Kenya Faces External-Debt Distress on Lower Export Receipts

Kenya is at a high risk of external-debt distress as the country’s foreign-currency obligations grow faster than its income from abroad, the National Treasury said.

The ratio of debt-service costs to exports for East Africa’s biggest economy will remain above the 21% threshold recommended by the International Monetary Fund until at least 2025, according to a report published on the Treasury’s website. This is the first time the Treasury publicly flags the danger, after the IMF in May raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus.

Kenya’s debt stock stood at 6.7 trillion shillings ($61.7 billion), or 65.7% of gross domestic product, by the end of June, according to Treasury. More than half of that is in foreign currency. The cost of servicing these obligations will jump 28% to 904.7 billion shillings in 2020-21 from the previous fiscal year, mainly due to an increase in foreign-debt redemption costs.

Horticulture and tourism are key sources of foreign income for Kenya and those industries were hit by shutdowns in key markets and global travel restrictions. Remittances by Kenyans working outside the country declined year-on-year in April and June and the central bank said in July those inflows will grow by 1% for the whole of 2020.

Growing Debt

The Treasury’s warning comes after the parliamentary budget office also this week sounded the alarm about the growing debt portfolio and possible distress in the absence of mitigating factors.

“Since the onset of Covid-19, external debt risk has persisted owing to domestic economic pressure, shocks on Kenya’s exports, non-conducive international financial market conditions for refinancing and the country’s reduced access to concessional financing,” the agency said in a report. The depreciation of the shilling presents further risks to external debt-service costs and requires closer monitoring, it said.

Kenya’s earnings from exports of goods and services will decline to 9.9% of GDP in 2021-22 from an estimated 10.1% in 2020-21, according to the Treasury. Earnings from tea and flowers grew in the first seven months of the year, data from the statistics agency show.

“Despite strong performance from agriculture exports, we expect lower export earnings,” Jibran Qureishi, Standard Bank Group’s head of research for Africa, said by phone. The debt stock as well as obligations have grown significantly, yet earnings from export of goods and services has been rather flat in the last few years, he said.

The liabilities risk is further aggravated by the structure of Kenya’s debt, where a third of the total is made up of commercial borrowing such as Eurobonds and syndicated loans, said Tony Watima, an independent economist based in Nairobi, Kenya.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.