The World Bank Group has warned Kenya of the persistence of a high risk of debt distress following its recent costly partial Eurobond settlement.
Kenya paid dearly to water down the sovereign default risk attached to the maturity of its debut Sh260.4 billion ($2 billion) Eurobond as it issued new notes worth Sh195.3 billion ($1.5 billion) at an interest rate cost of 9.75 percent in February.
The return paid out to investors of the new Eurobond notes stands at a premium when contrasted to the 6.875 percent coupon on the sovereign bond maturing on June 24. The balance of $500 million is expected to be paid on the maturity date.
“External borrowing is more expensive than it was prior to the pandemic despite sovereign spreads gradually declining from their peak in May 2023. For instance, the coupon of the new Eurobond issued by Kenya this February is 9.75 percent, compared to the 6.875 percent of the Eurobond maturing in 2024,” the World Bank noted.
Kenya is expected to incur about Sh1.1 billion more annually in debt service costs to the new Eurobond as total interest costs stand at Sh19 billion ($146.2 million) per year in contrast to Sh17.9 billion ($137.5 billion) annually for the initial notes.
The higher refinancing costs have been deemed to aggravate the region’s risk of debt distress despite the gradual decline in public debt as a share of the economy's GDP. “More than half of the African governments grapple with external liquidity problems, face unsustainable debt burdens, or are actively seeking to restructure or re-profile their debts. Public debt service obligations have surged as governments in the region are exposed to market financing and non-Paris club government loans,” the World Bank added.
Kenya’s move to refinance its debut Eurobond at a higher coupon/interest rate came as the country found itself in a difficult position as jitters started to build over its ability to meet the June maturity.
The jitters manifested themselves in various forms including the sharp depreciation of the Kenya shilling as investors priced in a potential currency devaluation in the case of a default.
Interest rates on government securities, both on domestic and externally issued papers also sharply increased as investors weighed in the default risk.
The higher coupon for the new 2024 Eurobond is largely attributable to a general increase in borrowing costs across economies after central banks lifted interest rates after the pandemic to cool off inflationary pressures.
Subsequent to the new sovereign bond, the Kenya shilling has rallied against major world currencies including the US dollar while interest rates on government securities have begun showing signs of declining.
For instance, interest rates on Treasury Bills fell for the first time in over two years last week, signalling an ease to government borrowing costs.
The Central Bank of Kenya (CBK) expects domestic interest rates to move lower on higher disbursements of external financing, especially by multilateral lenders such as the World Bank and the International Monetary Fund.
The external financing is expected to be partly used in closing out the settlement of Kenya’s debut Eurobond.
