East Africa biggest economies are under pressure to review and renegotiate the pricing of close to $51 billion of foreign debts denominated in the volatile US dollar as the use of the international pricing benchmark — Libor Rate — officially comes to an end on June 30.
Financial institutions and companies are also under pressure to shift their commercial contracts pegged to the London Interbank Offered Rate (Libor) to alternative benchmarks ahead of the deadline.
The UK’s Financial Conduct Authority (FCA) and ICE Benchmark Administration (the administrator of Libor) announced in March 2021 that the pound sterling, euro, Swiss franc and Japanese yen Libor panels, as well as panels for one-week and two-month US dollar Libor, would cease on December 31, 2021, with the remaining US dollar Libor panels terminating at the end of June 2023.
A $51 million debt
Kenya, Tanzania and Uganda hold over $51 million in foreign debts denominated in the US dollar with the strengthening of the greenback adversely impacting the economies mounting debt burden.
Tanzania’s external debt stood at $29.59 billion in March this year of which 68 percent ($20.12 billion) is denominated in the US dollars, according to the Bank of Tanzania’s latest monthly Economic review dated April 2023.
In Kenya, the external debt stock was Ksh4.15 trillion ($30.4 billion) in the month of February, according to the monthly debt bulletin by the National Treasury. The proportion of external debt denominated in the US dollar was 67 percent translating to Ksh2.78 trillion ($20.37 billion) in the same period.
In Uganda, public debt has risen sharply from $12.5 billion to $20.97 billion for the last four years due to increased fiscal deficit and thus high cost of servicing debt.
The total public debt stock at the end of December 2022, increased by 4.8 percent to $21.74 billion from $20.74 billion registered at the end of December 2021.
According to Uganda’s Ministry of Finance medium term debt Management Strategy (2023/2024), about 30.30 percent ($6.58 billion) of the country’s total public debt is denominated in the US Currency as of December 2022.
A breathing space
Last year Kenya’s National Treasury Director of Debt Management Haron Sirma told The EastAfrican last week that the extended period gave the government a breathing space to renegotiate with its foreign lenders with a view of reaching an agreement on viable alternative rates including the Swiss Average Rate Overnight (Saron), Secured Overnight Financing Rate (SOFR) in the US, and the Sterling Overnight Interbank Average Rate (Sonia) in the UK.
“National Treasury in consultation with relevant creditors is working towards a smooth and orderly transition from Libor to alternative rates such as the Secured Overnight Financing Rate (SOFR) for US$ denominated loans,” said Dr Sirma.
“It is about re-pricing existing debts (through adjustments of interest rate margins to achieve at least the equivalent pre-Libor rate levels).”
The phasing out of the Libor has become a hot topic in the financial markets owing to the fact that an estimated $350 trillion worth of financial contracts globally have been priced based on it as a reference rate.
Matter of urgency
The repricing of foreign loans has become a matter of urgency among governments seeking protection against a possible increase in the cost of debts which were procured based on a reference rate that has now become obsolete.
Financial experts warned that economies, companies, businesses, projects, banks, non-bank financial institutions and customers alike face huge exposure to interest rate risk due to uncertainties surrounding the alternative risk-free rates, which calls for renegotiations of these loan contracts.
In 2021, the State Bank of Mauritius warned that the Libor exposure on its Mauritian and Kenyan operations was significant in terms of fair value changes on financial instruments and loss or gain in interest income.
On the other hand, Wycliffe Shamiah, the chief executive of the Capital Markets Authority said lenders switching to different indices could mean higher base rates in the future.
He noted that many proposed replacements for Libor are country-specific and will not allow for easy comparison between investments across borders.
Libor linked contracts
According to Kenyan-based Stanbic bank, a member of the Standard Group of South Africa, the group has several Libor linked contracts that extend beyond 2021 but the lender ceased booking new Libor linked exposures from October1, 2021, apart from in limited circumstances to align with industry guidance and best practice.
The Financial Stability Board — international body that monitors and makes recommendations about the global financial system — has initiated a fundamental review and reform of the major interest rate benchmarks used globally.
This review seeks to replace existing interbank offered rates (IBORs) with alternative risk-free rates (ARRs) to improve market efficiency and mitigate systemic risk across financial markets.
In 2021 the Libor’s administrator — the Intercontinental Exchange Benchmark Administration (IBA) Ltd — announced it would no longer publish pound sterling, euro, Swiss franc and Japanese yen related Libor rates for all tenors after December 31, 2021.
The IBA adopted a two-stage approach for the cession of the US dollar Libor rates with the one-week and two-month rates no longer being published after December 31, 2021, and the remaining — overnight, one-month, three-month, six-month and 12-month rates no longer — being published after June 30, 2023.