Why Analysts are Concerned with Kenya’ Rising Debt

Kenya Manufacturing Growth Disappoints in Q1, But There is Optimism Ahead

Analysts continue to draw their concerns back to potentially unsustainable debt that has been accruing in Kenya.

Africa Development Bank Economic Outlook 2019

“The (Kenya’s public debt–to-GDP ratio increased considerably over the past five years to 57% at the end of June 2018. Half of the public debt is external. The share of loans from nonconcessional sources has increased, partly because Kenya issued a $2 billion Eurobond in February 2018. An October 2018 International Monetary Fund debt
sustainability analysis elevated the country’s risk of debt stress to moderate.”

A tighter fiscal stance reduced the fiscal deficit to an estimated 6.7% of GDP in 2018, with the share of government spending in GDP falling to 23.9% from 28.0% in 2017. To stimulate growth, the Central Bank
of Kenya reduced the interest rate to 9% in July 2018 from 9.5% in May.

The government plans to continue fiscal consolidation to restrain the rising deficit and stabilize public debt by enhancing revenue, rationalizing expenditures through zero-base budgeting, and reducing the cost of debt by diversifying funding sources.

Genghis Capital in the Playbook 2019

There are significant external debt maturities – above USD 2Bn – which are due in 1H19 and although measures are geared to refinancing, there is an added layer of fiscal uncertainties in the event of a delay or failure to secure refinancing. This worst-case scenario will dent KES confidence as foreign exchange reserves will be utilized to honor the external debt obligations.

Will the government achieve its fiscal consolidation objectives?
NO. There exists a proper misalignment of overly optimistic revenue targets and government spending plans.

There are indications that the Treasury plans on implementing controls on county spending which we believe is a red herring. So far, actions by the government already point to a challenging period. The fiscal deficit has already been revised upwards to 6.3% from an initial 5.7% estimate.

Revenue performance for the first half of the financial year 2018/2019 indicates a KES 114B shortfall (prorated) implying a 13.6% revenue deficit. The government is set to issue a Eurobond this year to the tune of USD 2.5B to offset the USD 760M syndicated loan due in March 2019 and the USD 750M Eurobond that’s due in June 2019.

Cytonn 2019 Markets Outlook

The government has a net external financing target of Kshs 272.0 bn to finance the budget deficit, coupled with the need to retire 3 commercial loans maturing in H1’2019.

We expect this to put pressure on yields on Eurobond yields coupled with the higher country risk perception by investors, partly attributed to the International Monetary Fund (IMF) raising the risk of Kenya’s debt distress from low to moderate on October.

Central Bank of Kenya

Dr. Patrick Njoroge, CBK Governor, “There is scope for the reorganisation of the debt portfolio, including replacing more expensive debt with cheaper debt.”