Inside Ruto's Sh320 billion Eurobond gamble

President William Ruto. [PCS]

President William Ruto’s cash-strapped administration is seeking to raise billions of shillings of new debt from international investors in a bid to help Kenya repay its Sh320 billion Eurobond debt with the June repayment deadline just five months away.

The Kenya Kwanza administration on Wednesday, offered investors holding its $2 billion (Sh320 billion at current exchange rate) bond an opportunity to exchange their current holdings for a fresh bond similarly denominated in US dollars.

The plan is seen as an acid test for the government’s ability to repay the massive debt and avoid a potential full-blown crisis, experts told The Standard on Thursday.

Following the formal offer by Kenya, it now remains to be seen the amount of money that will be able to be raised.  

The government revealed that the buyback offer, which includes the payment of accrued interest will conclude on February 14th.

Overseas investors have been closely monitoring Kenya’s strategy amid jitters about the possibility of a default and comes at a time when the country’s falling hard currency reserves, a steep weakening of the Shilling and revenue challenges have raised questions about Kenya’s ability to pay off the bond.

“It’s a bet on a straightforward refinancing. They’re hoping new debt will roll over the old debt, and lengthen the maturity out to the term of the new notes (debt),” said Deepak Dave of Autonomi Capital.

“The questions remain if they’ll raise the full amount that is $2 billion, and how expensive it will be compared to the old debt.”

In May 2019, Kenya raised $2.1 billion (Sh320 billion) from international capital markets to pay off other loans, including a $750 million Eurobond that matured on June 24, 2019, and other debt obligations.

Debt default

The Ruto government is similarly seeking to avoid a default on the Eurobond debt -  an unprecedented move for a country that has never before defaulted on debt.

“If it fails the government debt situation will start to look very precarious,” said Mr Dave.

“Which will either force strategically wise decisions or panicked mismanagement. Either way, it is a crossroads for Kenya Kwanza administration.”

Separately, on Thursday, the National Treasury announced that it had entered into a partnership with a Japanese government-owned insurance company to issue a Samurai bond valued at $500 million as the Government seeks to diversify its funding sources.

A Samurai bond refers to a bond issued in Japan, denominated in yen.

Several global lenders including the International Monetary Fund (IMF), the World Bank, the African Development Bank (AfDB), the Africa Export-Import Bank (Afreximbank) and the Trade Development Bank (TDB) have pledged billions of dollars in a new liquidity lifeline for the government to settle its maturing obligations amid mounting concerns about Kenya’s repayment ability. 

Public borrowing

The National Treasury earlier admitted that Kenya’s headroom for more public borrowing is narrowing.

Treasury Cabinet Secretary Njuguna Ndung’u said this is compounded by lower-than-expected revenues that could impact the government’s ability to deliver on its ambitious bottom-up promises.

“The economy faces two extreme constraints: financing constraints as tax revenues generated cannot finance the development we wish to have, and on the other extreme we have limited headroom for debt,” he said earlier.

“We are choked with inherited debt that must be paid.”

Public debt has hit the Sh11 trillion mark, according to the latest estimates, as both domestic and external liabilities rise rapidly.

President William Ruto’s revenue plan is also yet to gain momentum as tax collection has been falling short of the government’s target.

A random examination conducted by The Standard on various economies like Greece, Zambia, Lebanon, and even Argentina reveals 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.

This would see Kenya isolated from the international credit market.

This dynamic is comparable to an individual’s credit score, affecting how likely it is for a bank to grant them a loan and 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 would then significantly impact Kenya’s business environment, limit consumer spending, and dampen overall economic activity.

Additionally, the resultant budget constraints arising from default can trigger an economic crisis and lead to an increase in the unemployment rate, a decrease in government revenue, and a reduction in essential public services like health, new roads and education.

Ruto has previously sought to assure global investors that Kenya will not default on its debt. “I can now state with confidence that we will and shall pay the debt that has become a source of much concern to citizens, markets and partners,” he said.