Rising rates in US spike credit flight
By John Otini, November 9, 2022The rising interest rates in the US will spike capital flight, worsening public debt, Central Bank of Kenya (CBK) Governor Dr. Patrick Njoroge has said, warning of an impending storm in developing economies like Kenya .
The regulator said the rising strength of the dollar is sucking liquidity from developing countries, leaving them with weaker currencies, and increased risk of default.
Kenya’s total public debt stood at Sh8.58 trillion at the end of June this year, according to Central Bank data, but concerns about Kenya’s debt sustainability as Treasury allay fears that the country has procured too much debt.
20-year high surge
The governor says the US dollar has surged to a 20-year high against a basket of major currencies, pushing the euro, sterling pound, Japanese yen and several Emerging Markets and Developing Economies (EMDE) currencies to historic lows.
“Further, with the resultant flight of capital to the safety of the US dollar, financing from the global capital markets has dried up for EMDEs and particularly for the frontier economies. This has made it difficult to close the fiscal and external financing gaps in those countries,” Njoroge said in a statement on the CBK website.
With high Eurobond interest rates, Kenya has been unable to issue another bond which has sharply reduced the country’s dollar stock.
University of Nairobi lecturer Gerishon Ikiara says talk about cutting foreign loans has forced financiers such as the International Monetary Fund (IMF) waiting to wait and see what happens next. Financiers are trying to “understand the new administration and are perhaps waiting to see” whether they will engage them.
The governor, in pointing out the difficulties Kenya and other developing economies face in accessing funding, warns that external financing options have dried up.
“The drying up of external commercial and concessional financing has only served to worsen the situation. Unfortunately, the traditional safety nets do not appear to be ready for the impending storm. They remain small, ineffective, and unable to take up the slack,” he said.