East African economies are starting the new year on a borrowing spree with their eyes set on commercial debt to spur their economies out of the Covid-19 pandemic downturn.
Kenya, Tanzania and Uganda have indicated they will be in the market as early as this month for a mix of sovereign bonds, syndicated and commercial loans as they seek to support their budgets, which have huge deficits, amid looming loan repayments for ongoing infrastructure projects.
Kenya plans to float two new sovereign bonds in the next six months to finance the budget and repay part of the its inaugural Eurobond floated in 2014.
Kenya’s National Treasury last week told the International Monetary Fund (IMF) that it plans to float an issue as part of the external component of budget financing for the current fiscal year, and another by June 2022 towards refinancing the 10-year $2 billion bond floated in 2014.
Nairobi is seeking $2.19 billion in the two commercial loans.
Just last June, Kenya floated a $1 billion bond.
“Kenya is likely to return to the Eurobond market in first half of 2022 to raise funds, with $1.1 billion pencilled into the 2021/22 budget, as well as a tender offer for part of the $2 billion 6.875 percent, 2024 Eurobond. The Treasury is considering a euro-denominated issuance,” says the latest Sovereign Debt Radar by REDD, a market data and intelligence firm.
Nairobi is also looking at doing away with the $78.9 billion debt ceiling set two years ago as its debt stock of $67.5 billion is poised to shoot past that target.
The government had set to borrow $5.49 billion from the domestic market in the year ending June 2022, and as at December 10 it had already borrowed over half of that — $2.77 billion.
Debt ceiling amendment
Expenditure on servicing loans is pegged at $5.46 billion, out of which $2.33 billion will be principal repayments for domestic debt.
In November 2021, the Treasury submitted a proposal to the Attorney-General and Parliament to amend the debt ceiling under the Public Finance Management Act.
According to the IMF, the new debt anchor will be set at 55 percent GDP, with debt measured in present value terms.
Kenya’s overall public debt has increased in recent years. Gross public debt increased from 44.4 percent of GDP at the end of 2015 to 71 percent of GDP at end of 2020, reflecting high deficits, partly driven by past spending on large infrastructure projects, and in 2020 by the Covid-19 global shocks.
About half of Kenya’s public debt is owed to external creditors.
In the third quarter of its financial year, Nairobi paid $262.5 million to Chinese creditors to ease a deadlock over debt repayments. The payments were made to Chinese lenders, most notably the Exim Bank, after they paused disbursements for projects in Kenya due to Chinese pushback to Kenya applying for a debt repayment suspension.
In January 2021, Kenya applied for the G20 Debt Service Suspension Initiative (DSSI), as it was finalising the details of a three-year $2.4 billion blended Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programme with the IMF, which was approved in April.
The DSSI application, which saw Nairobi receive $425 million relief until December, added to existing strains in its relationship with China, its biggest bilateral creditor.
While China’s Exim Bank is a widely recognised bilateral creditor, its $3.6 billion loan to Kenya for the construction of the standard gauge railway was extended on commercial terms, hence Beijing’s insistence that it should be treated equally to other commercial borrowers.
In the in 2021/2022 budget, Kenya set aside $1.03 billion for servicing its debt to China, of which $217.1 million is interest payments and $817.6 million is redemptions, according to budget documents.
This year, Nairobi will only receive $89 million in debt relief, lower than an initially projected $379 million, Treasury Cabinet Secretary Ukur Yatani said in a recent letter to the IMF.
Kampala in the market
Across the border, Uganda is also in early-stage discussions with lenders for a new $500 million syndicated loan expected to launch before April of 2022.
Kampala has already sent a request for proposals to lenders, but no banks have been mandated yet. It is understood that Uganda is seeking a 10-year facility but is unlikely to get a maturity period this long.
Uganda has yet to issue a Eurobond, despite being approved by leading credit rating agencies since 2013. It was active in the international syndicated loan market on March 2021 when it signed a $200 million seven-year facility with Societe Generale and the Eastern and Southern African Trade and Development Bank. Kampala had sought a $351.8 million syndicated loan.
REDD analysts said in December that while a Eurobond issue for Kampala is unlikely in the near term, the domestic bond market has attracted increased inflows over the past 18 months, with non-resident holdings rising rapidly in the second half of 2020 and first half of 2021.
“Though the stock of non-resident holdings of domestic debt is still substantially below those in Ghana in terms of GDP and as a share of total market, potential withdrawals could still be destabilising due to the more limited size of the financial sector,” the REDD report says.
Uganda’s total public debt is valued at $14 billion while the debt-to-GDP ratio is slightly below 50 percent. Overall debt repayment expenses account for over 15 percent of the total budget.
Tanzania has also indicated it will be seeking loans in the new year to push through its ambitious infrastructure projects, coming days after it signed a contract with Turkish firm Yapi Merkezi to build a 368km section of its standard gauge railway, which will be funded by loans and is expected to cost $1.9 billion.
President Samia Suluhu said Tanzania will borrow to finance the project.
“We will find friendly loan facilities and the best ways to get loans. We won't get this money from levies or from domestic taxes. We will continue to implement projects despite efforts to discourage us from borrowing. Even developed countries have debts. We will borrow to complete the development projects we have initiated,” she said.
In February 2021, Tanzania launched a $200 million seven and 10-year loan into syndication.
Dodoma is keen to keep its investments in infrastructure on track and is currently building, among other things, a high-speed standard gauge railway from the Port of Dar es Salaam to the hinterland border with Rwanda.
Tanzania’s stance on borrowing comes amid growing debate over the country’s new loan binge, which parliamentary Speaker Job Ndugai termed “unhealthy.”
Mr Ndugai argued that the country cannot rely on external borrowing to support its grand infrastructure projects, instead proposing the use of internal revenues.
“Is it proper for us Tanzanians to continue borrowing and increasing the national debt which currently stands at about $33.8 billion or are we going to agree to carry the burden ourselves?” Mr Ndugai asked.
“Should we continue borrowing and singing praises once we get the loans or should we continue charging levies, whether the people are ready or not, but the end goal being to build our infrastructure using our own money?”
In the past four years, Tanzania has taken syndicated loans to push forward its infrastructure plans. In August 2017, it turned to Credit Suisse Bank for a $500 million five-year loan and returned to the market two years later to tap a $1 billion syndicated loan from the Trade and Development Bank.
Since March 2021, when President Samia took over, the country has received over $3 billion in debt, including concessional loans and relief funds from the World Bank, the IMF and the African Development Bank.
Latest Bank of Tanzania (BoT) data shows that Dodoma plans to borrow at least $2.34 billion from foreign financiers to finance its proposed 2022/2023 budget of $17.1 billion.
According to Finance Minister Mwigulu Nchemba, $1.32 billion of the 2022/23 budget will be funded through direct concessional loans and grants from development partners under the traditional general budget support arrangement.
Another $1.04 billion will come from project-specific commercial loans from international lenders, Mr Nchemba said while presenting the 2022/2023 budget proposals to Parliament in November.
The government will borrow a further $2.32 billion from the domestic market towards ensuring at least $12.4 billion internal financing of its 2022/2023 budget to balance the external funding.
Tanzania's total national debt stands at $33.88 billion, with the latest BoT report showing that the national debt went up $182.3 million as at end of August compared with July.
External debt accounted for 76.6 percent of the stock (at $25.95 billion), while external debt service payments amounted to $27.8 million in August 2021, of which $18 million was spent on principal payments and the rest on repaying accumulating interest, the central bank said. A total of $4.63 billion was allocated for government debt repayment in the 2021/2022 budget, making up 29 percent of total expenditure.