Will 2018’s loud public debt alarm bells stop?

No escape could last long enough in 2018, a year when the odds — political, economic and social — seemed more daunting with each passing day.

Every so often Kenyans got reminded of the fact that their country had accumulated a debt load too heavy for it to carry sustainably into the future. Public debt had become the proverbial elephant in the country’s economic room.

To size it up, the mountain of public debt currently stands at Sh5.17 trillion having grown 13 per cent from Sh4.57 trillion at the end of 2017.

Over the six years of the Jubilee administration public debt has grown more than two and a half times from Sh1.88 trillion in April 2013.

The concern with Kenya’s debt is, however, not primarily the volume, given that the economy is also growing, but rather the pace at which it has been accumulating.

High-speed debt accumulation has seen the Kenyan leadership lose the support of key international financial institutions such as the International Monetary Fund (IMF) that had all along stood behind it as critics questioned its management of public affairs.

There was little surprise when the IMF reviewed its assessment of Kenya’s external debt distress from low to moderate, citing the continued pile-up of debt at a faster rate than revenue growth and export earnings.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers. As a result, Kenya’s risk of debt distress has increased from low to moderate,” said the IMF in its October Kenya country report.

The Central Bank of Kenya (CBK) issued a similar warning on the home front, asking the government to look for better ways of financing its development agenda away from debt.

'No distress'

But the Treasury countered that the country was not facing a debt distress and that the debt to GDP ratio remained within the prescribed limit for an economy of Kenya’s size.

Kenya’s debt-to-GDP ratio is projected to hit 63.2 per cent by the end of this year, from 58 per cent in 2017 as the government’s public spending picks pace amid revenue shortfalls.

Former CBK governor Njuguna Ndungu said in an article for the think-tank African Economic Research Consortium (AERC) that African countries that found credit easy to come by in the international market following the global crisis of 2008 may now struggle to roll over the debt due to ongoing recovery in global markets.

“Some sub-Saharan African countries are faced with a sizeable market-based external debt, featuring large bullet payments most of which will be maturing in the next few years.

This presents a significant refinancing risk for the affected countries, especially if economic growth continues to flounder,” Prof Ndungu said in the paper co-authored with AERC director of research, Witness Simbanegavi.

As the New Year beckons, focus is expected to shift to repayment of debt, beginning with the Sh327 billion loan taken from China Exim Bank in 2014 to finance the construction of the standard gauge railway, and as the $750 million (Sh76.5 billion) five-year tranche of the 2014 Eurobond matures.

Expensive

Analysts warn that refinancing this debt will be expensive, partly due to rising US rates that has seen most lenders retreat from riskier emerging and frontier economies such as Kenya.

The Libor rate, on which the commercial tranche of the China SGR loan ($1.63 billion) is pegged, and also the measure that syndicated loans use, has more recently been rising in tandem with the US rates.

“Both these rates have been rising due to a combination of facts, including global economic recovery. In addition, rising concerns over Kenya’s sovereign credit risk could result in a deterioration of our credit rating, meaning that we would be expected to pay a premium for external debt,” said Sterling Capital analyst Renaldo D’souza.

Secondary market yields on Kenya’s outstanding Eurobonds have gone up this year to near double digits, indicating heightened risk perception.

Investors looking to lend to Kenya use this trading yield as a pricing guide for new debt.

The $1.5 billion 10-year bond maturing in June 2024 is now trading at 8.25 per cent in the secondary market on the Irish Stock Exchange, up from 5.6 per cent at the beginning of the year.

The five-year $750 million bond maturing next June has seen its yield rise from 3.6 per cent to 5.87 per cent this year.

So has the $2 billion Eurobond issued in February this year whose 10-year tranche ($1 billion) has seen its yield rise to 8.75 per cent from at 7.25 per cent, while yields on the 30-year $1 billion tranche has risen from 8.25 per cent in February to 9.52 per cent.

Local borrowing

In recognition of the refinancing risk on external debt, the Treasury has signalled that it could turn to domestic borrowing to meet its needs. That, however, can only happen if the borrowing target rises by Sh47 billion to Sh319 billion, which however risks further crowding out the private sector from the credit market. Foreign borrowing will drop by Sh80 billion or 27 percent to Sh207 billion.

Mr D’Souza said that from a cost perspective, borrowing locally is a prudent move given the stable interest rates on government securities with the rate caps against rising external rates.

“Banks shifted focus from lending to the private sector to purchasing government securities. Increased demand for government debt pushed interest rates lower and they have remained at comparatively low levels since,” he said, adding that the ultimate solution is prudence in expenditure.

"The Treasury should identify priority expenditure items and cut down on excesses, such as capital and recurrent investments that do not have a significant impact on economic growth."