Treasury gets Sh125bn loans to refinance debt

The Treasury took new $1.25 billion(Sh125billion) medium-term syndicated loans between January and March to retire maturing short-term foreign loans, officials said, in a move aimed at easing debt repayment pressures on the exchequer.

The two loans were contracted as part of debt management strategy geared at lengthening the maturity of the country’s foreign commercial loans.

This involves taking loans which will mature in at least seven years and using the proceeds to refinance short-term ones which are falling due.

“We reduced debt by paying off an already existing debt and took a fresh loan; so no change in debt stock to the extent of the maturing loan repaid.

"This is called liability management in international finance circles,” Treasury secretary Henry Rotich told Business Daily.

The Treasury said it took out $250 million (Sh25.33 billion) to pay off a short-term loan that was due in January and another $1 billion (Sh99.73 billion under the then prevailing exchange rate) in March to repay a two-year $760 million syndicated loan procured in 2017.

Commercial loans

The remainder of the cash was spent on pre-paying for smaller foreign commercial loans which are due later in the current calendar year, Haron Sirma, the director-general for public debt management at the Treasury said.

The facilities were arranged by regional lender Trade and Development Bank (formerly PTA) and South Africa’s largest lender by assets, Standard Bank Group Ltd.

“There’s no addition in debt stock,” Dr Sirima told Business Daily. “The whole idea is to manage costs and risks. It is purely a debt management operation.”

The short-term syndicated loans, he added, were expensive and piling up repayments like what an overdraft facility does to companies and individuals.

Short-term debt

President Uhuru Kenyatta’s administration has largely been contracting short-term commercial debt since September 2014 to build economic growth-enhancing roads, bridges, power plants and the SGR.

That started after Kenya became a lower middle income economy, limiting her access to highly concessional loans from development lenders such the World Bank Group’s International Development Association.

“Instead of having small syndicated loan portions falling due in the (debt) profile, we said why not consolidate all these and you will see more of these (medium-term loans) happen,” Dr Sirima said.

“This is just part of debt management. People just look at debt management as an act of borrowing to finance the budget, but we can also borrow to restructure existing debt.”

The Sh125 billion syndicated loans are part of the Sh287.95 billion that the Treasury plans to raise in commercial loans to help plug the hole in this year’s Sh2.58 trillion budget.

The Treasury remains keen on tapping a third Eurobond before end of June to refinance the debut five-year debt contracted in June 2014.

Debt repayments to foreign creditors in the current year ending in June is estimated at nearly Sh364.66 billion of the Sh870.62 billion that Treasury plans to spend on debt servicing, according to Medium Term Debt Management Strategy for 2018-2022.

This comprises Sh250.28 billion in principal sums falling due and Sh114.37 billion in interest repayments.

Some of the major external debt repayments which are due between July 2018 and June 2019 include the debut Eurobond, whose first five-year tranche will be maturing, at Sh98.15 billion, Citi Bank syndicated loan (Sh86.64 billion) and Trade Development Bank(TDB) with Sh50.29 billion, the Treasury data shows.

SGR loan

Others are the SGR financier Export-Import (Exim) Bank of China (Sh31.08 billion), World Bank’s IDA (Sh20.90 billion), second Eurobond floated February 2018 (Sh15.51 billion), France (Sh9.08 billion), Japan (Sh6.13 billion) and China Development Bank (Sh5.18 billion).

Repayments to the Asian Development Bank/Asian Development Fund (ADB/ADF) were estimated at Sh4.46 billion, while Italy, Germany, Belgium, Spain and Saudi Fund will get Sh3.43 billion, Sh2.67 billion, Sh2.37 billion, Sh1.94 billion and Sh1.60 billion, respectively.

The figures are subject to shilling’s conversion rates major international currencies, especially the US dollar.

Dr Sirima said $ 1 billion syndicated loan, arranged by TDB and Standard Bank, was split into US dollar and Euro portions to mitigate refinancing risks related to changes in the value of shilling against major international currencies.

“The purpose of splitting is simply to minimise foreign currency risks because our external debt portfolio is biased towards the US dollars,” he said.

Minimise costs

“We want to sort of diversify our foreign currency-denominated debt to minimise costs arising from FX (foreign exchange) movements and also interest rate movements because it’s a floating facility.”

The parliamentary Budget Office-- a professional unit within the National Assembly which advises legislators on financial, budgetary and economic matters-- last August warned increased procurement of expensive short-term foreign commercial loans will put pressure on Kenya’s dollar reserves.

“Commercial loans are expensive and a leaning towards this trend is increasing the country’s debt service,” the Office warned in the Budget Watch report.