Kenya's banking sector is among three listed by the World Bank on the continent facing high exposure to sovereign debt caused by the government's rising debt distress.
The multi-lateral lender lists Ghana, Kenya and Sierra Leone as some of the countries in Sub-Saharan Africa whose banking sectors are heavily exposed to government debt.
“If global inflationary pressures intensify further or persist longer than expected, global interest rates may rise by more than assumed, leading to an even greater deterioration of financing conditions and increased difficulty in regaining access to international borrowing markets,” the World Bank said in its Global Economic Prospects Report published on Tuesday.
“This could trigger financial distress and government debt defaults. Government debt distress would have large adverse spillovers on growth and financial stability.”
Kenyan banks carry slightly over one-fifth of Kenya’s total debt stock and about half of the country’s domestic debt.
Data from the Central Bank of Kenya (CBK) and the National Treasury shows that banking institutions held 47.51 percent of domestic debt as of the end of October last year or Sh2.09 trillion.
Banks are usually significant holders and traders of local debt which covers proceeds raised from Treasury bills and Treasury bond auctions.
In contrast, pension funds held 32.7 percent of domestic debt in the same period while insurance companies and parastatals held a lower share of the debt portfolio at 7.3 and 6.1 percent respectively.
Domestic debt has emerged as a low-hanging fruit in the management of potential debt crisis as governments find it easier to renegotiate repayment terms with local debt holders in contrast to external creditors.
For instance, Ghana which announced it would default on the part of its external debt payments at the end of last year has already laid down a domestic debt exchange program.
The Ministry of Finance in Ghana announced existing domestic bonds as of December 1 would be exchanged for a set of four new bonds maturing in 2027, 2029, 2032 and 2037.
At the same time, the annual coupon on the restructured bonds was set down to zero percent in 2023, five percent in 2024 and 10 percent from 2025.
On its part, Kenya is yet to announce a domestic debt restructuring program even as the new Treasury Cabinet Secretary Prof Njuguna Ndung’u hinted at local debt restructuring during his vetting to manage Kenya’s borrowing costs.
Nevertheless, the exchequer has deployed switch bond auctions to manage near-term liquidity risks including a switch sale at the end of November to postpone some maturities due in January 2023.
The switch auctions have however been voluntary, clearing the path for bondholders looking to exit.
According to the International Monetary Fund (IMF), Kenya’s debt remains sustainable but the country has since fallen to a high risk of debt distress.
The lender has backed ongoing fiscal consolidation under its supported program to stabilize Kenya’s debt levels.
“Important actions have already been taken to permanently broaden the tax revenue base, alongside expenditure savings to limit the expansion of the deficit from the COVID-19 shock and the war in Ukraine,” the IMF stated.
“The multiyear fiscal consolidation plan highlighted in the 2022 Budget Policy Statement (BPS) and substantiated by the FY2022/23 budget is premised on a more conservative approach to revenue projections and a commitment to additional policy steps to increase tax revenues and control expenditures.”