The stock of external bonds swelled by Sh57.5 billion in 10 months despite the Treasury’s decision to cancel the issuance of another Eurobond as the weak shilling aggravated Kenya's debt repayment woes.
This points to elevated repayment of the country's foreign debts, with the Controller of Budget Margaret Nyakang’o noting that she approved payment of an additional Sh5.4 billion in external debt servicing in the year ended June due to a weaker local currency.
Data from the National Treasury shows that the stockpile of International Sovereign Bond, also known as Eurobonds, increased by 7.2 per cent to Sh861.5 billion in October from Sh804 billion in December last year.
During this period, the shilling depreciated by 7.23 per cent from a base exchange rate of 113.14 against the dollar by end of December last year to 121.33 in October.
The accumulation of the costly dollar-denominated Eurobonds has been blamed for the spike in Kenya's debt service costs, with the global credit rating agency Fitch downgrading the country’s rating from B+ to B.
Kenya’s stock of international sovereign debt has risen sharply from Sh271.3 billion in 2014 when it issued its first Eurobond to Sh861.5 billion by end of October.
A recent World Bank report noted that Kenya’s growth has been driven by a huge uptake of commercial loans as revenues have not kept pace with spending, leading to huge budget deficits.
“The related deficits have been financed through debt with an increase in commercial borrowing,” said the World Bank.
By end of June 2024, Kenya is expected to make a bullet payment of $2 billion (Sh245 billion) for a maturing Eurobond amid tightening liquidity in the global financial market.
Churchill Ogutu, an economist at the Mauritius-based IC Group, reckons that markets will remain tighter next year with an expected 75 basis point rate hike in the United States next year, making emerging and frontier markets like Kenya less attractive.
“Ordinarily, the government needs to map out its refinancing plans early enough and this means by 2023 external events will be pivotal,” said Mr Ogutu.
To repay the Eurobond, Kenya needs to take another loan to retire the maturing one.
The Treasury was forced to cancel plans to issue an Sh115 billion ($1 billion) Eurobond, opting to borrow from a syndicate of commercial banks instead after it received bids priced at a high of 12 per cent.
“On the domestic side, we haven’t seen a solid plan by the new government on matters of bringing back fiscal discipline. There has been too much bark, but less bite,” said Mr Ogutu, noting that the investing market is yearning for a more credible plan.
Kenya’s 38-month programme with the International Monetary Fund (IMF) which is aimed at helping it reduce debt vulnerabilities by increasing revenues and slashing spending through the reduction of corruption and wastage is a yardstick that investors will be using to gauge the country’s creditworthiness.
Since upgrading into a low-middle income country, Kenya has been locked out of cheap loans from multilateral institutions such as the World Bank and missed debt forgiveness by major lenders such as China.
Consequently, the country has plunged into the market to finance its infrastructural needs.
Interest rates from commercial banks can be as high as 10 per cent, with shorter grace periods and tenors.