IMF Raises Kenya's Debt Distress Risk to Moderate From Low

(Bloomberg) -- The International Monetary Fund raised its assessment of the chance of Kenya’s external debt distress to moderate from low due to increasing refinancing risks and narrower safety margins in East Africa’s biggest economy.

The Washington-based lender estimates Kenya’s total public debt will peak at 63.2 percent of gross domestic product this year and gradually decline over the medium term. This compares with 58 percent in 2017 and 53.2 percent in 2016, when the nation ramped up infrastructure projects.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers,” the IMF said in an emailed statement.

It urged Kenya’s Treasury to refinance debt using concessional loans to lengthen maturities in the coming year and limit commercial credit for projects with high social and economic returns.

While most of Kenya’s public debt is concessional, the commercial portion has increased after the nation issued Eurobonds in 2014 and February 2018, and extended the maturity of a syndicated loan to seven years earlier this year.

External creditors hold about half of the country’s public debt, and multilateral lenders account for about 40 percent of that.

‘Shilling Overvalued’

The IMF report indicates Kenya is ready for another standby facility after allowing one to lapse in September, according to Jibran Qureishi, a regional economist for Stanbic Holdings Plc. Treasury Secretary Henry Rotich said earlier this month he’d meet officials from the fund to discuss a replacement arrangement.

“If they have done this for an IMF program, to get back to the IMF’s good books, they should know that there are more hurdles ahead, including the possible repeal or at least a substantial modification of the rate-cap law, which will be increasingly difficult to do going forward,” Qureishi said by phone.

The IMF urged the central bank to allow “greater exchange-rate flexibility,” given well-anchored inflation expectations and adequate reserves, saying this would boost the shilling’s role as a potential shock absorber.

The IMF reclassified the shilling from “floating” to “other managed arrangement” to reflect the currency’s limited movement due to periodic central bank interventions. The currency, which has the fourth-best performance globally, is also overvalued by about 17.5 percent, it said.

The central bank reiterated its position on the shilling’s value, saying the currency reflects its true and fundamental value.

“Our calculations support the view that there is no fundamental misalignment reflected in our exchange rate,” it said in an emailed response to questions.

The shilling has strengthened 1.9 percent against the dollar this year and was little changed at 101.23 by close of trade in the capital, Nairobi. The yield on Eurobonds due in 2024 lost 3 basis points to 7.25 percent, after adding 6 basis points at the close of Tuesday’s trade.

While the IMF says the shilling’s trade is controlled, the currency offers the best foreign-exchange access on the Absa Financial Markets Index when compared with markets including South Africa, Botswana and Tanzania. The country beat 19 others when it came to its reserves base relative to net portfolio flows, and has a deep and liquid interbank market, according to George Asante, Absa’s head of markets trading.

To contact the reporters on this story: Ramah Nyang in Nairobi at rnyang2@bloomberg.net;Adelaide Changole in Nairobi at achangole2@bloomberg.net

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Helen Nyambura, Michael Gunn

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