KENYA: DEBT PILE UP, OPPOSITION WARN GOVERNMENT
NAIROBI - Kenya’s Bungoma Senator Moses Wetang’ula has warned that Kenya’s borrowing might spiral out of control and the debt which is standing at US$49.8 billion was likely to hurt the economy.
“Efforts are being made to further diversify and sustain Kenya’s debt currency mix. The National Treasury strategy to manage the currency exposures is by seeking to match currency of external liabilities with currency composition of Kenya’s forex inflows, international reserves, and cost of borrowing in each currency,” Rotich says in the debt management strategy.
According to Watang’ula, the country owes 70 percent of its debts to China and could lose some resources if not paid, as happened to Sri Lanka which lost control of its main port to China because of the outstanding debt.
He cited the Standard Gauge Railway as one of the projects that had eaten into the country’s economy and that might turn out to be a failure.
“We are supposed to pay US$95 million annually for the rail, yet it cannot raise US$29 million,” he said
Kenya’s rising debt has been a hot-button subject for a while now. With the debt now in the region of US$49 .8 billion, the que stion is for how long will it remain sustainable.
While Treasury has always been qu ick to point out that it is still within the limits of financial prudence, analysts have constantly warned that the economy is beginning to feel the heat.
Some economic analysts say the countr\ is bound to find itself bumping down a rough road this financial \ear when some of the major debts will mature.
To mitigate the impact of debt repayments, Treasury will be compelled to negotiate for a series of refinancinJ a measure it has already resorted to. Rolling oYer debt as refinancinJ is also referred to, is expected to be the norm going forward as more government credit facilities become due.
Treasury secretary Henry Rotich has budgeted US$8.6 billion to pay off maturing debt and interest in the current year which ends next June, nearly double the US$4.53 billion estimates for the year ended last month and US$4 .34 billion in 2016- 17 financial \ear
That means 49.59 per cent, or nearly half of the US$7.4 trillion which the Treasury targets to collect from taxpayers will be spend on debt repayments, well above the recommended debt service-to-revenue threshold of 30 pe r cent.
The debt repayments are more than double the US$3.9 trillion which has been allocated to development projects, underlining the impact on economic activities. Domestic debt repayments are estimated at about US$5,036 billion between this month and next June, statistics from the Treasury show, while ext ernal debt obligations are projected at US$3,630 bi llion.
MEGA PROJECTS
President Uhuru Kenyatta’s administration has been contracting short-term domestic debt since September 2014 to build roads, bridges, power plants and the Standard Gauge Railway. The government is banking on these mega projects to accelerate economic growth and somehow justify the current debt burden.
It is worth noting that the be- ginning of the increased uptake of short-term domestic loans coincided with the period when Kenya was upgraded to a lower middle income economy, locking it out of the highly concessional loans from development lenders such the World Bank Group’s International Development Association.
Some of the ext ernal debt which are set to be redeemed this financial \ear include the fiYe \ear Sortion of the first Eurobond estimated at US$779 million and US$784 million syndicated loan, according to analysts at Genghis Capital.
The commercial loan was procured early last year from Standard Chartered, Standard Bank, Citi and Rand Merchant Bank.
“The external debt obligations in FY2018/19 has risen to 41.88 per cent of overall public debt from 36.97 per cent in Fy2017/18 mainly attributed to ext ernal debt redemptions. This brings to the fore the currency risk as a weaker local unit drives up the ext ernal debt obligations,” the Genghis analysts said in a recent note.
Kenya’s total public debt stood at US$48.650 billion in May, comprising US$25.032 billion in foreign loans with nearly US$23.640 billion being domestic, the latest data from the Central Bank of Kenya shows.
“With debt to GDP (Gross Domestic Product which was estimated at US$77.173 billion last December) nudging 60 per cent and emerging markets in headlong reverse, policymakers need to read the signals that the market is emitting,” said AlyKhan Satchu, the chief exe cutive of Rich Management, an investment advisory.
“The markets were incredibly benign through Q1 (January-March) 2018, but are no longer; the Treasury needs to stay ahead of the curve and do any rollovers ahead of time.”
HIGH REFINANCING RISK
Rotich has maintained the debt level remains sustainable and well below the 74 percent of the GDP for a lower middle-income such as Kenya as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) index. He has, however, kept a close eye on maturing debt which may e[Sose the countr\ to hiJh refinancing risk amid below-target taxr evenue.
The Treasury has been negotiatinJ for refinancinJ of its maturing domestic debt to ease the pressure on under-performing tax revenue, managing to roll over US$2.020 billion between January and May.
“The government is expos ed to refinancinJ risk $s at end )< 2017/18 (last month), the main refinancinJ risk is associated with high domestic debt repayments (at 37.7 percent falling due within the year largely comprised of Treasury bills,” Rotich says in the three-year Medium Term Debt Management Strategy for the period ending June 2021.
“The average time to maturity (ATtM) for domestic debt portfolio stands at 4.4 years while that of ext ernal debt portfolio stands at 9.7 ye ars.”
About half of 50 percent of the total government debt portfolio is expos ed to exc hange rate risk, according to the report. The main expos ure is to US dollar at 67.3 percent, followed by Euro (16.6 per cent), Japanese yen (6.3 percent) and sterling pound (2.9pe rcent).
“Efforts are being made to further diversify and sustain Kenya’s debt currency mix. The National Treasury strategy to manage the currency expos ures is by seeking to match currency of ext ernal liabilities with currency composition of Kenya’s fore[ inÀows international reserves, and cost of borrowing in each currency,” Rotich says in the debt management strategy.
7he 7reasur\ Slans to cut deficit in the budget, the main driver for borrowing, to US$5630 billion, or an equi valent of 5.75 Sercent of the *'3 this financial year mainly through cutting of non-priority expe nditures such as travel and entertainment expenses.
That, however, remains below its target of three percent by 2021. “When you consistently start crossinJ fiYe Sercent fiscal deficit for a number of \ears you start running into problems meetinJ \our financial obliJations,” Citibank chief economist for Africa David Cowan said in an interview in Nairobi in February.
“The solution? Bring and keep inÀation rate down and issue long-term local debt as much as you can. That’s the way forward. That’s what most countries do.”