Why Kenya’s sovereign debt debut faces ‘bleak future’

By Macharia Kamau and James Anyanzwa

Kenya: Concerns are rising over the proposed funding of the Standard Gauge Railway line (SGR) by the Chinese Export-Import (Exim) Bank with fears that the move could severely hurt the planned $1.5 billion (Sh129b) sovereign bond issue.

Exim Bank has been earmarked to provide over 85 per cent of the financing for the controversial project whose cost is estimated to be at least Sh327 billion. But analysts warn that the borrowing would significantly push up Kenya’s external debt to a point that it would appear a risky borrower in the international markets.

David Ndii, an economist and chief executive of consultancy firm Africa Economics, says financing of the proposed railway project would heavily impact on the country’s foreign debt status to a point of making it unsustainable.

“When it comes to borrowing in the market like in the Government’s case where it wants to float a Euro Bond, the interest you pay depends on how prudently you have managed your finances and the markets might charge you higher rates if you have not been very prudent,” says Ndii.

 “Our ability to borrow would be significantly compromised and it might mean borrowing at higher interest rates.” According to Ndii the consequences of borrowing to finance SGR, one of the Government’s vision 2030 flagship projects, are detrimental to the economy.

“The consequences of the project will outlive the (Jubilee) government for many years. The terms of the borrowing including the interest rate, the currency in which the loan will be issued and the grace period are not clear,” he said.

Kenya’s foreign debt stood at Sh885 billion as of June 2013 or 44.5 per cent of the total public debt. Total borrowing stood at Sh1.9 trillion, or 49 per cent of the gross domestic product (GDP).The debt to GDP ratio is against the Government target of 45 per cent, with expectations that this will come down to 43 per cent in the medium terms.