State rules out restructuring of debt as cash crunch bites

The government has ruled out debt restructuring even as it struggles to pay salaries for civil servants.  The President’s Economic Council has said the government is not insolvent but rather illiquid, meaning that it has money but that money is not presenttly available.

 “You restructure your debt when you are insolvent. That means you couldn’t pay. We are not insolvent, our debt is actually payable,” said David Ndii, the chairman of the council.  He said that debt restructuring would plunge the country into a long period of negotiations with creditors such as those witnessed in Ghana, Zambia and the perfect example of Argentina.

Credit constraints

“Illiquidity means that you need cash today but the cash is only available next week. Typically, the government has no credit constraints, that is why it issues Treasury bills and bonds,” said Ndii in an  interview on Citizen TV Monday night. Last week’s government bond auction results signaled tough times ahead for National Treasury which may struggle to refinance maturing debt after the bond issue performance rate topped 17.8 per cent.

Central Bank of Kenya (CBK) reported that the results of the 10-year Treasury bond attracted offers totaling Sh20 billion but the Treasury only accepted Sh3.5 billion as a result of the high bid rates.

The performance rate refers to the amount of interest on returns investors are willing to take compared to what the government is ready to pay. Weighted average rate of accepted bids was 14.3 per cent while the coupon rate was 12.5 per cent.

This means that the government which is facing heavy maturities this year will struggle to raise the funds to clear the outstanding bonds.  But global financial markets volatility continues to be a key hindrance forcing the country to survive on bilateral and multilateral funding arrangements.

World Bank is, however, concerned about Kenya’s and other sub-Saharan countries’ capacity to refinance their multi-billion Eurobonds in coming months in light of the challenges the international debt markets are currently encountering, which have led to a fresh wave of pricey loans. The multilateral lender underlined a rise in the bond’s refinancing risk from higher interest rates, which has resulted in a reduction in the number of nations with market access for refinancing, in its update of sub-Saharan Africa’s economic forecast for 2023. The World Bank stated in a study released on Wednesday that “the selling of developing countries’ Eurobonds and growing investor concerns about the global outlook amplify the risks for sub-Saharan African countries facing large Eurobond redemptions.”

Debt stock

Kenya is getting ready to redeem its Sh264 billion ($2 billion) debut Eurobond.

Kenya’s debt stock rose to Sh9 trillion last year and is expected to top Sh10 trillion this year after the Parliament agreed to peg the debt ceiling on 55 percent of the net present value of gross domestic product (GDP).

Kenya is targeting to return to the international market float a Eurobond due to tight domestic market conditions.

In December, Kenya’s total public debt for the first time exceeded Sh9 trillion ($72 billion), bringing the nation one step closer to the Sh10 trillion ($80 billion) cap established by Parliament in June of last year. This comes at a time when the country’s external debt obligations are under increased strain due to the weak shilling, with about 69.3 per cent of that debt being denominated in US dollars.