DEBT BURDEN

Kenya’s high debt service ratio worry experts as exports shrinks

In Summary
  • According to experts a country's international finances are healthier when this ratio is low. For most countries the ratio is between 0 and 20 per cent
Treasury. Photo/Monicah Mwangi
Treasury. Photo/Monicah Mwangi

Kenya’s export as per percentage of Gross Domestic Product (GDP) has hit a decade low, even as it's external borrowing balloons, worsening the country’s debt service ratio.

A World Bank report dubbed Unbundling the Slack in Private Sector Investment,  shows Kenya’s exports as percentage of GDP fell to 6.9 per cent in 2018 from a high of 13.9 per cent in 2011, the lowest in a decade.

In 2008, Kenya's exports as percentage of GDP was 12.3 but dropped marginally to 12.2 in 2009. It later rose to 13.1 per cent in 2010 before hitting a high of 13.9 per cent in 2011.

The country has been witnessing a rapid downward trend since 2012 when export to GDP dropped from 12.3 in 2012 to 10.6 the following year.

In 2014, it further dropped to 10.1 per cent, 9.3 per cent in 2015 and 8.1 per cent in 2016 before shrinking further to 7.3 the following year.

A country's debt service ratio is debt service payments to its export earnings.

According to experts a country's international finances are healthier when this ratio is low. For most countries the ratio is between 0 and 20 per cent.

According to World Bank, Kenya’s debt service ratio is currently at 10.6 per cent, having doubled from a single digit of 5.3 per cent in 2013.

Data from the Central Bank of Kenya shows Kenya’s total public debt hit Sh5.8 trillion in June, Sh2.78 trillion from local market and Sh3.02 trillion borrowed externally.

Last year, Kenya’s export value rose to Sh612.9 billion from Sh594.13 billion. Even so, the balance of trade deficit rose by 1.42 per cent from Sh1.13 trillion to Sh1.15 trillion.

World Bank classifies Kenya as a “medium performer” in terms of the quality of its policies and institutions as measured by a three-year average of the World Bank’s Country Policy and Institutional Assessment (CPIA) Index.

 

The relevant indicative thresholds for this category are: 40 per cent for the Net Present Value (NPV) of debt-to-GDP ratio, 150 per cent for the NPV of debt-to-exports ratio, 250 per cent for the NPV of debt-to-revenue ratio, 20 per cent for the debt service-to-exports ratio, and 30 per cent for the debt service-to-revenue ratio.

These thresholds are applicable to public and publicly guaranteed external debt.

Although Kenya’s debt service ratio is within the 20 per cent margin, analysts are worried at rising ratio, subdued revenues and the government’s appetite for external debts.

‘’The more worrying trends that show whether the country will be solvent by June next year is exports to imports, revenue to expenditure. Debt service to revenue and foreign debt service to exports, all these are very red,’’ Reginald Kadzutu, chief investment officer at Amana Capital said.

Kenya’s export as percentage of GDP on a ten - year low .Meanwhile, It has been loading foreign debt like mad. It is worrying,’’ a financial risk manager Mihr Thakar said.