Kenya debt doomsayer dodge backfires

Kenya debt doomsayer dodge backfires
Kenya's stock market experienced $150mn in net foreign selling last year, as ownership fell to a historic low of 30% of the total. / Nairobi Stock Exchange
By Gary Kleiman of Kleiman International Consultants May 23, 2023

Kenya’s sovereign bond index at the distressed 1,000 basis point spread over US treasuries enjoyed a brief reprieve from unrelenting gloom, as IMF managing director Kristalina Georgieva declared it an innocent bystander in sub-Sahara default panic that has already engulfed Ghana and Zambia.

She was talking about the Fund’s book in light of $1bn due to be disbursed under an existing $2.5bn programme out to next year, and the 35% overall multilateral share in Kenya’s external debt at roughly $20bn, versus bilateral, mainly China and private creditor banks/bondholders, each at $10bn.

Public debt/GDP, split evenly between domestic and foreign, already exceeds $70bn, or 60% of gross domestic product (GDP), above a long-brandished Finance Ministry red line that may be enshrined in law as a future confidence-building measure while the current predicament lasts.

The numbers are daunting, with $6.5bn in FX reserves, down 15%, and the shilling’s 10% slide against the dollar in the first quarter. That sum covers little more than three months of imports, the IMF’s own danger zone, and also must meet a chronic 5%/GDP current account deficit and 2024 $2bn bullet Eurobond repayment.

Before issue, officials were offered a different structure that would amortise over time, and G-20 creditors, who granted a year pause after Kenya belatedly entered the post-Covid debt service suspension programme, pressed both sides for term reconsideration to no avail. At 20% market yield, sovereign re-entry is not in the cards and syndicated commercial lenders who once fell over one another are also cautious, with $200mn dribbled out in a new operation from long-standing relationships with global banks.

Despite the IMF chief’s catchphrase, policymakers have dug themselves into a hole on both FX and local debt where auctions regularly fail, and on the equity market where the MSCI Index was off 25% up to the end of April at the pack bottom. A durable turnaround implies follow-through on long-standing promises of state company privatisation, bank non-interference and capital market cross-border integration to reach investor absolution beyond high-profile declaration.

Aside from the twin deficits with the fiscal shortfall also in the 5% of GDP range, economic indicators are mixed this year. Growth is put at 5% and inflation in the high single digits, with the central bank’s benchmark interest rate at 9%. Food and fuel import costs were at record levels last year, but the former have come down as measured by the FAO index, while the latter has improved with a multi-billion dollar pay delay trade credit deal with Gulf suppliers.

In other external accounts, foreign direct investment (FDI) remains lacklustre at a projected $1bn, with a US free trade pact still in preliminary negotiation. Tourism has rebounded, and the export mainstays are tea and flowers at roughly $2bn each of the $5.5bn total. The current account is otherwise buoyed by remittances, up 8% to $4bn last year, but from a narrow source base in the US, Europe and the GCC.

Kenya is a charter member of the now seven-member East African Community (EAC) that includes Tanzania, Uganda, Burundi, Rwanda, South Sudan and, most recently, the DR Congo. The bloc is trying to align tariff and banking practice with the continental pan-African blueprint in an arduous process that underscores the limited progress to date with the original vision. Part of the design was a common currency and central bank that has been postponed until at least 2027, while a decision is due this year on the headquarters' location as a first step.

Debt service/budget revenue already approaches 50%, and the Treasury has followed President William Ruto’s no restructuring mantra from the campaign through selected switch auctions swapping short for long-term maturities to tepid response. Banks heavily depend on government securities returns for one-third of assets and hold one-fifth of the amount outstanding, behind state and private pension funds together with one-third.

Yields blew out quickly this year from 12% originally with few takers, and secondary trading is now at the 18% handle on second half expectations. Infrastructure bonds, with dedicated project cash flows as collateral and tax-free status have been issued as a sweetener, in contradiction to formal shelving of $5bn in planned public-private investments with official lenders.

