Rising borrowing costs and tougher market conditions could mean that the government will struggle to refinance upcoming maturing debt, the World Bank says in a new report on Kenya.
“Overall public debt remains sustainable; however, risks persist,” says the World Bank in its latest regular Kenya Economic update released on Wednesday.
The World Bank singled out the $2 billion (Sh277 billion) bullet repayment of Kenya’s debut Eurobond due in June next year.
According to the World Bank study, the decline in commercial loans (suppliers’ credit, commercial banks, Eurobonds) in the recent five years – from 35.2 per cent of total external debt in March 2019 to 27.1 per cent in March 2023 – has contributed to the accumulation of relatively less costly and long maturity concessional debt, which offers relief to the Kenya Kwanza administration.
“However, 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,” says the World Bank.
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 World Bank’s concerns on Kenya’s refinancing risks 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.
“Kenya’s Eurobond yields have been rising as international financial markets remain tight,” said the World Bank study.
The World Bank’s view, however, bucks the view of other global lenders such as the International Monetary Fund (IMF) and the African Development Bank (AfDB), which say Kenya will not have difficulties to honour the looming maturing debt.
IMF Managing Director Kristalina Georgieva told The Standard in a recent interview that the global lender does not see Kenya facing any difficulties in paying up the Eurobond.
“We do not see Kenya facing difficulties to serve the $2 billion next year. Why? First, because reserves are still quite sound,” she said.
“The country has some $6 billion (Sh834 billion) in reserves, and it has been taking very prudent measures both on the fiscal front and on the monetary policy side to make sure that this reserve position remains sound. Second, Kenya can raise money through syndicated loans or other ways, including from us, the IMF.”
Her view was recently echoed by the African Development Bank (AfDB) in a separate interview.
“I don’t think President William Ruto and his team would want anything like a default. It would be very catastrophic both financially and politically, and I know they are doing all that is within their power to circumvent that,” AfDB Director-General for East Africa Nnenna Lily Nwabufo told The Standard recently.
The cash-strapped government is banking on the controversial Finance Bill 2023, which seeks to hike taxes on fuel, housing and digital content to mobilise additional revenues in the face of rising debt repayments such as the maturing Eurobond.
But the tax proposals in the Bill have drawn sharp criticism from ordinary Kenyans and various interest groups as well as the Raila Odinga-led opposition coalition, arguing the cost of living is already too high, leaving no room for additional taxes.