10 October 2017

Kenya: Why Kenya's U.S.$40 Billion Debt is Worrying Observers

Photo: World Bank

International credit rating agency Moody's expects Kenya's debt to rise to 60 per cent of GDP by mid-next year, heralding higher financing costs for the private sector.

Moody's expects the government debt burden which stood at 56.4 per cent of GDP by June this year, to continue rising due to high budget deficits and interest payments.

The agency is concerned by Kenya's rate of accumulating debt that it has started looking at whether it needs to lower the country's ability to repay debt, in what is referred to as credit rating.

A downgrade in national credit rating would make it difficult for Kenyan companies to source cheap funds from international markets while also forcing commercial banks to hold higher bad loan loss provisions in line with the new accounting standard that is expected to take effect in January.

That would force them to raise interest rates and, with current regulatory ceilings, to reduce credit to riskier segments of borrowers.

"Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP ratio surpass the 60 per cent mark by June 2018," said Moody's.

Currently the debt position is Ksh4 trillion ($40 billion) as per data from CBK which is more than double what the Jubilee administration inherited, Ksh1.7 trillion ($17 billion) in 2013.

The government has taken up commercial debt, which has seen its interest payments rise to 19 per cent of its revenues, up from 10.7 per cent when the Jubilee government came to power.

Kenya has gobbled up debt as Treasury Cabinet Secretary Henry Rotich sought to fund ambitious development projects steered by the Jubilee government amidst weak revenue collection.

"Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated," notes Moody's.

Liquidity problems

If Moody's downgrades the country from its current rating of B1, investors will be forced to increase the price of their cash to the economy as they factor in a higher risk premium. Higher prices may scuttle government plans to issue a new sovereign bond through which it plans to raise $2 billion in the current financial year.

Commercial banks will also be forced to hold higher provisions for loan defaults following the introduction of new accountings standard (IFRS 9) which requires banks to consider the possibility of government defaulting on its Treasury bills and bonds.

Moody's believes that the Kenyan government may get into liquidity problems due to high loan repayments which may force it to source new and expensive debt to ensure it does not default.

"A key area of focus in the rating agency's liquidity analysis is the government's increasingly large roll-over of Treasury Bills, which amounted to 9.4 per cent of GDP in June 2017, and the external debt payments to private creditors, including the $750 million Eurobond due in June 2019," said Moody's.

Fitch, another international rating agency, has also indicated that it could downgrade Kenya's credit rating due to its debt position. Fitch had noted that the country was spending a larger proportion of its revenue in paying debt, compared with its economic peers such as Uganda, Rwanda and Ghana.

Fitch gave Kenya a B+ rating with a negative outlook due to the country's debt position.

Kenya, however, insists that its debt is manageable and has headroom for more. Mr Rotich believes that Kenya can comfortably borrow up to 74 per of its GDP.

Kenya

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