The stock market had $150mn in net foreign selling last year, as ownership fell to a historic low of 30% of the total. Heavyweight listing Safaricom lost 35% last year, in part as it became entangled in rule swings around Ethiopia’s telecoms opening during civil war. International fund managers have tired of scuttled privatisation as a catalyst, and President Ruto’s team has repeated the pattern with $800mn in sales identified in a fast-track process bypassing parliament that has met wide resistance.

Deeply indebted Kenya Power (KPLC) received another injection to maintain operations, while flagship carrier Kenya Airlines (KQ) remains suspended from the Nairobi exchange as it pursues potential buyers to skirt liquidation. At December’s US-Africa Leaders Summit in Washington, the delegation tried to arouse US interest at the same time as its Export-Import Bank sent a notice of $300mn default.

Regional stock market integration in the same vein has been held up by self-defeating protests over vendor procurement, indefinitely sidetracking a broad cross-listing and trading timetable beyond select bank blue chips with cross-border operations. Kenya as the largest market with $15bn capitalisation, most sophisticated brokerage community, and only East African representative on the frontier index at first spearheaded the initiative, which has since degenerated into an argument over contract spoils seeking to bar non-member providers.

Two leading banks, KCB and Equity, between them have one-third of deposits and one-quarter of total assets as of end-2022, and a deliberate pan-African strategy that has paid off in terms of balance sheet diversification and continued dividend pay-out. Commercial banks have long been political cannon fodder and under the central bank’s unwavering thumb, and the past year’s FX/debt crisis has magnified their plight. The past government was notorious for imposing a hard cap on borrowing rates in the name of preventing usury, and as rates were hiked to stem double-digit inflation more recently, the governor applied an informal ceiling as banks looked to maintain interest margins.

An interbank market for shilling/$, both spot and forward, previously functioned smoothly, but it was interrupted after regulator abuse findings, spurring a code of conduct as desperate business and retail clients resorted to parallel sources instead. The past month, the central bank gave its blessing to full resumption, and average buy/sell spreads quickly halved.  

The latest expansion into DR Congo and South Sudan tries to bypass geopolitics for franchise development with uneven success. Rwanda is again implicated in proxy war over mineral resources in the former, but executives point to the lack of currency risk in a banking system 90% dollarised. In the latter. initial aspirations were dashed by a central bank edict that all transactions must be in pounds to safeguard FX reserves, as international aid dwindled on continued fighting between the President and Vice President’s military forces and constitution revision/election delay at least until 2024.

The IMF calculated $1.5bn in oil export revenue this year before the blow-up between rival armies in Sudan but has been unable to track proceeds over the years diverted to regime insiders. With the latest flight from Khartoum, Kenya’s 1mn refugee population in the northern Dadaab camp will further swell. In operation for three decades, and the first to host arrivals from Somalia’s civil war, it was reinforced with Ethiopia’s Tigray Province carnage, with plans to close it shelved as authorities try to offer national work and school access under a new framework.

The World Bank has joined the IMF in doubling down on support, with the portfolio growing from $7bn to $11bn in three years, roughly equal to the bilateral total. China, on the other hand, has abruptly pulled back after splashing out high-speed rail and Nairobi expressway loans. According to the Kenyan Treasury $200mn net funding came last fiscal year, which will reduce to $20mn in the current one after $400mn repayment was made in January.

Beijing has imposed penalties for late instalments after granting a pause under the G20 post-pandemic aegis. Along with bondholders, it is taking a harsher stance in a historical sweep that sets up a severe servicing crunch in 2024 under a best-case scenario. “No default” – as President Ruto’s team loudly proclaims – is a catchy slogan, but skirting it alone will not change investor minds inured to debt-equity market, state-run company and bank-supervisor dysfunction.

Gary Kleiman, senior partner, Kleiman International Consultants, Inc.