4 December 2017

Kenya: IMF Team to Visit Kenya As Red Flag Is Raised Over Debt Levels

The International Monetary Fund will be sending an economic review team to Kenya this month amid growing concerns over the spiralling country's public debt, which could force a slowdown in delivery of infrastructure projects.

The IMF has already asked the government to seek ways to reduce the country's fiscal deficit -- the gap between expenditure and revenue -- in order to address debt vulnerability.

With the economy growing sluggishly after a prolonged election and collections by the Kenya Revenue Authority still below target, pragmatism could see the government only go ahead with projects that promise the highest return.

"You reduce the deficit by growing the revenue base, and also looking at spending. Infrastructure development is necessary but you need to examine how you select projects ... to ensure cash allocations go to the most productive ones," IMF representative to Kenya Jan Mikkelsen said.

International rating agency Moody's has also raised the red flag over the country's debt levels, which currently stand at Ksh4.4 trillion ($44 billion), or 54 per cent of GDP.

However, the Treasury has dismissed Moody's views, saying only Fitch and S&P are accredited to assess Kenya's capacity to absorb liability.

Higher debt burden

In a report released a week ago, Moody's notes that Kenya has a higher debt burden and weaker debt affordability metrics than countries that have defaulted in Asia, Latin America and Europe.

Kenya's debt is more than 300 per cent its revenue, a ratio common to all countries that have defaulted before.

"In Kenya, large fiscal deficits and rising debt levels, combined with low institutional strength and a limited track record of engineering policy changes to address macroeconomic imbalances amid tightening financial conditions, leave it vulnerable," notes Moody's.

The agency has already signalled it could downgrade Kenya's credit rating in its next review, a move that would result in the country having challenges in access the international market even as it plans a second sovereign bond in the current financial year.

However, Kenya's Treasury Cabinet Secretary Henry Rotich has downplayed concerns over the country's debt levels, saying it still has room to take in more debt up to 74 per cent of its GDP.

Mr Rotich has also argued that the economic dividends from infrastructure projects will repay the loans.

Whether the country will benefit from the infrastructure layout remains to be seen as most of it is only being used to move human capital and not manufacturing products.

The director of Kenya's Vision 2030 economic pillar, Veronicah Okoth, cautioned that the country needs to go slow on infrastructure development and work on productivity.

Exchange-rate fluctuations

Moody's further cites Rwanda and Tanzania for holding high volumes of foreign currency-denominated debt, exposing the countries to exchange-rate fluctuations.

Rwanda's foreign denominated debt stands at 83 per cent of its total debt while Tanzania's is at 79 per cent higher than the 76 per cent that has been the threshold for countries that have defaulted.

Currency weakness not only increases the absolute level of debt in local currency terms but also debt-servicing costs. Foreign debt is at 51 per cent of Kenya's total debt, which has previously been domestic-heavy.

Kenya and Tanzania have been singled out for having more than 10 per cent of their external debt is short term. This implies the two have an option of restructuring their debts in case they are burdened by maturities.

The rating agency further warns that a default by any of the sub-Saharan countries that have issued Eurobonds, could lock out other countries in the region from accessing the international market as investors may generalise the default. This could hurt Kenya's prospects of a second sovereign bond.

Mr Mikkelsen said it was not sufficient to look at the threshold but whether the country can honour its obligations under shock. Most defaults have arisen from political and institutional challenges and not economic performance.

Concerns

Kenya was faulted for lack of institutions to vet infrastructure projects and single out which ones to prioritise. Increased consumption of revenue by interest repayments has also fuelled concern, with the Treasury spending Ksh215 billion ($2.15 billion) to pay interest last year. The interest payment was 17 per cent of total revenues up from 10 per cent in 2012.

Implementation of capital intensive projects has forced Treasury to borrow from the international market to bridge its fiscal deficit, which currently stands at eight per cent of GDP.

This has seen the country's external borrowing exceed local borrowing, exposing it to foreign currency fluctuations a danger shared with other East African countries.

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