Treasury reveals fears over foreign debt load

The Treasury has revealed concerns over the sustainability of Kenya’s foreign loans, saying the rate of foreign currency inflows is not matched by the rising demand for dollars needed to repay foreign lenders.

Mr Rotich says the country faces a moderate risk of distress in servicing foreign loans given that it is breaching one key indicator of debt service to exports ratio, which is at 26.2 percent against a preferred threshold of 21 percent.

The threshold means that the amount spent to service external debt should not be above 21 percent of the country’s export earnings (a key source of the foreign currency inflows used to pay debt).

This is even as the minister insists that the Sh5.276 trillion public debt remains sustainable, being equivalent to 52.7 percent of GDP in nominal terms as at December 2018 against a threshold of 70 percent.

The Treasury has been pursuing an even split between foreign and domestic borrowing, in order to avoid crowding the private sector out of the local credit market.

“The 2019 MTDS proposes a strategy of gross external debt financing of 38 percent and 62 percent gross domestic financing. On the external debt, concessional is proposed at 26 percent, semi-concessional eight percent and commercial four percent,” says the Treasury in the document.

The lower proposal for commercial loans is an indicator that Mr Rotich is planning to curb the appetite for Eurobonds and syndicated loans for new debt, with these two loan types having been the staple for external borrowing in the last five years.

Kenya has cited difficulties in obtaining concessional loans recently due to the country’s status as a lower middle income economy, meaning that the minister faces a daunting task of turning around the external borrowing strategy away from commercial loans.

In line with this, the Treasury has also raised concerns over the foreign exchange risk factor in external debt service due to rising interest rates in the West, where most of the commercial loans such as Eurobonds are sourced.

These loans are, however, becoming expensive as interest rates in the US continue to go up, which coupled with the ever present risk of foreign exchange fluctuations can have a big hit on a country’s ability to pay.

“The rising interest rate environment in the international debt capital markets may increase cost of refinancing existing maturing debt and overall cost of borrowing,” the Treasury says.

“In the fiscal year 2019/20, the government will aim at maximising the official external sources for loans on concessional terms even though this source is shrinking with Kenya’s graduation to lower middle income economy.”

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