Eurobond: Inside Ruto's 2024 roadmap to avoid Sh302b economic catastrophe

The repayment plan for Kenya’s Sh302 billion Eurobond ($2 billion), which is scheduled for next year, has sparked controversy and is being keenly watched by global investors.

The repayment plan was developed by President William Ruto’s administration to stave off a default and has received support from major global lenders.

Its significance now lies in its potential to prevent a disastrous economic event caused by a default. Kenya is seeking to avoid a default on the Eurobond debt -  an unprecedented move for a country that has never before defaulted on debt and which would have far-reaching and long-lasting implications for Kenya.

A random examination conducted by Financial Standard in 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. A default would also impact Kenya’s ability to borrow money in the international markets in future, as global lenders would demand higher interest rates for loans to a country that recently defaulted.

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 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 unrest.

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

These policies may disproportionately affect marginalised groups, leading to public discontent, social unrest, and even political instability. On Thursday, President William Ruto finally revealed a much-awaited plan to pay off the Eurobond.

The Head of State said his administration plans to next month pay off the first $300 million (Sh45 billion) instalment of the $2 billion Eurobond debt that is due next year in December.

“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 (Sh45 billion) instalment of the $2 billion Eurobond debt that falls due next year,” he said in his State of the Nation address in Parliament.

The President did not provide additional plans on where the government will raise money to pay off the rest of the Eurobond debt.

Earlier in the week, President Ruto’s top economic adviser Dr David Ndii announced that the 2024 Eurobond (refinancing) has been completely funded.

He also mentioned that an IMF mission is currently present to finalise a new financing programme, where Kenya will explore different options.

The IMF has various facilities and can supplement Kenya’s programme with up to $650 million (Sh98.4 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, said Ndii.

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

The cash-strapped Ruto government is banking on the controversial Finance Act 2023, which hikes taxes on fuel, housing and digital content to mobilise additional revenues in the face of rising debt repayments such as the maturing Eurobond.

It is also eyeing new levies to beef up its revenues.

But the tax proposals have drawn sharp criticism from 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.

With several African countries struggling with unsustainable debt, Kenya is being closely watched as a test case for how borrowers and creditors might navigate a broader debt crisis.

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

Ruto in his address to Parliament said: “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.

However, 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.

Bullet payment

The World Bank stated earlier that the rise in borrowing costs in the external financial market has led to a surge in refinancing risks due to the upcoming bullet payment of the Eurobond.

“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 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.

Ruto’s intention to buy back part of the $2 billion Eurobond has also sparked negative sentiments with global ratings agency Moody’s equating it to a default. Redeeming the bonds at a price below par value would constitute an economic loss to investors,” a Moody’s’ official was earlier quoted as saying.

Moody’s argued it deems a distressed exchange occurs when there are economic losses to creditors and when the transaction has the effect of allowing the issuer to avoid a likely default.

“We need to see the details and the terms of the buyback before we can assess whether it constitutes a distressed exchange, and therefore a default under Moody’s definition,” a Moody’s official told Bloomberg.

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 honouring the looming maturing debt.

IMF Managing Director Kristalina Georgieva. [Courtesy]

Facing difficulties

IMF Managing Director Kristalina Georgieva told Financial 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 (Sh906 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 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 Financial Standard recently.

AfDB Director-General for East Africa Nnenna Lily Nwabufo. [Courtesy]

Kenya has for years, been on a path of debt accumulation, amid red flags from global lenders, ratings agencies and even internal warnings from Treasury mandarins. Due to these budget deficits, successive Kenyan governments have had to resort to debt, by issuing dollar-denominated bonds (Eurobonds) on international markets.

In addition, growth has been slower than the rise of debt, and therefore the Kenyan debt burden has become every year harder to bear.

Kenya’s public debt hit Sh10.58 trillion in September, with the National Treasury revealing that both domestic and external liabilities have risen rapidly under the government.

The elevation of the public debt points to a sustained borrowing appetite by the Kenya Kwanza government and the impact of the weakening shilling against foreign currencies.

The debt levels have grown at a time when Treasury has acknowledged Kenya’s headroom for more public borrowing is narrowing in a move expected to pile pressure on the taxman to raise more funds for servicing public debt.

“As of September 31, 2023, gross public debt increased by Sh310.0 billion to Sh10.58 trillion compared to Sh10.27 trillion at the end of June 2023,” said National Treasury Principle Secretary Chris Kiptoo in a presentation before the National Assembly’s Public Debt and Privatisation Committee.

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