Why Kenya is not begging rich nations for debt relief even as coffers run empty
THE STANDARD INSIDER
By Dominic Omondi
| May 24th 2020
Most borrowers who have found themselves in financial distress due to the Covid-19 pandemic have desperately lunged at any opportunity to pause for breath in debt repayment.
Yet Kenya, which has a tight debt repayment schedule, has politely turned down the offer to suspend its payments.
Indeed, several other low-income countries that have been offered an opportunity by the G20 - a club of rich nations - to have their debt payment obligations frozen for six months have been reluctant to take it.
For Kenya, fear of being blacklisted as a potential defaulter by credit rating agencies, and the gush of cheap loans that keeps flowing into its coffers from multilateral institutions, have made the National Treasury to dither.
This comes at a time when the country’s external finance position has been ravaged by the pandemic, with inflows of foreign exchange slowing to a trickle.
Export earnings from horticulture, tourism receipts and remittances have dwindled, denying the country critical foreign reserves to help with its imports and payment of external debt.
Moreover, foreign investors spooked by the effect that the pandemic would have on Kenya’s economy have raided the forex reserves on their way out.
As a result, the International Monetary Fund (IMF) reclassified Kenya as a borrower that was at high risk of defaulting, with the global lender saying that the pandemic had led to a sharp decline in exports and economic growth.
Debt vulnerabilities as a result of Covid-19 also saw Moody’s, a global rating agency, change the country’s outlook from stable to negative, signaling the possibility to downgrade it to a lower rung from the current B2.
“Moody’s would likely downgrade the rating if it were to conclude that the ongoing deterioration in Kenya’s debt burden and debt affordability was likely to exacerbate liquidity risks, raising questions over the State’s ability to refinance maturing debt,” said the agency.
It said the negative outlook reflected the rising financing risks posed by Kenya’s large gross borrowing requirements, which include the need to spread out its external bilateral debt and refinance a large stock of short-term debt.
The revision signalled that Kenya’s B2 rating could be revised to B3, which would see it in the company of fiscal miscreants such as Ghana, which nearly defaulted on one of its external loans.
Yet, a debt moratorium granted by official bilateral creditors to Kenya, said the World Bank in a report, would release resources worth $675 million (Sh72 billion), which the country could use for Covid-19-related expenditures.
It is an attractive offer for a country that has seen its currency battered, with the Shilling trading at 107 against the dollar. Before Kenya reported its first case on March 13, you needed 102.4 shillings to buy one dollar.
National Treasury Cabinet Secretary Ukur Yatani reckons that while the G-20 debt relief initiative is welcome, it also comes with some restrictive terms.
He also fears that taking the offer might lead to the country’s credit rating being downgraded.
With a low rating, Kenya would struggle to get loans from the market at favourable terms with investors jittery about the country’s ability to repay.
“While the initiative seeks to provide temporary debt relief to mitigate the effect of Covid-19 pandemic, Kenya is reviewing this package taking into consideration the structure of its public debt portfolio and the evolving macro-economic environment,” said Mr Yatani in a statement.
Treasury officials have painstakingly been poring over the issue, trying to find a way around it.
It is not just Kenya that has been spooked by the possibility of its ratings being downgraded should they take the G20 offer.
Speaking to Reuters, IMF Managing Director Kristalina Georgieva said most low-income countries fear that the offer could harm their credit ratings and future market access.
The G20 is made up of 19 countries and the European Union. Kenya had paid them about Sh65.7 billion between July last year and March, according to official data.
It was still expected to pay close to Sh73.2 billion in principal and interest before the end of the current financial year in June.
In total, the G20 share of Kenya’s loans stood at about $10 billion (Sh1.07 trillion) by March. This is about a sixth of the total public loan at Sh6.3 trillion.
But the steady flow of cheap loans from multilateral institutions might also have made Treasury to have a change of heart.
Churchill Ogutu, a research analyst at Genghis Capital, says the World Bank cash will be critical in spurring the foreign exchange reserves to estimated $9.5 billion against recent levels. Forex reserves were at $8.5 billion on Friday.
