While going through new numbers contained in a recent report on the financial affairs of East African Portland Cement Company (EAPCC) #ticker:PORT - one of the leading cement manufacturers in the region - I saw a poignant lesson of the pitfalls of taking a foreign currency loan when the revenues you earn are in shillings.
The burden the company has been carrying in its books because of a yen- denominated loan it contracted several years ago gives you a compelling story about the dire situation that obtains when a company engages in currency mismatching.
It all got me reflecting about how large the quantum of contingent liabilities on the government books- and especially in respect of loans contracted on behalf of state linked corporations and parastatals would look like.
Although I have yet to come across a recent comprehensive study on the quantum of contingent liabilities in the books of the government as a result of loans contracted on behalf of parastatals, my guess is that it must be very large.
With the rapid accumulation of Chinese Exim Bank loans, the preponderance of commercial agreements between private creditors and key parastatals, and opaque memoranda of understanding that some of the large parastatals have been promiscuously signing with commercial creditors- the burden of servicing loans contracted on behalf of state-linked entities must be very large indeed.
Indeed, loans borrowed by the government on behalf of parastatals have majorly contributed to the saddling of our external debt register with too many expensive and opaquely-negotiated commercial loans.
Several corporations and parastatals including- Kenya Power, Kenya Broadcasting Corporation and EAPCC have massive dollar-denominated loans in their books.
Which brings me to the story of the suffocating yen loan on the books of EAPCC. The company obtained this loan from the Japan International Co-operation Agency (Jica) 18 years ago. It is repayable in half-yearly instalments currently coming to Sh195 million every six months.
To mitigate against fluctuation of the exchange rate, the company entered a rate swapping arrangement deal with CFC Stanbic that is repayable on half yearly instalments at the rate of Sh50 million every six months.
Two years ago, and in view of the fact that the Jica loan was guaranteed by the government, the National Treasury agreed to repay the loan as repayments fell due.
So far - in the period between September 2016 and March 2018, the government has paid four instalments- allowing the company to enjoy temporary reprieve from the suffocating foreign exchange loan. It has not led to significant improvement on liquidity. Even with the burden of paying the loan and interest having been reduced, the company is forced to continue repaying huge amounts to service the contracted swap instalments whenever they fall due.
Caught in the middle of crippling cash flow problems, the company attempted to renegotiate the terms of the loan swap arrangement with the intention of discontinuing it.
The lenders informed them that the loan swap deal did not have a termination clause.
Thus, the cement maker has found itself in a situation whereby it must continue repaying the full amount contracted for the swap deal to the very end. By the way, the Jica loan is due to be fully repaid by March 20, 2022.
But the understanding is that the amounts the government has so far paid are to be treated as soft loans that must be recovered when the company is able to negotiate refinancing facilities.
I see the government suffering the consequences of currency mismatches in the near future. We have borrowed too many expensive commercial loans despite the fact that our exporting sector is doing well. Where will the dollars to service all these expensive Chinese loans come from?
If the government does not move quickly to resolve the financial problems of EAPCC, the company will collapse. In excess of 1,300 citizens who work there are bound to lose their jobs.