Nairobi opted for expensive loan to avoid bad reputation.
Kenya has been forced to borrow $750 million to assuage fears by lenders about the country’s ability to service its mounting debt.
The loan from the Trade and Development Bank — formerly PTA Bank — is reflected in the latest Quarterly Economic and Budgetary Review for the period ending September 30, 2017, which was released in November.
Sources said the loan came about as four lenders of a $800 million syndicated loan frowned at Treasury’s request for an extension to April this year to settle the debt.
The creditors were so anxious of default risk that one of them declined to grant the government a grace period, forcing the Treasury — itself jittery over reputation risks that the rescheduling carried — to take the more expensive contingent debt.
“We drew down $107 million from this amount and used part of it to pay off one of the arrangers who wasn’t comfortable extending the October maturity by six months,” a Treasury official told The EastAfrican.
Before extending the term of the syndicated loan, the government had managed to repay $80 million. Kenya had secured the two-year loan that came with an option of six months extension from Citigroup, Standard Bank, First Rand Merchant Bank and Standard Chartered in October 2015.
The TDB facility has a tenure of eight years and will mature in 2025. It comes with higher servicing costs at 6.7 percentage points above the prevailing six-month London Interbank Offer Rate (Libor).
In contrast, the syndicated loan taken in February last year was priced at 5.7 percentage points above Libor, which is currently at 4.85 per cent.
It means the interest rate on the bridging loan is 11.55 per cent, a percentage point higher than the syndicated loan.
The bridging loan, however, has failed to pacify creditors who see the recourse to a development loan and opting out of an earmarked Eurobond issue as a red flag that the government is struggling to meet its short term obligations.
National Treasury Cabinet Secretary Henry Rotich had for the better part of last year maintained the government would settle the loan through proceeds of a second Eurobond. This would have been the second time Kenya was issuing a Eurobond to repay a loan.
The $2 billion debut Eurobond floated in 2014 settled a $600 million syndicated loan that was maturing in August the same year have made Eurobond not viable.
Unfavourable international market conditions such as a bullish dollar outlook as the US Federal Reserve is expected to nudge up its benchmark lending rate in 2018 after doing so three times last year.
“These are not good times to go to the international market to float a Eurobond when the dollar is expected to strengthen,” said Ken Gichinga, chief economist at Mentoria Consulting.
With the syndicated loan falling due at a time when Kenya is grappling with missed revenue targets, increasing expenditures and an economic slowdown, analysts have warned that a default would soil Kenya’s ability to tap into the international debt market.
“Kenya has a strong appetite for external borrowing and has remained politically intransigent about its downsides,” said Daniel Heal, Control Risks senior partner for East Africa.
He added that while Kenya remains highly unlikely to default on its debt, growing interest payments and international banks’ shrinking appetite to provide further loans will result in lower public spending, which has been a key driver for economic growth in recent years.
The fact that international banks are showing signs of fatigue in lending to Kenya poses a challenge for the government because one of the options that Treasury is exploring, and one that is perceived to be the most feasible, is procuring another syndicated loan to settle the one due for maturity.
“Treasury could be forced to borrow to repay the loan. It will be a case of borrowing from Peter to repay Paul,” said Dr Emmanuel Manyasa, an economist and country manager of Uwezo Programme at Twaweza East Africa.
Treasury, however, has moved to calm market jitters on its ability to pay, saying the TDB loan was taken only as a precaution.
“As it stands, we still have a buffer from the new loan to meet the April obligation with the other lead arrangers. We don’t see any form of panic. We are comfortable,” the Treasury official said.
Mr Gichinga said commercial banks would be willing to offer a facility at a better interest rate because the government is desperate.
If Treasury pushes ahead with the option of borrowing, analysts said will not be sustainable in the long run.
“Settling debt using debt is not sustainable. We need to increase revenue and reduce on expenditure,” stated Dr Manyasa.
In recent years, Kenya’s gross public debt has significantly surged to stand at $40.4 billion last year compared to $37.6 billion in 2016.
The country is now spending at least a third of annual revenues on debt financing, making it hard to finance development projects.
According to the 2017 Budget Outlook and Review Paper, a staggering $2.6 billion was spent in interest payments last year. The paper shows that public debt to gross domestic product ratio was expected to rise to 59 per cent from a previous target of 51.8 per cent though the government insists it has headroom of up to 75 per cent.
“The high level of public debt in Kenya narrows the window for future borrowing and increases vulnerability to fiscal risk in the event of any urgent need for borrowing,” states Kenya Institute of Public Policy Research and Analysis in its Economic Report for Kenya 2017.