Why debt restructuring won’t be easy

One of the common questions I have been receiving is what a debt restructuring would look like or mean. Despite the global economy experiencing a number of debt crisis situations, it has struggled with finding a mechanism for orderly sovereign debt restructuring and default.

The main problem with finding an orderly restructuring and default is because of the principle of sovereign immunity. Ideally, investors are unable to force governments to pay debt and as well can't sue governments.

This makes investors to remain highly conscious of a default risk and creates an untidy domino effect. For example, in 2010 when Greece was downgraded by rating agencies because of its ability to refinance its debt, yields on Greek government bonds rose substantially because investors were dumping the bonds because of the high risk of default.

So, when we talk about a restructuring programme, we should have it at the back of our mind that it is an expensive exercise. Second, I am sceptical that, whichever government comes in, we will see a comprehensive public debt audit.

Kenya’s public debt is understated, and full disclosure of the overload will send negative signal to investors and spook them to drop Kenyan bonds in the international market, setting the stage for a debt refinancing crisis.

Kenya’s 2024 Eurobond yields are already high. Full disclosure of the debt register will be biting the bullet and I doubt any of the side will risk-taking that heat. This may be the reason why the IMF has dialled down about full disclosure of the public debt register.

Now, coming to the main question which is what debt restructuring will look like. Kenya will have to apply for a debt restructuring consideration under the Common Framework for debt treatment beyond the Debt Services Suspension Initiative (DSSI), which is an initiative endorsed by the G20 together with the Paris Club to support highly indebted countries on coordination and timely resolution on the structural debt issues.

Chad, Ethiopia and Zambia are among the countries that have recently applied for consideration during the pandemic period. Th reason countries have avoided this initiative despite it looking like a noble idea is because its fraught with delays, making a country more vulnerable.

Then after consideration, it is followed by tough structural conditions and austerity measures that are mostly unpopular to the general public.

For Kenya, China is the biggest lender to engage if it seeks to create a debt liquidity headroom and despite Beijing being part of the Common Framework it has shown little commitment when it comes to coordinating restructuring plans.

So can Kenya engage China outside the Common Framework? Yes! Kenya can do that and if it is able to secure a deal and share it under the Common Framework.

The challenge is that, though, much of the Chinese debt is negotiated as government-to-government, the lender is always a private entity or a profit-seeking state-owned entity. The Chinese government has always hidden behind these institutions when countries request for debt restructuring or rescheduling.

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Note: The results are not exact but very close to the actual.