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How oil discoveries derailed Kenya and Uganda debt plans

By Otiato Guguyu | December 11th 2018
Finds of so-called black gold by two countries may have lured them into the speculative credit market trap, borrowing heavily against the hope of reaping big from new resource.

The discovery of oil at the little known Kodekode village in Nakukulas location in Turkana East District in 2012 was a turning point for the country in many ways.

The big find, as it came to be known, had thrust Kenya among the league of oil producing countries overnight and was hailed as a game changer for a country whose other traditional exports were shrinking at an alarming rate.

However, unknown to many Kenyans, the mandarins at Treasury had already started crunching the numbers in the intervening months between the announcement and the actual extraction of the first drop of oil from the Turkana fields.

The oil find would start shaping State policy in a move that was seen as having handed the country a blank cheque to start spending oil money that was not there, driving it on the brink of a debt crisis.

The oil discovery also had a geopolitical significance, with landlocked Uganda also making a similar find.

“The oil that was discovered in Uganda is much lower than what has been discovered in Kenya,” then Energy Minister and current Meru Governor Kiraitu Murungi said at the time.

A resource race would ensue as Kenya looked to outdo Uganda in being the first country in the region to export oil despite the uneconomical cost of trucking the commodity all the way to the Mombasa port.

According to the Kenya Civil Society Platform on Oil and Gas (KCSPOG), transporting 2,000 barrels of oil per day to Mombasa would cost the country Sh3 billion.

Kiraitu was to be proven wrong a few years later as Uganda’s find proved to be significant at 6.5 billion barrels against Kenya’s 754 million barrels.

This notwithstanding, East Africa was suddenly thrust into the global scene, expecting a huge windfall from the black gold which with the inclusion of South Sudan’s 3.5 billion barrels made up 0.63 per cent of all the proved reserves in the world.

“East Africa’s discovery of oil does not rank it amongst uniquely endowed nations, nor does the quantity of oil suggest that those discoveries will make a significant impact on the world market,” the Institute of Economic Affairs said in a report.

But it was enough to lure both countries into the speculative debt markets. This as they went on a dollar debt binge that is now threatening their economies.

Uganda’s national debt has nearly trebled in the last three years to more than 50 per cent of gross domestic product (GDP), creating a risk of default risk, since nearly two-thirds of the debt is external.

Kenya’s debt, on the other hand, has hit Sh5.1 trillion this year and the country now faces its major test in settling two significantly heavy dollar-dominated loans without any viable source of the money.

The trend has caught on in other African countries, prompting the withdrawal of the International Monetary Fund (IMF) support in Kenya, Zambia, Congo and Mozambique which could otherwise have offered dollars to restructure loans.

Kenya was among the sub-Saharan countries under IMF programme that has risen nearly five-fold between end-2014 and end-2017 from $1.8 billion (Sh180 billion) to $7.2 billion (Sh720 billion) to tame the financing gap and manage debt.

Only Chad and Gabon have secured bailouts from the IMF.

Mozambique has set the pace for resource-rich African countries to pay off their dollar debts with natural resources.

The southern African country has reached an agreement with the bulk of its creditors to restructure a $726.5 million (Sh72.6 billion) Eurobond, including extending maturities and sharing future revenues from huge offshore gas projects, the finance ministry said on Tuesday.

Bloomberg reported that under the deal, Mozambique would issue a new $900 million (Sh90 billion) Eurobond maturing in 2033 with a coupon of 5.875 per cent - just over half what the current outstanding bond was designed to pay in interest.

Through a separate instrument, creditors would also receive five per cent of future fiscal revenues from the Area 1 and Area 4 natural gas projects, though payments would be capped at $500 million (Sh50 billion).

Kenya expects to settle Sh185 billion foreign commercial debt including $750 million (Sh75 billion) five-year Eurobond next June coupled with $766 million (Sh76.6 billion) syndicated loan in March.

Capital outflows

The country is hoping to roll over part of the debt by getting a syndicate of banks to stretch repayment dates.

However, Kenya operates in a global economy and while post-2008 global financial crisis meant Americans were printing money and lending rates were as low as 0.25 per cent, the debt was affordable.

African countries were issuing bonds at an average of six per cent and lately at an average of eight per cent yet they celebrated oversubscription while foreign creditors were laughing all the way to the bank.

The 10-year US Treasury yield was 2.46 per cent at the beginning of this year and had risen to 3.09 per cent by October 11 this year.

The US Federal rates increased by 0.25 per cent to 2.25 per cent. Global macroeconomic shocks such as capital outflows from emerging markets and oil price instability could weaken the shilling, increasing external debt repayment costs.

This means that refinancing current loans will inevitably be expensive.

Although some analysts say that the Mozambique way is a viable option, Treasury officials say the country will not explore this route.

“We are not including any matter of oil in any of our economic outlooks or projections,” said Treasury Principle Secretary Dr Kamau Thugge.

Kenya will make about Sh6.4 trillion from the Turkana oil find alone if commercial production starts by 2020.

An Oxfam report has also suggested that the oil will be completely depleted by 2043, about 23 years, while IEA estimates that at 80,000 barrels a day, Kenyan reserves will be depleted in just under 25 years.

The country has four Eurobonds and one tap sale. The first Eurobond is estimated at $270 billion (Sh27 trillion), part of which has to be paid in June next year and in 2024.

This year, the country also took a 10-year $1 billion (Sh100 billion) bond that matures in 2028 and a 30-year $1 billion bond that matures in 2048.

Oil may be the only steady source of dollars that could service these debts since the Government has to keep on borrowing.

With oil trading at $59 (Sh5,900) a barrel, Kenya could easily get dollars from its finds which according to Global development charity Oxfam report, the break-even point for Kenya’s oil will be about $45 (Sh4,500) per barrel.

Oxfam says the country will make on average about Sh280 billion every year from the estimated 600 million barrels of oil in Turkana.

“The oil royalties are spent already, we need more oil or a faster working economy,” said Deepak Dave of Riverside Capital.

“By borrowing against oil reserves, the Government is now in the business of taking investor type risk instead of renting a national treasure. However, debts raised from infrastructure should be repaid out of that specific infrastructure,” said Mr Dave.

However, as Aly Khan-Satchu, chief executive of Rich Management, said in an earlier interview, the country’s biggest risk is that its investments have a sub-optimal return on investment.

The SGR cannot pay for itself and is actually costing the country more money to maintain as it made a Sh9.98 billion loss in its first year of operations.

Another radical move proposed by analysts would be to take Kenya’s debt package it into one and sell it on the open market for a lesser rate essentially called debt restructuring.

The National Treasury has been looking for a loan negotiation and financial modelling expert to help reform the debt office.

The adviser, to be hired through the World Bank, will need to be good at issuing and refinancing debt.

According to a notice by the ministry, the adviser will serve for the next eight months, which is crucial for the Government’s management of the first Eurobond and syndicated loan repayments.

“The consultant should have an excellent understanding of the financial sector reform issues with specific emphasis on debt management, issuance and restructuring,” said the notice.

The expert is also supposed to help drive changes at the Treasury’s debt management office, which is under pressure from international partners over worrying levels of repayment of the Sh5.1 trillion debt.

Dr Thugge, however, downplayed this was just a regular appointment.

“We are not looking for a restructuring expert. We are simply looking for someone to head the PDMO since the contract of the previous head expired. It is a regular occurrence in the Government,” he said.

Treasury also issued an internal advertisement in July seeking 20 officers to fill vacancies after breaking up its risk and debt mobilisation functions.

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