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Kenya faces costlier debt financing


Treasury secretary Henry Rotich. FILE PHOTO | NMG

Significant debt repayment from next year is likely to expose Kenya to higher interest rate, particularly if global loan market conditions tighten and the currency depreciates, a rating agency says.

Moody’s Investor Services, however, says the credit profile of Kenya (B2 Stable) is likely to be supported by President Uhuru Kenyatta’s government progress in implementing a reform programme, which entails fiscal consolidation and a build-up of foreign exchange reserves.

“As international sovereign bonds mature in 2019 and 2020, governments in Sri Lanka (B1 negative), Armenia (B1 positive) and Pakistan (B3 negative), and to a lesser extent Honduras (B1 stable) and Kenya (B2 stable), will be most exposed to costlier debt financing,” said Moody’s.

“If pronounced and sustained, this would weaken debt affordability and raise their debt burdens, especially if local currencies depreciate.”

Kenya issued a $2 billion (Sh201 billion) international bond early this year that matures next year. It has $800 million (Sh80.7 billion) interest which represents 0.9 per cent of GDP maturing next year.

Refinancing risk arises when the debt issuer is unable to successfully take in new debt at sustainable market rates to offset maturing debt. This may occur when there are competing instruments that offer better return, forcing higher rates to compensate for potential losses.

Treasury secretary Henry Rotich has budgeted Sh870.62 billion to pay off maturing domestic and external debt and accruing interest in the current year.

Domestic debt repayments are projected at Sh505.96 billion while obligations to foreign creditors are budgeted at Sh364.66 billion.

Kenya’s total public debt stood at Sh5.04 trillion at the end of the last financial year in June, a growth of 14.3 per cent over Sh4.41 trillion a year earlier.

At 49 per cent of the gross domestic product (GDP)—national output— in net present value terms, the country’s debt was just shy of the 50 per cent mark stipulated under Public Finance Management Framework and way below the 74 per cent threshold recommended by the IMF. Even then, President Uhuru Kenyatta is tipped to accumulate nearly Sh2.13 trillion more by the time his final term ends in four years, Treasury projections show, signalling increased pressure on taxpayers.