Last-minute move save country from debt hole Sh10.8b Financial abyss

Treasury Cabinet Secretary Njuguna Ndung’u. [Wilberforce Okwiri, Standard]

The government sidestepped an economic landmine after settling a crucial instalment on one of its maturing international bonds through a last-minute interest payment.

The National Treasury told jittery investors on Thursday evening that it had made a Sh10.8 billion “coupon” payment for the $2 billion (more than Sh312 billion) Eurobond ahead of the last international banking working day.

Even then, fresh jitters have been raised on Kenya’s debt distress after the government backtracked on an initial repayment plan trumpeted by President William Ruto, say analysts.

This came amid mounting anxiety and speculation on whether Kenya would default on its obligations.

“The timely settlement of interest payments on the Eurobond has not only sent a positive signal to investors but has also resulted in a reduction in yields on Kenya’s Eurobonds in the global financial markets,” said Cabinet Secretary Njuguna Ndung’u.

The recent $68.7 million interest payment plan was a departure from President Ruto’s earlier intention to buy back part of the $2 billion Eurobond, signalling financial distress.

Ruto earlier said his administration planned to this month pay off the first $300 million (Sh46 billion) installment of the $2 billion Eurobond debt that is due next year in June.

“Our efforts to stabilise the situation have yielded such progress that next month, in December, we will be able to settle the first $300 million (Sh46 billion) instalment of the $2 billion Eurobond debt that falls due next year,” he had said earlier in the year in his State of the Nation address in Parliament.

Ruto’s initial plan had, however, sparked negative sentiments with global ratings agency Moody’s equating it to a default.

Long-lasting implications

Kenya was being watched closely with a new wave of sovereign debt defaults and restructurings underway across the world. Earlier this month, Central Bank of Kenya Governor Kamau Thugge had also revealed the county had suffered a setback after receiving only part of the expected proceeds to conduct the Eurobond buyback from the Trade Development Bank. The latest payment averted a disastrous economic consequences caused by a default, said analysts.

Kenya Kwanza administration officials have been burning the midnight oil seeking to avoid a default on the Eurobond debt - an unprecedented move for a country that has never before defaulted on debt, which would have far-reaching and long-lasting implications for Kenya.

Economies like Greece, Zambia, Lebanon and Argentina have shown that a default could initiate an economic downturn in unprecedented ways.

In the event of a default, credit rating agencies would further downgrade the country. A default would also impact Kenya’s ability to borrow in the international markets in future, as global lenders would demand higher interest rates.

This is comparable to an individual’s credit score, affecting how likely it is for a bank to grant them a loan.

For a country, it is a situation that can take decades to recover from. The decline in investor confidence, limited credit availability and higher borrowing costs can significantly impact business investment, consumer spending and overall economic activity.

Additionally, budget constraints may lead to an increase in the unemployment rate, a decrease in government revenue and a reduction in essential public services.

This economic decline has the potential to trigger a harmful cycle of slower growth, increased debt payments and mounting financial strain.

Defaulting on a loan can exacerbate social injustices and financial problems, which in turn can ignite protests and other forms of political unrest.

Government-imposed austerity measures such as budget cuts, reduced public services and higher taxes are often the consequence of a default.

This week Prof Ndung’u said the timely settlement of interest payments on the Eurobond had “sent a positive signal to investors.”

“The final interest payment on this Eurobond is scheduled for the last week of June 2024, alongside the repayment of the principal amount of $2 billion,” he said.

IMF lifeline

Kenya was in the spotlight on its repayment plan at a time when Ethiopia recently became Africa’s third default in as many years after it failed to make a $33 million “coupon” payment on its only international government bond.

Africa’s second most populous country was expected to make the payment on December 11. This saw it join Zambia and Ghana in a full-scale restructuring.

The repayment plan for Kenya’s Sh302 billion Eurobond was developed by President William Ruto’s administration to stave off a default and had received support from major global lenders.

Ruto’s top economic adviser Dr David Ndii and the CBK governor had earlier announced that the 2024 Eurobond (refinancing) has been completely funded.

The International Monetary Fund (IMF) has various facilities and can supplement Kenya’s programme with up to $650 million (Sh101 billion), which they have already agreed to approve, said Ndii. Additionally, they can provide access to an extraordinary window, and Kenya has access to the entire IMF balance sheet.

“Without the IMF programme, we would probably default,” said Ndii.

The cash-strained government is also banking on the controversial Finance Act 2023, which hiked taxes on fuel, housing and digital content to mobilise additional revenues.

“Substantial external inflows from the World Bank, IMF and other Development Finance Institutions, in addition to key bilateral partners, are anticipated between January and March 2024,” said Ndung’u. 

But the tax proposals have drawn criticism from some Kenyans and various interest groups as well as the Raila Odinga-led opposition coalition, Azimio, arguing the cost of living is already too high, leaving no room for additional taxes.

The shilling has tumbled past the 20 per cent mark since the start of the year, adding to the pressure on debt repayment.

World Bank warning

According to a recent report by the World Bank on Kenya, the government may face difficulties in refinancing its maturing debt due to the increasing borrowing costs and challenging market conditions.

“Kenya’s Eurobond yields have been rising as international financial markets remain tight,” said the World Bank study. Refinancing risk refers to the possibility that a borrower will not be able to replace a debt obligation with suitable new debt at a critical point.

Factors that are beyond the borrower’s control - such as rising interest rates or a shrinking credit market - often play a role in their ability to refinance.

The Bank’s concerns echo mounting concerns that the unrelenting volatility in the global credit market and a slowdown in economic growth threaten to increase pressure on Kenya’s ability to refinance its maturing debt.

However, IMF and the African Development Bank say Kenya will not have difficulties honouring the looming maturing debt.

“We do not see Kenya facing difficulties to serve the $2 billion next year. Why? First, because reserves are still quite sound,” said IMF Managing Director Kristalina Georgieva in an earlier interview .

Kenya’s public debt hit Sh10.58 trillion in September, pointing to borrowing appetite by the Kenya Kwanza government and the impact of the weakening shilling against foreign currencies.