Kenya’s dilemma of managing the runaway public debt is set to roll over in 2019 as the government confronts the reality of maturing loans.
Despite repeatedly insisting that Kenya’s public debt that currently stands at $50 billion and is projected to hit $60 billion by 2020 and $70 billion in 2022 is within sustainable levels, challenges in settling maturing syndicated loans has exposed the burden facing Treasury in debt management.
In recent years the government has relied on a strategy of borrowing from Peter to pay Paul, which is basically borrowing at expensive interest rates to settle maturing debts and avoid a calamitous possibility of default.
The severity of this strategy came to the fore early this year when Treasury settled a $750 million syndicated loan that accrued $63 million in interest and fees.
The fact that the strategy has resulted in debt servicing galloping a huge amount of revenues leaving the country with no resources to finance development projects has forced the government to change tact.
This is based on the reality that public debt obligations is the first charge item under the Consolidated Fund Service and in light of sub-par ordinary revenue performance, meaning the government must always prioritize meeting its financial obligations to creditors.
Ratio of debt service to revenues
According to Treasury’s Annual Debt Management Report 2018, the ratio of debt service to revenues increased to 33.8 per cent by end June 2018 from 23.6 per cent by end June 2017 as a result of higher stock of external commercial debt maturing in 2017/18.
Notably, this has increased from 16.5 per cent at end of June 2012.
During the 2017/18 year, the total public debt service payments amounted to $4.4 billion, an increase of $1.4 billion from $2.9 billion in June 2017.
“The increase was largely on account of more repayments done during the year on external syndicated debt,” states the report.
In the 2018/19 financial year, Kenya is staring at a public debt redemption bill to the tune of $4.5 billion.
To ease the pressure on debt servicing at a time when revenue collections are falling way below targets, the government is now opting for a lesser painful route of lengthening the maturity of loans falling due.
This has become the most prudent option owing to the fact that Treasury can ill-afford to impose more hikes in taxes that are bound to overburden Kenyans who are already overtaxed.
National Treasury Principal Secretary Kamau Thugge said the government has rolled out plans of going to the international markets to source for cheap funds that will help settle two loans set to mature in 2019.
The Eurobond comprised a five-year issue of $500 million at an interest of 5.875 per cent and $1.5 billion for 6.875 per cent to be repaid in 10 years.
“We are going back to the international market. This is about lengthening the maturities of the debts that are falling due. It will not increase our debt. It is just a rolling over of the syndicated loan,” Mr Thugge said.
Decline in revenue
Notably, the government is borrowing a cue from the fact that it has somehow achieved the goal of lengthening the maturity of domestic debt in line with the medium term debt strategy.
This has been achieved through issuance of long term tenors with high volumes to increase liquidity in the secondary market, something that has been realized by increasing the average maturity of Kenya shilling denominated securities to 4.13 years and 6.31 year for treasury bonds as at June 2018.
Analysts say that seeking for an extension of the maturing debt for at least 10 years is critical not only in safeguarding against default but more importantly avoiding the pitfalls of expensive loans to repay those falling due and also free more revenues to invest in development projects.
“The nature of public debt is that is takes the first charge on a country’s resources, ahead of other national expenditures. Therefore, one of the techniques of prudent debt management is to reduce the instalment amounts by lengthening the maturity of the debt facility,” said Ken Gichinga, managing director at Mentoria Economics.
Though seeking for longer tenures for the debts falling due is ideal, Kenya will be going to the international markets at a time when the market fundamentals are not entirely favourable.
That the current market conditions are not optimal is evident going by the rising interest rate in the US which are creating a fertile ground for liquidity crunch in emerging markets.
Benchmark interest rate
In September, the US Federal Reserve increase its benchmark interest rate by a quarter-percentage point to 2.25 per cent, which is the highest level since April 2008.
The fact that international investors are wary of the prevailing market conditions explains why Nigeria’s $2.8 billion Eurobond attracted relatively high interest rates despite having long term tenor maturity.
The Eurobond was a seven-year issue of $1.1 billion at an interest at a rate of 7.625 per cent, a 12-year issue of $1 billion at 8.75 per cent and a 30-year issue of $750 million at 9.25 per cent.
“In the light of declining revenue collection, it is a prudent strategy to stretch further some of the upcoming maturities. This helps in managing refinancing risk in the short-term,” said Churchill Ogutu, research analysts at Genghis Capital.
For officials at the Treasury, the term refinancing risks is one that often sends shivers down their spines and thus the quest for longer average term-to-maturity of loans allowing more time to repay.
Refinancing risk fundamentally means the possibility that a borrower cannot refinance by borrowing to repay existing debt.