Kenya is at a risk of defaulting on foreign debt obligations should the current accumulation rate in borrowing be followed by further devaluation of the shilling, analysts at financial services giant BNP Paribas have cautioned.
In a brief to Bloomberg Intelligence, the head of fixed income for emerging markets at BNP Paribas Investment Partners Bryan Carter said a new round of devaluation for African countries would lead to a sharp rise in debt-to-GDP ratios among African countries, which have in recent years taken up large amounts of dollar debt through Eurobond issues.
Kenya’s public debt has doubled over the past four years from Sh1.6 trillion to Sh3.48 trillion, with external debt shooting up in the last two years as the country took out a Sh280 billion ($2.8 billion) Eurobond.
External debt stood at Sh1.667 trillion by March this year, according to Central Bank of Kenya data.
In addition, the country has turned to China for the financing of the Sh327 billion standard gauge railway, and has recently received another Sh60 billion from China through a syndicated loan to bridge fiscal deficit.
“It is pretty clear that we will have some defaults in the next five years. The most likely trigger for that would be another round of devaluation. That was the biggest single cause in 2014-2015; sub-Saharan African countries had so much dollar debt that the devaluation led to a rapid increase in their debt to GDP ratios. Ghana, Zambia and potentially Kenya could default in the next five years,” said Mr Carter.
International rating agency Fitch has this month also weighed in on the debate on Kenya’s external debt, saying that the rising stock of dollar-denominated debt was leaving the country vulnerable to exchange rate shocks.
Fitch also downgraded Kenya’s local currency Issuer Default Rating to ‘B+’ from ‘BB-’ with a negative outlook.
For those looking to invest in Kenya, however, Mr Carter says that the return on investment will still outperform the regional average, even with the underlying risk.
“We have an overweight on Kenya, though the upcoming elections, concerns about potential new issuance and volatility around the next few months are keeping us a little guarded,” he said.
Although the analysis issues a caution on future risk, the shilling emerged as one of the stable currencies in Africa last year, losing only 12 per cent to the dollar while regional peers were down between 20 and 30 per cent over the same period.
The unit benefited from the low price of oil, which lowered the country’s import bill.