Ruto's debt reform call rattles bond investors again

Financial Standard
By Brian Ngugi | Sep 26, 2023
President William Ruto speaks at the United Nations (UN) General Assembly in New York. [PCS

President William Ruto’s recent rallying call for debt relief for poor nations has kept global investors on their toes again with Kenya Eurobonds investors showing signs of anxiety after the statement.

Bloomberg reported that Kenya’s Eurobonds had plunged after the statement by President Ruto.

According to Bloomberg, Kenya’s Eurobonds fell on Friday after Ruto called for a debt restructuring initiative by developed countries.

In his recent speech at the United Nations (UN) General Assembly in New York, Ruto called for a new debt initiative that does not wait for nations “to plunge over the cliff into debt distress before providing relief.”

He said the ideal new sovereign debt architecture should extend the tenor of sovereign debt and provide a 10-year grace period for countries “that are in debt distress.” 

Ruto did not make reference to Kenya specifically in his rallying call for global reform of the international debt structure.

Global investors were, however, concerned by his remarks on debt restructuring, Bloomberg reported.

Financial markets, earlier showed signs of anxiety again after Ruto revealed his government’s intention to buy back part of the $2 billion (Sh294 billion) Eurobond ahead of the June 2024 maturity date. 

The plan sparked negative sentiments with global ratings agency Moody’s equating it to a default. 

But Ruto defended the plan while ruling out fears of a possible default. He said the buyback would help government effectively deal with the repayment burden, adding that he did not foresee any default whose implications would be costly.

“There are people who are tools of colonialists called credit rating agencies saying we will probably default on the Eurobond. They are criticising our plan to buy back this Eurobond debt but we will continue with it,” said Ruto.

“How is the buyback plan a problem?” 

Treasury is yet to publicly provide additional details on the plan as the year inches to a close.

The National Treasury recently warned that the slowing economy and global factors are pushing Kenya on the fringe of debt distress.

“The debt sustainability analysis shows that Kenya’s public debt remains sustainable as a medium performer in terms of debt carrying capacity,” said Treasury in the draft 2023 Budget Review Outlook Paper.

“However, there is a high risk of debt distress as a result of global shocks, leading to a slowdown of economic growth.”

Struggle to refinance

Rising borrowing costs and tougher market conditions could mean that the government will struggle to refinance upcoming maturing debt, the World Bank had earlier said.

“Overall public debt remains sustainable; however, risks persist,” said the World Bank in a recent Kenya Economic update released in June. 

The World Bank singled out the $2 billion bullet repayment of Kenya’s debut Eurobond due in June next year.

“The upcoming bullet payment of previous commercial loans (Eurobond repayment due in 2024) has created a surge in refinancing risks as the cost of borrowing in the external financial market rises,” said the World Bank

Refinancing risk refers to the possibility that a borrower will not be able to replace a debt obligation with a suitable new debt at a critical point.  

Issuing bonds in the Eurobond market exposes African countries to interest rate risk, as changes in global interest rates can impact the cost of borrowing.

The risk of default is always present when issuing debt, and countries may face challenges in repaying their Eurobonds if they experience economic or financial difficulties.

Elevated risk

Kenya spent 84 per cent of tax collections in the first two months of the current financial year to repay its creditors, pointing to an elevated risk of debt distress.

Debt servicing costs amounted to nearly Sh267 billion in July and August against a record Sh317.58 billion in tax receipts, the latest Treasury data shows.

Treasury data indicates that for every Sh100 netted by the Kenya Revenue Authority (KRA) in the last two months to August, an average of Sh84 went into repaying debts procured from local and foreign creditors.

Kenya’s sovereign loan repayments have been rising faster than tax revenue in recent months, signalling the country could be headed for a fresh debt crisis.

The lagging revenues against the pending urgent debt obligations highlight mounting concerns about the strength of the economic recovery and the government’s ability to sustainably service upcoming debt repayments, including the $2 billion Eurobond.

“To reduce debt vulnerabilities, the government has committed to a fiscal consolidation programme and optimising the financing mix in favour of concessional borrowing to finance capital investments,” said Treasury.

“Additionally, a steady and strong inflow of remittances and a favourable outlook for exports will play a major role in supporting external debt sustainability.”

The Ruto government is also betting on the new managers at KRA to ramp up collections to support debt servicing alongside the daily running of crucial programmes such as health and education or building new roads.

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