Kenya must go for 5th Eurobond to clear maturing loans - Fitch

Already the government also plans an additional $600 million in syndicated loans from commercial banks.

In Summary
  • Kenya's total public debt stood at Sh8.7 trillion in October
  • Yesterday, the shilling closed the market at the lowest level ever of 123.05 against the US dollar as the Fed rate rose for the fifth time this year. 
National Treasury and Planning CS Njuguna Ndung'u
FIXING ECONOMY: National Treasury and Planning CS Njuguna Ndung'u
Image: FILE

Kenya will have to go for the fifth Eurobond in order to meet upcoming external debt obligations, including the $2 billion Eurobond issued in 2018.

This is just one of the reasons why the global credit rating firm, Fitch Rating, lowered the country's foreign debt profile to B from B+ with a stable outlook. 

"We forecast external debt service to rise to 24.8 per cent of current external receipts in 2024, up from 16.6 per cent in 2023, owing to the $2 billion Eurobond that must be settled in June 2024," Fitch said.

The firm assumes that the government will meet its external debt obligations of $3 billion in the fiscal year ending June 2023 through a combination of official and commercial borrowing.

They include approximately $900 million in IMF disbursements, a U$750 million World Bank budget support loan, and $300 million from the Eastern and Southern African Trade and Development Bank.

The government also plans an additional $600 million in syndicated loans from commercial banks.

"We also expect that the government will be able to meet its FY24 external debt obligations through disbursements from the IMF and other multilateral lenders and through additional commercial borrowing,' Fitch said in the latest report.

These sentiments are shared by economist Mohamed Wehliye who says that bullet payment for 2024 requires a good plan.

"Assuming the international markets don't open for Kenya by then, partial buyback and replacement of balance with a short-term Eurobondof 5-6 years is probably the best way to deal with bullet payments for the sovereign bond in 2024," he said.

In June last year, Kenya scrapped plans to issue a $1 billion Eurobond that was expected at the end of the last financial year as the rising cost of financing foreign debt coupled with a relentlessly depreciating currency. 

Already, yields on the 10-year bonds maturing in 2024 and 2028 have risen sharply and continue to spike amid the Ukraine conflict and the announcement by major central banks, including those in the US and the UK, signaling higher repayment costs.

Yesterday, the shilling closed the market at the lowest level ever of 123.05 against the US dollar as the Fed rate rose for the fifth time this year. 

The Federal Reserve raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite some promising signs lately.

Keeping with expectations, the rate-setting Federal Open Market Committee voted to boost the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25 and 4.5 percent.

The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s.

Kenya's debt obligation rises by Sh40 billion anytime the shilling drops by a unit against the greenback which accounts for 70 per cent of the country's foreign debt. 

Downgrading Kenya, Fitch cited several factors including twin fiscal and external deficits, relatively high debt, deteriorating external liquidity, and high external financing costs.

"The government faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion Eurobond in June 2024, which combined with high current account deficits, will lead to sustained pressure on international reserves," Fitch says.

According to the agency, the successive shocks of the coronavirus pandemic and the Russia-Ukraine war have contributed to a widening current account deficit and lower international reserves.

Fitch forecasts the current account deficit to grow to 5.9 per cent of GDP ($6.9 billion) in 2022 and to remain at broadly the same levels in 2023 and 2024.

As a result, the international reserves position has fallen to $7.2 billion as of November 2022, down from $9.5 billion at the end of 2021.

Despite IMF and other official disbursements, we forecast reserves to remain under pressure reaching $7.4 billion at end-2023.

"This would constitute a fall to three months of current external payments at end-2023, down from 4.8 months of at end-2021,'' says Fitch.

The rating agency says that strong revenue performance helped the fiscal deficit narrow to 6.2 per cent of GDP in FY22, down from 8.2 per cent in FY21.

According to Fitch, the improvement came from a combination of strong revenue performance after several years of declining revenue and a fall in capital expenditure.

The incoming government has ended the subsidy on petrol and is working on a supplementary budget that cuts an additional 0.7 per cent of GDP in expenditure.

"We forecast a fiscal deficit of 6.1 per cent of GDP in FY23, above the forecast 3.5 per cent 'B' median'.

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