Kenyan firms raise debts from foreign lenders to Sh850bn

Kenyan companies have increased their borrowing from external sources to an estimated 15 per cent of the gross domestic product (GDP) or Sh850 billion.

The International Monetary Fund (IMF) disclosed the preliminary estimate of the private sector foreign debt in its most recent report on the economy but noted a further assessment of the same would give a more accurate picture of the vulnerability of the corporate sector to external shocks.

The IMF said under the programme — in which Kenya is cushioned on forex to the tune of Sh153 billion in the next two years — several reforms, including improving data on external debt, are supposed to be made to strengthen Kenya’s resilience to shocks.

READ: IMF offers Kenya Sh153bn stand-by loan for next two years

“Private sector external debt is tentatively estimated at about 13–15 per cent of GDP,” said the IMF putting the nominal GDP at Sh5.7 trillion as at December last year. The Kenyan Bureau of National Statistics (KNBS) is supposed to do a full survey of the private sector external debt this year, according to the IMF.

“The implementation of the structural benchmarks laid the preconditions for… better quality external sector data that will allow for a better assessment of private sector vulnerabilities,” said the IMF.

The piling up of external debt by private companies is seen as a result of cheaper credit overseas where saving rates are higher than in Kenya. Global interest rates have averaged nearly zero for years, though a risk premium is imposed by lenders.

Domestically, the credit advanced by banks to the private sector was nearly triple the external one as it stood at Sh2.2 trillion as at last December.

“Our saving rate is low so many companies are borrowing from overseas. After the government raised money through a sovereign bond, we have a benchmark for companies to seek cash abroad,” said Eric Musau, senior research analyst at Nairobi-based Standard Investment Bank.

Mr Musau noted that the amount of the debt, being only a third of the domestic private sector borrowing, “is reasonable.”

Companies that get loans denominated in dollars or other foreign currency however face exposure to exchange rate risks. The Kenyan shilling weakened by more than 12 per cent against the dollar towards the end of last year.

New financing

In recent months, several companies have shown the extent to which foreign currency borrowing can impact on their finances.

Mr Musau drew attention to the cases of ARM Cement and TransCentury which have seen the foreign debt they hold increase with the depreciation of the Kenya shilling.

“If you do not have a natural hedge such as that where you are getting some of your revenues in foreign currency, then you have significant exposure as we have seen with some listed companies,” said Mr Musau.

The expansion that local companies are undergoing also means they have to source new financing and local lenders may not be able to make it available in affordable terms.

“You can also attribute the rising foreign borrowing to the growth of local companies. They have therefore to seek debt and balance this with equity financing,” said Mr Musau.