Kenya risks going the way of Ghana Greece and Sri Lanka if its current public debt load is not lessened, ahead of the first Eurobond it issued, which matures in June next year. This is the scenario a Debt Distress report by Nairobi headquartered Faida Investment Bank paints.
Kenya is left with the International Monetary Fund(IMF) as the only rescue out of its debt hole. The report warns that with Kenya now unable to issue a new Eurobond, ostensibly to settle old debt, the country risks plunging into a more serious liquidity and debt crisis in 2024.
At the moment, the country still enjoys some headroom even as the Kenya shilling maintains its downward spiral against the US dollar, with the depreciation reportedly still sustainable and supported by fast-depleting forex reserves – they stood at $ 7 billion as of 22 September 2023, representing 3.8 months of import cover.
At current levels, the foreign exchange reserves have fallen below the statutory reserve threshold of 4.0 months of import cover and this growing mismatch between the demand and the supply of US dollars is disrupting business and fuelling steady the Kenya Shilling depreciation, which has accelerated in 2023.
The Kenya Shilling exchange rate slumped to KSh 147.8 against the dollar on 27th September 2023 which is a 22.0% depreciation year-on-year.
Analysts note that this continued weakening of the Kenya Shilling has added to inflationary pressures in line with Kenya’s heavy import dependence and has increased Kenya’s already-high debt-servicing costs.
“It can be argued that the current crunch in foreign reserves is a forewarning of what could happen in 2024 when the Eurobond debt maturities fall due. Interest rates on T-Bills are still high and rising, and this adds to the debt maturity pressure in 2024.
“Despite increasing taxes, the government is still not meeting its revenue targets and no cuts in government expenditure have been witnessed so far; this leaves Kenya in a perilous position,” reads the report.
Meanwhile, the Central Bank of Kenya (CBK) has been urged to maintain its foot on the gas pedal and further tighten its monetary policy stance at the next top decision-making meeting that takes place on October 3rd, 2023.
The CBK last held its last Monetary Policy Committee meeting on August 9, 2023.
According to a research note from the Kenya Bankers Association (KBA) lobby group, representing interests of the banking industry, while monthly inflation slowed in August, this trend could be reversed by a spike in fuel prices, further weakening Kenya Shilling and the damage the anticipated October-December El Nino rains on Kenya’s food basket.
The CBK monetary policy committee (MPC), chaired by CBK Governor Kamau Thugge, has been in tightening mode since June 2022, raising the Central Bank Rate (CBK) from 7.5% to 10.5% over the period to early August 2023.
The implication of this has been an increase in money market yields and an increase in interbank market rates.
Banking sector average lending rates have also increased suggesting that the effects of the tight monetary policy continue to be felt in the credit market.
During the MPC meeting on 9th August 2023, the CBK introduced an interest rate corridor framework to guide monetary policy operations and market outcomes. The corridor provided for targeting the interbank rate to oscillate within ± 250 basis points around the CBR, with the aim of enhancing the effectiveness of the bank’s policy.
This has since been achieved. However, there remain concerns about weaker transmission of the policy signal from the interbank market to other longer-term market interest rates, particularly the lending rates, that would otherwise effectively trigger the anticipated faster slowdown in credit supply.
The government does have the IMF program as a crutch to assist with inflows and is actively consulting lead arrangers to find solutions and timelines for the upcoming maturity.
Analysts, however, maintain that the practice of taking on debt to pay debt is unsustainable, and going forward, Kenya should devise new strategies centered on debt sustainability with Eurobond 2027 and 2028 maturities coming soon after the June 2024 one.
Bankers are pushing for further tightening of monetary policy to deal with inflationary pressure, stabilize the Kenya Shilling exchange rate against the US dollar, and ensure macro-economic stability.
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