Now debt refinancing puts Treasury in a tight corner

The tipping point could occur when the country starts using new debt to pay interest.
Treasury has borrowed more than Sh181 billion locally in the bond market for the last one and half months out of which only 28 per cent went into funding government operations.

The rest was given back to creditors as debt redemption.

This worrying trend means Treasury took Sh129 billion borrowed this year back to creditors,  remaining only with Sh51 billion, leading to a debt crisis.

“When 80 per cent of new debt is going into redemption, it is an indication that we are in a danger zone. The tipping point is 100 per cent after which you start using new debt to pay for interest,” said Deepak Dave of Riverside Capital.

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Debt refinancing is common and not unique to Kenya as it is part of managing the cost of debt and easing the burden of repayment.

However, the share of new debt going to redemption has been rising, with maturity building so fast that Treasury can barely maintain the balancing act.

Syndicated loans

Under the rate capping regime, investors prefer short-term loans which mature too quickly while globally, Treasury has relied on syndicated loans - expensive short-term bank facilities that mature every two or so years.

The average maturity period for the country’s whole domestic debt burden has reduced to four years, putting immense pressure on the National Treasury.

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“The average time to maturity of domestic debt has been on a decline (estimated at four years and one month) and this has presented the government with a challenge when it comes to refinancing debt,” said Renaldo D’souza of Sterling Capital Research.

Sterling Capital Research last year indicated that as at June 2017, more than a third of the Sh2.4 trillion domestic debt was placed in Treasury bills (T-bills) that were to mature within a year.

“According to the Medium Term Debt Management Strategy (MTDMS) 2018/19 - 2021/22, the Government aims to lengthen the maturity of domestic debt by reducing the share of T-bills in total domestic debt from 35 per cent in June 2017 to 13 per cent by 2021/22,” said Sterling Capital.

While any country would like to pay off their debts and become debt-free, the fact that we do not generate more taxes than our budget means we constantly need to borrow.

“We are not at a level where government receipts are adequate or surpass its expenditure. This would be a unique situation where the country would be able to reduce its debt levels. Instead, the country’s expenditure is growing faster than its revenues, resulting in an ever growing fiscal deficit,” said D’souza.

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However, refinancing the entire debt increases the risk of having little to invest in productive sectors that boost the economy and the ability to pay.

Kenya’s current domestic debt stands at Sh2.55 trillion while foreign debt stands at Sh2.60 trillion. The biggest risk is that the Government intends to roll over and amortise Sh470 billion this year to avoid borrowing more than Sh1 trillion as several debts, including the Eurobonds, mature.

An amortised bond is where the debt is paid down regularly along with its interest expense over the life of the bond instead of waiting for the redemption of the whole principal amount at the end of the tenure.

Rolling over is extending a maturing debt into a new one by either borrowing additional funds to buy a present debt or getting holders of the present debt to extend it.

However, this is not guaranteed as Treasury Cabinet Secretary Henry Rotich learned in October 2017 when a Sh77 billion syndicated loan matured.

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When Kenya failed to pay and sought to refinance or roll over, some creditors refused to roll over some $103 million (Sh10.6 billion), forcing Treasury to turn to Trade Development Bank (TDB)  to help settle the loan.

Treasury took a Sh77 billion loan from TDB which matures over seven years.

The loan would also be paid semi-annually so that the government is not under pressure to settle one big bullet payment.

This, however, came at a cost as Treasury paid an interest rate of 6.7 per cent plus a six-month libor (1.87 per cent) and a facility fee of three per cent for the seven-year loan.

The loan also attracted a $20,000 (Sh2 million) facility agency fee annually.

The refinanced loan, which elapsed due to prolonged negotiations attracted additional charges of 0.15 per cent (Sh97 million or $969,300) for the six-month roll-over to April year despite the extension having been included in the contract.

Refinancing is still not guaranteed this time. “There are significant external debt maturities, above Sh200 billion ($2 billion) which are due in first half of 2019 and although measures are agreed to refinancing, there is an added layer of uncertainties in the event of a delay or failure to secure refinancing,” said Genghis Capital research analyst Churchill Ogutu. Mr Ogutu said that if Kenya fails to secure rollovers, the worst case scenarios will dent confidence in the Kenyan shilling as foreign reserve exchange will be utilised to honour the external debt obligations.

In the ideal, debt ought to pay for itself from investments but in practice, this is rarely the case. It is hoped that through infrastructure development, the economy will get a boom that will generate enough resources to pay up.

However, infrastructure like other capital intensive investments has a long payback period say 20 years plus depending on the nature of the investment.

This means that in the short run money to pay for their loans will have to come from somewhere else. But where?

As the debt piles up, the government has also slowed down funding development project that could generate revenues to fund debt payment.

For a long time the government has been insisting that debt is going to infrastructure hence it will generate returns to pay back. But that has changed.

Treasury has muffled spending on development while using borrowed cash from Peter to pay Paul.

Treasury has spent Sh415 billion to pay salaries, administration and another recurrent spending, Sh370.8 billion on repaying debt and pensions and only Sh116 billion on development.

“It is arguable as to whether these investments are going into infrastructure development as a significant portion (approximately 30 per cent is used to finance recurrent expenditure (wages and salaries, interest payments etc),” said D’souza.

The austerity measures have even been extended to counties where Council of Governors Chairman Wycliffe Oparanya blamed Treasury for making it hard for counties to spend on development. In the first months of a financial year, he said, the budget line on development spending in the Integrated Financial Management Information System (Ifmis) is normally closed.

“At this time, Treasury is only releasing money according to wages. You can’t divert money to anything else because you have to pay salaries,” Oparanya told Financial Standard on the phone when contacted for comment.

He said this was Treasury’s ways of containing spending. “It’s like we are like being micro-managed from Nairobi,” said Oparanya, noting that when development lines are closed, counties can only pay pending bills from previous financial years which is done through “auto-creation.”

Funding development has now been left to development partners who fund projects outside the debt juggling treasury that seems to be only interested in avoiding default.

“Most capital intensive infrastructure developments are financed partially by development partners such as the World Bank or African Development Bank or through partial concessional financing rather than purely domestic financing,” D’souza said.

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National TreasuryDebt refinancingNational debtPublic debt