoidable. The required policy steps include a reduction in fiscal deficits,…Countries that do not export commodities, including Kenya, are more favourably placed to weather the slowdown,” said Mr Lipton.

He urged accumulation of foreign international reserves. Kenya has so far raised its reserves to five months of import cover, well above the statutory four months minimum.

Some African countries are facing adverse weather conditions, said the IMF executive, but added that the weather is likely to favour Kenya where rains have so far been adequate.