Global rating agency Standard and Poor (S&P) has revised Kenya’s outlook on debt service capacity from stable to negative.
“Constrained external financing led to Kenya suspending plans to tap international capital markets in 2022, prompting the country to draw more extensively on its forex reserves to meet its external debt repayments,” S&P said in its ratings update.
“Our base-case scenario assumes that Kenya will meet its financing requirements for fiscal 2023 (year ending June 30), but risks remain given relatively high foreign debt service obligations in fiscal 2024 (including a $2 billion Eurobond maturing in June 2024) against a backdrop of still-difficult issuance conditions.”
Kenya’s foreign exchange reserves, vital in meeting external debt repayments, currently stand at a decade low of USD 6.86 Billion, equivalent to 3.84 months of import cover.
This is below the Central Bank’s statutory endeavour to maintain at least four months of import cover.
“We could also lower the ratings if we perceived Kenya’s economic growth prospects or fiscal metrics had weakened significantly relative to historical norms,” the agency said.
Further, in June 2024, a USD 2.00Bn Eurobond issued in 2014 is due to mature. And while the yields on Kenya’s Eurobonds have eased from record highs observed in July 2022, they are still trending in the double-digit territory.
The highest observed yield is on the 10-year 2024 issue, currently trading at a yield of 11.883% as at February 23, 2023.
The Russia-Ukraine war and the aggressive monetary policy tightening in advanced economies have constrained the sovereign’s access to international financial markets, limiting it to concessional lenders such as the IMF and World Bank.
According to the Budget Policy Statement of 2023, the National Treasury highlighted various fiscal measures to bridge the budget deficit, including increased reliance on domestic borrowing (from the current Ksh438.10 billion to Ksh 521.50 billion.
“And while low subscription has characterized this calendar year’s bond issuances with the fiscal agent only meeting 65.01% of the targeted Ksh 120.00 billion.
T-bill auctions have supported the sovereign’s domestic borrowing efforts; year-to-date, the sovereign has picked up Ksh259.87 billion in T-bills versus the targeted Ksh 216.00 billion,” NCBA Research Analysts note.
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