High rates shock Kenya out of external borrowing

Rising yields on external commercial loans due to a strong US dollar saw Kenya make an about-turn on plans to restructure payments of its first $2 billion (Sh243 billion) bond taken in 2014.

This is revealed in the 2022 Annual Public Debt Management Report by the National Treasury; making it the second time in less than a year that high-interest rates are pushing the country out of the external debt market.

According to the report, the liability management operations were not implemented due to unfavourable international market conditions due to the elevated yields as a result of the global monetary policy to increase rates to avert inflation rates as well as the Ukraine and Russia Crisis.

The exchequer had already initiated engagements with the holders of targeted commercial debt earmarked for re-profiling and proposed amendments to the facility agreements.

“The proposed review of terms included repeal of the punitive prepayment clauses which require prepayment fees that could arise as a result of voluntary pre-payment of any amount outstanding,” the report reads in part.

The exchequer did not however disclose the outcome of the negotiations.

In June, Kenya was forced to shelve plans to go for the fifth Eurobond worth $1 billion (Sh121 billion) but instead hinted at opting for syndicated loans from banks that would lend it at cheaper rates.

At the time, commercial loans in the international market were going for a rate of about 12 per cent from seven per cent.

“Last year we borrowed at six per cent and now it stands over 12 per cent. This is no longer feasible,” the then National Treasury CS Ukur Yatani said.

The country is now at the crossroad with interest rates on sovereign bonds rising on the strengthening dollar that has gained close to eight per cent in just one year.

For instance, the maturity of the first Eurobond will push up external debt service costs by 97 percent from Sh241 billion in the current financial year to Sh475.6 billion in the coming financial year.

Pressed on how it plans to meet the jumbo maturity, new Treasury Cabinet Secretary Njuguna Ndungu said the exchequer would explore options in cheaper financing from bilateral and multi-lateral sources.

“There are pockets of concessional financing that we can use to help us manage our liability and create space. This is the way we want to go,” he when he assumed office last week.

A weak shilling is likely to increase Kenya's debt obligation by more than  Sh500 billion by December if the current depreciation trend prevails.  

On Thursday, a financial consulting firm, PKF projected the shilling to trade as high as 122 units against the US dollar by end of the year. 

The devaluation of the country's currency has already pushed up its obligation on external debt by Sh410 billion since June last year.

The country's debt increases by Sh40 billion any time the shilling drops a unit against the US dollar.

Most of Kenya's external debt which accounts for almost half of the country's total public debt is denominated in US dollars, with the latest data from the National Treasury showing that it accounts for 71 per cent of external debt.

Other currencies including Euro, the Japanese Yen, the Chinese Yuan, and the Sterling Pound hold debt to 18.0 per cent, 6.6 percent, 5.4 per cent and 2.5 per cent, respectively.

According to the report, the total public and publicly guaranteed debt stock in nominal terms as of June 2022 was Sh8.6 trillion against a debt ceiling of Sh10 trillion.

This comprises external debt of Sh4.3 trillion and domestic debt of Sh4.2 trillion. The proportion of external and domestic debt accounted for 50.1 per cent and 49.9 per cent of the total debt portfolio respectively.