Kenya is caught in a huge debt crisis squeezing government finances. The following is an excerpt from an article published by Nation Kenya on April 27, written by editor Jaindi Kisero.
Kenya is clearly stuck on the external debt treadmill and is firmly in the grip of what is now popularly described as ‘Eurobondage’. This is when, as an African country, you find yourself in a vicious circle in which you are permanently financing debt with debt, perennially negotiating extensions of redemption periods, and constantly dropping in credit ratings.
Nobel laureate Joseph Stiglitz could not have described the Eurobond borrowing craze and the phenomenon we are witnessing more aptly. He attributed the Eurobondage phenomenon to ‘‘short-sighted financial markets, working with short-sighted governments, laying the groundwork for the world’s next debt crisis’’.
Last week, Kenya put out an advert inviting bids for transaction advisers to help it in two assignments.
First, how to manage a massive US$2 billion Eurobond bullet payment that is maturing in June 2024.
Secondly, advisory services on a new Eurobond issuance between July 1, 2023 to June 30, 2024. It is a gutsy move because the conditions in both the local and international debt marketplace are not so rosy.
In recent auctions, domestic investors and bondholders have been voting with their wallets, sending a clear message that they are no longer willing to lend to the government beyond the 90-day T-bill treasury bonds.
Last week, a reopened 15-year-bond had to be cancelled. Neither was the performance of a re-opened three-year bond encouraging: Out of Sh30 billion bonds on offer, bids were received for Sh7.3 billion, of which only Sh1.7 billion were accepted at a weighted average interest rate of 13.47 per cent.
In a previous bond auction, domestic and international investors were only willing to lend to the government for 30 to 90 days, and essentially refused to buy 10-year Treasury bonds as only Sh3.3 billion ($25 million) was taken from Sh20 billion ($148 million) on offer. Investors’ reluctance to buy Kenya bonds is due to either their demand for high interest rates that the government is unwilling to accept or to the specter of sovereign debt default.
What is clear, however, is that Kenya’s debt situation is now piling pressure on government finances in an unprecedented way. Indeed, the debt metrics are dire with public debt to GDP now at 70 per cent. But the gravity of the crisis is more accurately reflected in the statistics on what the government is currently spending on debt service: total debt service to revenues have galloped to a level of 65 per cent of revenues collected by the Kenya Revenue Authority.
When you are in the grip of Eurobondage and at high debt levels as Kenya is, three things happen. First, what you spend on debt service is predominantly ‘interest on interest. Secondly, most of the debt is incurred to pay debt, borrowing from Peter to pay Paul. Thirdly, debt markets start demanding higher interest rates as investors start factoring a sovereign default.
The proceeds of the Eurobond Kenya is planning will not be used to build roads, bridges or ports. The government made it clear in the advert that they want money to repay the Eurobond payment maturing within fifteen months.
Kenya’s journey to the Eurobondage began in earnest in 2012 when the country went to the debt markets for a syndicated loan that was maturing in 2014. In 2012, Kenya was touted as the one of the fastest growing economies in Africa and a poster child of the Africa rising narrative. Fund managers in advanced debt markets in the West found lending to Kenya attractive because dollar interest rates were at a historic low, and Kenya was able to raise $850 million in December of that year.
However, the Eurobond Kenya is planning currently will be floated in totally different circumstances, with the world economy still recovering from a once in a century pandemic and Europe in a war affecting markets and supply chains of food, fuel and fertilizer. In addition, rising interest rates are exerting pressures on exchange rates of African countries and increasing external debt repayments.
Kenya is now caught in the ‘Eurobondage’ game needing to arrange or underwrite a syndicated multimillion-dollar loan from European commercial banks, typically with a two to three-year tenure. When the bonds or loans are near maturity it will have to refinance the existing debt with an even bigger bond.
Kenyans wonder if they are going to be saddled with unpayable debt in perpetuity.
Altered photo by Aboodi Vesakaran on Unsplash