“This will cushion against the upcoming short-term debt obligations, in particular, interest payments on Eurobond 2014 and Eurobond 2019,” he said.
Treasury had paid about Sh80 billion worth of commercial loans and was expected to pay commercial creditors - including Eurobond holders, commercial banks and supplier creditors - about Sh94 billion by the end of the current financial year.
So far, Kenya has received Sh213 billion from multilateral institutions in under two months to help it address the health and economic impact of Covid-19, with the latest being Sh22 billion from the African Development Bank on Friday.
The World Bank has extended Sh113 billion to Kenya while the IMF gave Sh78 billion.
On receiving the AfDB loan, Yatani said Kenya’s engagement with international financial institutions had paid off.
“We are happy as most of these highly concessional loans will go a long way in injecting new money and therefore replacing commercial ones,” he said.
Kenya has recently come to rely on expensive commercial loans, given at market rates of up to eight per cent. The loans have short or no grace periods and short repayment periods.
The share of commercial loans in the country’s debt mix has surged by over 750 per cent, raising the cost of debt servicing, said Treasury’s Public Debt Management Office in a recent report.
In 2010, the share of commercial loans stood at four per cent compared to cheap loans from multilateral institutions, which stood at 64 per cent. Bilateral loans were at 33 per cent 10 years ago.
This has since changed with the share of concessional loans from World Bank, IMF and other multilateral institutions declining to 33 per cent even as the fraction of commercial loans shot up to 34 per cent.
In the year to June 2019, for every Sh100 the country earned from taxes, non-tax revenues and grants from donors, Sh57 went into servicing debt.
Six years ago, the Treasury would pay out Sh25 from every Sh100 earned.
IMF, which in 2018 noted that Kenya’s probability of defaulting had increased from low to moderate (it has since deteriorated further to high), said interest payments on public debt increased to almost one-fifth of the country’s revenue, putting it among the top five frontier economies.
This was due to the accumulation of expensive loans, including over Sh500 billion in Eurobond, which is debt borrowed from international markets and denominated in dollars.
It is not clear whether Kenya, with a total debt service of over Sh900 billion, will dip into the global financial market as soon as the effects of Covid-19 abate to refinance some of the loans.
Outgoing World Bank Country Director Fillipe Jaramillo noted that while the cheap cash that the World Bank has offered Kenya will help significantly, the country’s refinancing needs exceed what they offered.
Treasury needs to spread out its external bilateral repayments, most of which will be bunching up in the next financial year.
It will thus need to borrow, either by issuing a sovereign bond (a kind of IOU) or from a syndicate of commercial banks. With a lower credit rating, Kenya will struggle to refinance.
Its rating will even be worse should Kenya “participate in any debt relief initiative that requires the participation of private sector creditors,” according to Moody’s.
Such a decision could carry further negative implications for the country’s rating.
While Moody’s downgraded the rating of other countries such as Ethiopia, it affirmed Kenya’s at B2 with the expectation that Kenya will not participate in any debt relief initiative.
“And more generally that Kenya will meet all its debt service commitments to private sector creditors,” it said.
Moody’s downgraded the ratings for Ethiopia to B2 from B1 and placed the ratings on review for further downgrade.
Fitch, another rating agency, has downgraded the rating for close to 18 developing countries as their yields increase.
Kenya might also have realised that there is no need to take such a risk when its external debt payment is expected to reduce by Sh11 billion in the current financial year.
The government expects to pay Sh255 billion compared to Sh266.2 billion that it paid to foreign creditors in the 2018/19 financial year.
This has left the National Treasury with some breathing space as Covid-19 ravages through the country’s foreign exchange reserves, leaving it with little to pay its external debts as they fall due.
Even more critical is that Treasury will need a ‘full tank’ of foreign currencies as it prepares for a marathon of external debt repayment starting July.
So far, Kenya has paid Sh98.3 billion to external creditors in the first nine months of the current financial year compared to Sh148.9 billion in the same period last year.
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