Kenya’s National Treasury Cabinet Secretary Prof. Njuguna Ndung’u has disclosed an elaborate strategy by the Government to settle the US$ 2 billion (KShs 299 billion) Eurobond that matures in June 2024.
“What we are trying to do is realign financial resources from multilateral development banks, which include the International Monetary Fund (IMF) and the World Bank. We are also reaching out to our bilateral partners including friendly countries such as Japan and others, Development Finance Institutions(DFIs) institutions such as SNBC. The idea is to reduce our exposure with the Eurobond and then contain the market jitters,” said CS Prof Ndung’u.
He said the next step will be to ensure that any financial instrument that Kenya accesses in the markets will be complemented by the financial resources at its disposal.
“We also want to enhance our financial capability to deal with such issues as climate change as well as drive our development agenda,” Prof Ndung’u said.
With the Kenyan Eurobond set to mature in June 2024, market expectations were that Kenya would have gone back to the global financial markets to refinance. But CS Ndung’u says Kenya cannot repeat the same mistakes that it has made in the past, and that the current strategy decided to fix the issues that triggered the current liquidity crisis.
“Our debt structure has thus been amplified. We are telling the World Bank that our fiscal deficit or gap has moved from 4.4% to 5.6%. This 1.2% is due to appreciation of our dollar-denominated debts, “Prof Ndung’u added.
“We have seen the continued tightening of monetary policy by developed economies and the resultant jitters it has caused in the global financial markets. This is in terms of weakening of currencies in the South and strong appreciation of the US dollar and other world hard currencies in the North,” said CS Prof Njuguna Ndung’u.
Trouble first began between 2013 and 2020 when Kenya’s appetite for external borrowing grew significantly. The Government sank its teeth in the Eurobond market, drawn by competitive financing terms—with coupon rates in the 6.5 – 8.5 percent range.
From 2020-2022, Kenya shifted its external borrowing strategy when further accessing the Eurobond market became financially unviable due to rising yields on already existing Eurobonds. It went back to the IMF, World Bank, and the African Development Bank, to assist in dealing with the COVID-19 pandemic.
It was also during this period that Kenya signed into a 38-month IMF program, in April 2021, a program that terminates in the middle of 2024.
With yields on existing Eurobonds still high (at 18.7%) on 27th September 2023) and no end in sight to the current US monetary-tightening cycle, the prospects of Kenya issuing another Eurobond remain dismal.
In the absence of a new Eurobond, foreign exchange reserves will come under pressure in 2024 as the impending maturity comes with a chance of a debt and liquidity crisis in 2024.
Should Kenya manage to jump this hurdle and settle the Eurobond, external debt pressures in the short-term could ease because of increased concessional borrowing and the possibility of increased fiscal space if ongoing tax reforms yield more revenue. That’s until the next cycle of Eurobond maturities in 2027 and 2028.