Kenya targets to issue a new Eurobond to manage next year's maturity of a Ksh270 billion ($2 billion) 10-year bond, exposing a deepening debt trap as the government continues kicking the can down the road.
Faced with the stark reality of handling the large maturing loan amid highly ballooned debt-servicing costs in recent years and the country's highly weakened local currency against the US dollar, the country’s national treasury has opted for another Eurobond — yet again putting off a chance to confront the worsening debt situation.
“The government of the Republic of Kenya through its national treasury is considering accessing the international capital markets before the end of the fiscal year 2023/24 (July 1, 2023, to June 30, 2024) to issue a sovereign bond,” the Treasury said in a tender call for lead arrangers to express interest in the new Eurobond plans.
This comes when the government is about to conclude a deal to raise a slashed $500 million (Ksh67.53 billion) from a syndicate of banks over the next few weeks, down from the $600 million (Ksh81.03 billion) initially targeted, as part of the planned $900 million (Ksh121.55 billion) commercial borrowing for the current financial year.
Dual currency option
Sources told Nation last week that Kenya settled on a dual currency option for the debt to ease the pressure of the US dollar on its economy.
Kenya’s debt crisis has seen the government delay salaries of public servants, with nearly seven out of every 10 shillings collected in tax revenue going towards servicing debt.
The country’s total debt hit Ksh9.182 trillion ($68 billion) in January and is projected to reach Ksh9.41 trillion ($69.7 billion) by June, just Ksh590 billion ($4.4 billion) shy of the Ksh10 trillion ($74 billion) debt ceiling.
The Treasury will also spend Ksh1.36 trillion ($10.07 billion) to service debt in the current financial year, which is 63 per cent of the tax revenue targeted for collection by the Kenya Revenue Authority (KRA) by June.
This may be worsened by the weakening of the shilling that has raised foreign currency debts by at least Ksh350.6 billion ($2.6 billion) since the beginning of the year, as the local currency Tuesday stayed at a historic low of Ksh134.73 against the greenback.
Higher foreign loan costs
A weak local currency means Kenya requires more shillings to pay back the same amount of debt, translating into higher foreign loan repayment costs.
By the end of January this year, slightly more than 51.2 per cent of Kenya’s Ksh9.18 trillion public debt constituted external public debt.
Straight months of steep depreciation of the Kenyan shilling will see the country spend more to service the debts when the government purchases the respective currencies to pay back its creditors.
To illustrate the debt crisis, President William Ruto’s top economic adviser, Dr David Ndii, barely two weeks ago said the treasury had the tough choice of delaying civil servants’ salaries or defaulting on maturing debt obligations.
The issuance of the Eurobond comes during Dr Ruto’s first Budget of Ksh3.663 trillion ($27.12 billion) in 2023/24, which has a financing deficit of Ksh720.1 billion ($5.33 billion). This deficit will be plugged through a mix of Ksh198.6 billion ($1.47 billion) in net external financing and net domestic borrowing of Ksh521.5 billion ($3.86 billion).
This means Kenya’s total public debt, excluding the planned Eurobond, is poised to hit a record Ksh10.13 trillion ($75 billion) by June 2024. The Treasury has not disclosed the sum of the new Eurobond, but should it be an estimated Ksh270 billion, this would see public debt jump further to Ksh10.4 trillion.
Nominal debt ceiling
This comes at a time when the Treasury has kicked off public participation in the proposed changes to the law to remove the nominal debt ceiling in favour of a debt anchor of 55 per cent of the gross domestic product (GDP).
A Treasury analysis shows that under Kenya’s fiscal consolidation programme, it will take at least four years (2023-26) to revert the present value of public debt to the sustainability threshold of 55 per cent of the GDP.
The public debt stood at 60 per cent of the GDP at the end of last year, the Treasury said, citing a debt sustainability analysis prepared by the International Monetary Fund and the World Bank.
The Treasury has also doubled down on its efforts to swap the country's short-term debt with longer-term issuances as uncertainty in the movement of interest rates lead to a contraction of new debt on short-term maturities, thus increasing the refinancing risk.
The proceeds from the latest Eurobond will be used to refinance the Ksh270 billion Eurobond, which was Kenya’s first-ever, that the country is expected to pay in June next year.
Kenya issued the bond on June 24, 2014, with a coupon rate of 6.875 per cent annually. That is, however, not the only Eurobond that will fall due during Dr Ruto’s first term. Another Eurobond of Ksh121.5 billion ($899.7 million) will mature on May 22, 2027. The eight-year bond with a coupon rate of seven per cent per annum was issued on May 22, 2019.
The other Eurobonds, totalling Ksh567 billion ($4.2 billion), will mature in February 2028, May 2032, January 2034 and February 2048. The latest Eurobond will be Dr Ruto’s first since he took office in September last year. He has announced his first budget of Ksh3.663 trillion for 2023/24 but faces multiple headaches.
First, tax revenue collection by KRA is lagging behind the target. KRA was handed a target of Ksh2.108 trillion ($15.6 billion) in tax revenue in the current financial year but has collected just Ksh1.393 trillion ($10.3 billion) in the nine months to March.
This has left KRA in a tough race to fill the Ksh714.97 billion ($5.3 billion) deficits in the next three months. To meet the target, it must collect an average of Ksh238.32 billion ($1.76 billion) per month between April and June.
Despite this below-target performance, the Kenya Treasury expects KRA to increase tax revenue collection to Ksh2.571 trillion ($19 billion) or 15.8 per cent of the GDP in 2023/24.