The Kenya Debt Situation and its Impact on Treasury Bills and Bonds – A Comparison with Ghana
| Summary -Kenya is due to pay USD 2 Billion in June 2024 as Eurobond Matures. -If Kenya makes the payment, the economy will experience relief as the next Eurobond maturity is in 2027. -Kenya's dollar reserves are low and settlement is dependent on a bailout from the World Bank, IMF and other concessional loans. -If Kenya defaults, there will be far-reaching effects that could result in Treasury Bonds being restructured as was the case in Ghana. -The risk of defaulting is however low. -If Kenya settles the June 2024 payment, those who will have invested in Treasury Bonds before June stand to gain as interest rates may fall thereafter. |
CBK continues to borrow heavily locally and interest rates are now hitting record highs. Treasury bill rates are now above 16% and in January 2024, CBK issued an Infrastructure Bond and the coupon (interest rate) is expected to get to around 20%.
However, as the government continues to borrow aggressively locally to hedge against foreign debt and raise funds to meet its obligations, questions continue to arise as to whether there is a chance of default on payments from these local Treasury Products.
This article looks into Kenya's current debt situation and whether there is a risk in investing in Treasury Bills and Bonds. We will look at the 2022 Ghana domestic debt crisis and the chance that Kenya can go in that direction.
State of Maturing USD 2 Billion Eurobond at the end of June 2024
In June of this year (2024), Kenya must settle USD 2 Billion as a Eurobond matures. Settling this Eurobond would bring relief to the economy as the next Eurobond maturity will be in 2027. However, Kenya finds itself in a financial challenge as its dollar reserves are low and the weakening of the Kenya Shilling has affected the government’s capacity to raise the required funds. Kenya is now relying on bailouts from the World Bank, the International Monetary Fund (IMF) and other international institutions.
Red Flag as President Ruto's Backtracks on Pledge
Concerns of a potential for default were raised when President Ruto failed to meet a commitment. He had announced plans for Kenya to pay USD 300 million in December 2023 as a partial settlement of the USD 2 billion Eurobond but this did not happen.
What would a default mean?
In the event of a default, Kenya faces dire economic consequences experienced by countries like Greece, Zambia, Lebanon, and Argentina. Consequences of default would include the government's inability to borrow through Eurobonds, a decline in investor confidence, a weakening local currency, and inflation, among other far-reaching and long-term negative impacts on the economy.
How would this affect your investments in Treasury Bills and Bonds
Traditionally, governments are considered least likely to default on domestic debt as they can leverage their control over their local currency. However, the December 2022 default by Ghana on its overseas debt and the impact it had on domestic debt challenged this narrative.
What happened in Ghana?
When Ghana defaulted on its foreign debt and sought a bailout from the IMF and World Bank, these lenders of last resort introduced a unique precondition for the bailout that substantively affected the way we look at treasury products. The IMF required the Ghana government to restructure its local debt so that the pain of default would be shouldered by both foreign and local creditors – including Treasury Bond holders. This restructuring saw a reduction in Bond investors’ principal and a lowering of the Bonds’ interest rates (coupon).
Prospects for Meeting the June 2024 Deadline
However, there is much hope for the Kenya situation. Signs indicate that Kenya will meet the June 2024 obligation especially because the stakes of a default are too high. A default would jeopardise most government projects as the government would be forced to go into survival mode. This would in turn adversely affect a Kenya Kwanza re-election bid.
Besides this, the government is collaborating well with the IMF and World Bank and following through with their bail-out conditions – which include increased taxes and reduced government spending.
Which way to go
In light of this, there is a collective confidence that the country will successfully make the June 2024 Eurobond payment. If it does so, there is an expectation that the government will relax its aggressive borrowing and this will in turn reduce the interest rates on Bills and Bonds. If this does happen, those who will have bought Treasury Bonds within this period before June will continue to reap good returns on their investment for years.
