Treasury Cabinet Secretary Njuguna Ndung’u faces a headache over how to repay Kenya’s debut Eurobond that comes due in June 2024, with his options being limited by high global interest rates and the country's shrinking dollar reserves.
Kenya is due to fork out more than $2 billion (Sh251 billion) to investors in a bullet payment to retire the 10-year sovereign bond whose issuance in 2014 signalled the Jubilee administration’s turn to commercial debt to fund the budget.
When the bond was floated, the international debt market was awash with capital looking for a home, which African economies were only too happy to provide at rates that would look like a bargain today.
Kenya took up $2.75 billion (Sh345.5 billion at today’s rates) in two tranches consisting of a 10-year paper and a five-year issuance ($750 million), at interest rates of 6.78 percent and 5.87 percent respectively.
The five-year paper was repaid partly using the proceeds of another $2.1 billion Eurobond that was issued in May 2019.
Rolling over the 10-year tranche is now proving much more complicated, due to high rate demands by lenders that scuppered plans to float a sovereign bond last year—yields in the secondary market rose to highs of 22 percent in July.
While the asking rates have eased from record highs, they still remain elevated at between 9.8 and 10.8 percent, and may even resume the upward trajectory due to emerging global geopolitical risks.
“The balance of risks (elevated inflation risks, higher-for-longer Federal Reserve rate) all point to tighter financial conditions in the near future, and as such, I expect Kenya (and other Emerging/Frontier markets) to be shut off from the international market, in the near term,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).
Kenya’s dollar reserves, from which external debt is repaid, are now at a near 10-year low of $6.9 billion, having fallen below the required four months of import cover three weeks ago.
In the just released 2023 Budget Policy Statement, the Treasury laments that market pressures due to the Russia-Ukraine war and monetary tightening in the US and Europe have limited its access to the international market, bar the concessional funding the country is getting from the IMF and World Bank.
The high inflation rates in particular, the Treasury says, have hindered its liability management operations on its debt portfolio—meaning rollovers of maturing debt—, adding that it will continue to monitor financial conditions before taking action to lengthen maturities and cut refinancing risk.
“Limited access coupled with the illiquid international market may hinder the Government’s plan to refinance the 2024 sovereign bond maturities…Governments to strategise for alternatives to avoid defaults,” the Treasury said in the budget policy statement.
One of the alternatives, Mr Ogutu said, is to find a short-term bridging facility to help the government pay up the Eurobond creditors.
“The syndicated loans route is the next best possible route that the authorities are exploring and also extrapolating from recent communication. At least with the syndicated loans, you can have a short-term two to three-year bridge syndicated loan, which gives the sovereign some fiscal room as they monitor the risks in the global arena,” he said.
The BPS has given an indication of the scope of financial manoeuvres the Treasury will have to execute to balance the books next year while appeasing external lenders.
Total external debt principal repayments are expected to gobble up Sh475.6 billion in the 2023/2024 fiscal year, largely towards the Eurobond and continuing obligations to China for the SGR loans, while external interest costs will eat up another Sh146.9 billion.
This leaves room for net external borrowing of Sh198 billion, down from Sh378 billion in the current fiscal year.