Landmines in Kenya’s piling debt

Kenya’s rising debt has been a hot-button subject for a while now. With the debt now in the region of Sh5 trillion, the question is for how long will it remain sustainable. While Treasury has always been quick to point out that the debt is still within the limits of financial prudence, analysts have constantly warned that the economy is beginning to feel the heat.

Economic analysts say the country is particularly bound to find itself in a rather rough road this financial year when some of the major debts will mature.

To mitigate the impact of debt repayments, Treasury will be compelled to negotiate for a series of refinancing, a measure it has already resorted to. Rolling over debt, as refinancing is also referred to, is expected to be the norm going forward as more government credit facilities become due.

Treasury secretary Henry Rotich has budgeted for Sh870.62 billion to pay off maturing debt and interest in the current year which ends next June, nearly double the Sh455.34 billion estimates for the year ended last month and Sh435.72 billion in 2016-17 financial year.

That means 49.95 per cent, or nearly half of the Sh1.743 trillion which the Treasury targets to collect from taxpayers will be spend on debt repayments, well above the recommended debt service-to-revenue threshold of 30 per cent.

The debt repayments are more than double the Sh394.89 billion which has been allocated to development projects, underlining the impact on economic activities.

Domestic debt repayments are estimated at about Sh505.96 billion between this month and next June, statistics from the Treasury show, while external debt obligations are projected at Sh364.66 billion.

President Uhuru Kenyatta’s administration has been contracting short-term domestic debt since September 2014 to build roads, bridges, power plants and the Standard Gauge Railway. The government is banking on these mega projects to accelerate economic growth and somehow justify the current debt burden.

It is worth noting that the beginning of the increased uptake of short-term domestic loans coincided with the period when Kenya was upgraded to a lower middle income economy, locking it out of the highly concessional loans from development lenders such the World Bank Group’s International Development Association.

Some of the external debt which are set to be redeemed this financial year include the five-year portion of the first Eurobond estimated at Sh78.30 billion and Sh78.74 billion syndicated loan, according to analysts at Genghis Capital.

The commercial loan was procured early last year from Standard Chartered, Standard Bank, Citi and Rand Merchant Bank.

“The external debt obligations in FY2018/19 has risen to 41.88 per cent of overall public debt from 36.97 per cent in Fy2017/18 mainly attributed to external debt redemptions. This brings to the fore the currency risk as a weaker local unit drives up the external debt obligations,” the Genghis analysts said in a recent note.

Kenya’s total public debt stood at Sh4.888 trillion in May, comprising Sh2.514 trillion in foreign loans with nearly Sh2.374 trillion being domestic, the latest data from the Central Bank of Kenya shows.

“With debt to GDP (Gross Domestic Product which was estimated at Sh7.749 trillion last December) nudging 60 per cent and emerging markets in headlong reverse, policymakers need to read the signals that the market is emitting,” said Aly-Khan Satchu, the chief executive of Rich Management, an investment advisory.

“The markets were incredibly benign through Q1 (January-March) 2018, but are no longer; the Treasury needs to stay ahead of the curve and do any rollovers ahead of time.”

Mr Rotich has maintained the debt level remains sustainable and well below the 74 per cent of the GDP for a lower middle-income such as Kenya as measured by the World Bank's Country Policy and Institutional Assessment (CPIA) index. He has, however, kept a close eye on maturing debt which may expose the country to high refinancing risk amid below-target tax revenue.

The Treasury has been negotiating for refinancing of its maturing domestic debt to ease the pressure on under-performing tax revenue, managing to roll over Sh202.88 billion between January and May.

“The government is exposed to refinancing risk. As at end FY 2017/18 (last month), the main refinancing risk is associated with high domestic debt repayments (at 37.7 per cent falling due within the year largely comprised of Treasury bills,” Mr Rotich says in the three-year Medium Term Debt Management Strategy for the period ending June 2021.

“The average time to maturity (ATtM) for domestic debt portfolio stands at 4.4 years while that of external debt portfolio stands at 9.7 years.”

About half of 50 per cent of the total government debt portfolio is exposed to exchange rate risk, according to the report. The main exposure is to US dollar at 67.3 per cent, followed by Euro (16.6 per cent), Japanese yen (6.3 per cent) and sterling pound (2.9 per cent).

“Efforts are being made to further diversify and sustain Kenya’s debt currency mix. The National Treasury strategy to manage the currency exposures is by seeking to match currency of external liabilities with currency composition of Kenya’s forex inflows, international reserves, and cost of borrowing in each currency,” Mr Rotich says in the debt management strategy.

The Treasury plans to cut deficit in the budget, the main driver for borrowing, to Sh562.75 billion, or an equivalent of 5.75 per cent of the GDP, this financial year mainly through cutting of non-priority expenditures such as travel and entertainment expenses.

That, however, remains below its target of three per cent by 2021.

“When you consistently start crossing five per cent (fiscal deficit) for a number of years, you start running into problems meeting your financial obligations,” Citibank chief economist for Africa David Cowan said in an interview in Nairobi in February. “The solution? Bring and keep inflation rate down and issue long-term local debt as much as you can. That’s the way forward. That’s what most countries do.”