Treasury’s dollar-denominated debt rises by Sh219bn

Kenya’s dollar-denominated debt rose Sh219 billion in the first four months of the year, exposing the country to higher interest costs following weakening of the shilling against the green back.

The rise was largely informed by a stronger dollar and the sovereign bond issue.

Central Bank of Kenya (CBK) monthly economic report for April shows the dollar-denominated portion of the total external debt of Sh1.33 trillion ($13.6 billion) in April was equivalent to 56.3 per cent. It previously stood at 45.1 per cent in December 2014 when the external debt stood at Sh1.17 trillion.

The increase came as the debt denominated in Japanese Yen and Euro declined from 12.1 per cent and 29.9 per cent, respectively, to 9.6 per cent and 23.6 per cent during the period. The net change in total foreign debt was Sh156 billion.

“The rise in the US dollar-denominated component is attributed to the proceeds from the tap sale of the sovereign bond issued in June 2015...the growth in external debt during this period was largely attributed to exchange rate revaluation,” said CBK in the report.

Kenya issued the tap sale at the end of last year, raising Sh73.8 billion to add to the Sh176 billion ($2 billion) raised in the initial Eurobond sale in June 2014.

The principal and interest repayments for external debt are made in the currency of denomination. The shilling has depreciated to the dollar to the tune of about 11.5 per cent this year, and the yen by 8.4 per cent, while against the Euro the shilling remains flat exchanging at 109.8 units.

The stronger dollar and yen, therefore, pushed up the debt load in local currency terms on account of revaluation.

According to the CBK data, debt owed International Development Association, Kenya’s largest multilateral lender, amounted to Sh382 billion ($3.9 billion) or 29.4 per cent of total external debt while that owed Japan, the largest bilateral lender, amounted to $800 million, or 5.8 per cent of the total external debt as at the end of April.

The stake of the total external debt attributable to the central government stood at Sh1.28 trillion (97 per cent), with government guarantees to parastatal accounting for the remainder.

READ: Kenya’s dollar-denominated debt rises in six months

The increase in total debt load, taking into account that domestic debt has also grown in the first seven months of this year by Sh95 billion to Sh1.402 trillion, has raised concern over the strain the repayments will have on the economy in coming years.

Ratings agency Moody’s said on Monday that Kenya’s debt, at about 50 per cent of gross domestic product, remains manageable for now, but that continued wide budget deficits would begin to seriously erode the government’s debt servicing capacity.

“In our view, the authorities’ decision to seek IMF assistance with its two stand-by arrangements and their fiscal consolidation over the next four years are signals that the government recognises its fiscal vulnerabilities as well as the need to build capacity to avoid a more difficult outcome,” said Moody’s.

Another international ratings agency, Fitch, announced two weeks ago it had put Kenya’s credit rating — long-term foreign and local currency issuer default ratings — on a negative outlook from stable.

It signals that financial commitments are currently met but capacity for continued payment is vulnerable to deterioration in the business and economic environment.