Ruto softens stance on foreign borrowing

Addressing governors in Naivasha, Ruto who has been critical of local debt attracting interest rates of more than 10 per cent said the international market has finally opened its doors for Kenya. 

''The European debt market has now reinstated confidence in us. We can now access syndicated loans that we have been looking for to fund development projects at seven to eight per cent,'' said the President.

His sentiments come months after the National Treasury Cabinet Secretary Njuguna Ndung’u informed the International Monetary Fund (IMF) of Kenya's intention to borrow $900 million in the current financial year.

In the letter of intent addressed to the lender in December, Ndung'u said, Kenya took this route after the planned issuance of $1.1 billion (Sh136 billion) in external commercial financing for the financial year 2021/22 backfired due to unfavourable market conditions. 

Kenya was forced to abort the fifth Eurobond in the wake of Russia’s invasion of Ukraine, which increased volatilities in the global money market as the dollar strengthened. 

“In our funding for this financial year, we factored in borrowing from the international market, the Eurobond. But we realised as a result of challenges in Russia and Ukraine the cost of borrowing has gone really high,” former National Treasury CS Ukur Yatani told journalists last year.

According to him, the country had borrowed at six per cent in 2021 but the rate had doubled to 12 per cent 

"That is why we are still exploring options to look at a number of banks that can advance us the money at a cheaper rate, a figure more or less than an average of six per cent,” Yatani said in June. 

Kenya had picked Citi and JP Morgan as joint book-runners for a dollar-denominated sovereign bond.

By warming to flexible external debt, Ruto's administration seems to depart from his predecessor's focus on local debt after accumulating the highest public debt in history in his first term.

The previous regime had accumulated a total of Sh6.7 trillion in 10 years, most of it composed of syndicated loans before switching gear to domestic loans. 

Ruto has on many occasions fronted cheaper debt and taxes to fix the budget deficit. 

Last November, he said the government will no longer borrow money at interest rates of more than 10 per cent, adding that the cost of debt had become “unacceptable''. 

“If we find that in the market we cannot find money at 10 per cent, we will go back and re-look at other sources,” he told a meeting of pension industry executives.

This was after the weighted average yield on a 14-year Treasury bond auctioned that week hit 14 per cent. 

Debt experts are however in favour of domestic loans, terming them fixed and within the government's flexibility.

Economic analyst Jacob Mugera argues that local debts have a stable currency advantage compared to external ones and repayments can be extended.

"Sh100 borrowed locally by the state today will remain so even in the next 100 years. The same amount in the external market can rise over 1,000 times in the same period due to currency fluctuations,'' he said.

Most of the country's external debt is denominated in the US dollar. Last year the greenback was trading at 113 but it is now at 125 units.

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

Last year, the global rating agency Fitch Ratings said that Kenya faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion Eurobond in June 2024 and high current account deficits.

“We forecast external debt service to rise to 24.8 per cent of current external receipts in 2024, up from 16.6p per cent in 2023, owing to the June 2024 $2 billion Eurobond payment,” said the report.  

Fitch has since downgraded Kenya’s credit rating from "B+" to "B", attributing the action to the country’s persistent twin fiscal and external deficits.