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Kenya looks to borrow $1.5b for budgetary support, shilling cushion

Sunday January 22 2017
Dollars image

Dollars. FILE | NATION MEDIA GROUP

Kenya is looking to borrow more money from the commercial market in the face of a widening deficit that is pushing the shilling towards record lows, and to meet urgent expenditures occasioned by a biting drought.

Last week, the government reopened a $300 million bond first issued in 2007, helping it save on issuance costs — underscoring the urgency with which the country needs to beef up its financial position. The reopening came on the same day that the government was at pains to deny that it had selected four banks to arrange a syndicated loan of $800 million.

According to Treasury insiders, the denial followed misgivings by senior members of the executive that the timing was not right to announce that the government was tapping the commercial market in view of the political competition ahead of the August 8 elections.   

Proceeds of the reopened bond will be received next month, bringing to $550 million the loans Kenya has taken out since the beginning of the year after borrowing $250 million from regional development financier PTA Bank. PTA Bank disbursed $100 million immediately, and the country now expects to receive the last tranche.

Last month, Treasury Cabinet Secretary Henry Rotich said that the country planned to raise $1.5 billion by the end of this financial year in June from the commercial market. The money is expected to ease budgetary pressures exerted by the general election in August, ongoing infrastructure projects as well as food imports and other drought mitigation efforts, in the face of underperformance in tax collections.

“We opine that the CBK settled on the bond, which has a five-year tenor, on account of the shilling’s weak outlook in the near term causing most investors to employ a short term duration strategy,” Genghis analyst Churchill Ogutu said in a fixed income note.

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Kenya has seen its budget deficit rise in this financial year by 9.6 per cent of gross domestic product, from 7.2 per cent in the 2015/16 financial year, to currently stand at $5.16 billion till end of June. Treasury wanted to borrow $3.22 billion internationally and $2.17 billion from the domestic market.

The shilling is also facing pressure from the dollar, sliding to the current 103.83, which has also seen the country’s Central Bank spend close to $1 billion of its reserves over a two month period in a bid to cushion the local unit.

In October 2015, Kenya took up a $750 million through a syndicated loan arranged through CFC Stanbic, Standard Chartered and Citi to plug in the gaping $6 billion deficit in the budget, which has been made worse by missed revenue targets.

Heavy maturities

The country is also facing heavy maturities next month of $1.37 billion, and a further $911.9 million between May and June, which will need to be rolled over through new borrowing, possibly through the domestic market.

The Treasury has so far avoided borrowing from the international market despite a $2.87 billion target for external debt.

In late December, Kenyan legislators endorsed the Budget Policy Statement to restrict the National Treasury from borrowing beyond six per cent of the GDP, instead restricting the debt ceiling further in 2018 to five per cent of the GDP until it will reach 4 per cent in 2020. This now means that the government will not be allowed to borrow the $5.82 billion (7 per cent of GDP) it intended to supplement the fiscal budget in the 2016/17 financial year.

Data from the Division of Revenue Bill tabled in parliament late last year shows that the country’s annual debt repayment is set to reach $5.85 billion this coming financial year, a 38.5 per cent jump from $4.21 billion spent on public debt in 2016,   compared with a projected 12 per cent growth in tax collection. Last month, global rating agency Fitch maintained its long-term rating on Kenya’s foreign and local currency at B+ but with a negative outlook, citing concerns over the country’s fiscal deficit and public debt.

“Although Kenya has been cutting back on its budget deficit — expected to come in at 7.1 per cent this fiscal year against the original budget target of 9.7 per cent — the consolidation is likely to face headwinds, notably from underperforming revenues,”it said.

According to government accounts printed in last month, the Kenya Revenue Authority will be under pressure to achieve its annual target of $12.28 billion after it collected only $4.47 billion in the five months to November. At this rate, KRA would have a shortfall of $1.5 billion by the close of the financial year in June.

Kenya’s ratings are constrained by its low GDP per capita, sizeable twin budget and current account deficits and rising public and external debt ratios,” said Fitch in a statement.

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