Kenya Favors Domestic Loans After Dollar-Debt Binge Proves Risky

NAIROBI (Capital Markets in Africa) – Kenya will rely on domestic borrowing to fund budget deficits in a new debt-management strategy to reduce the fiscal risks arising from a binge on Eurobonds and syndicated loans.

Treasury officials of East Africa’s biggest economy are targeting domestic borrowing at 72% of the total in the next three fiscal years, according to a medium-term debt-management strategy presented to lawmakers on Thursday. That compares with a previous three-year target of 62%.

Kenya will issue “fewer but larger-sized” benchmark bonds and short-term paper “will only be used for cash-management purposes and not as a budget-financing instrument,” according to the document.

The share of planned foreign commercial debt will increase to 13% of total credit in 2020, according to the proposal, from 4% last year.

Key Highlights:

• About 35% of domestic debt matures this year, posing a high refinancing risk, Treasury said. The amount is a drop from 43% last year.
• Total public debt in nominal terms was 6.01 trillion shillings ($59.3 billion) by the end of 2019, or 58% of gross domestic product. Internal loans accounted for 49%.
• Kenya’s debt-to-GDP ratio was 51.1% last year, against a 70% sustainability threshold by the World Bank.
• Treasury is also exploring the issuance of local-currency debt in overseas markets.
• It plans an over-the-counter trading platform for government debt in the fiscal year beginning July.
• To diversify funding instruments, Treasury could issue zero-coupon bonds, indexed bonds and undertake liability-management operations including bond exchanges.
• The budget gap could narrow to 571.2 billion shillings, or 4.9% of GDP, in the year to June 2021, from an estimated 657.4 billion shillings, or 6.3%, this fiscal year. Treasury will plug the hole using net external borrowing of 345.2 billion shillings and domestic loans of 222.8 billion shillings.
  • NOTE: Oct. 30, Kenya Raises Budget-Deficit Forecast Second Time in Two Months
• Treasury plans to cut 2020-21 expenditure and net lending by about 4% to 2.74 trillion shillings (23.6% of GDP), from 2.87 trillion shillings (27.7% of GDP) in the 12 months to end-June 2020.
• Public-debt servicing costs will climb 10% to 630.1 billion shillings in the fiscal year starting July. The payments include 456 billion shillings of interest payments and 174.1 billion shillings in principal repayments.