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Kenya on Tightrope as Options Fade to Scale $26 Billion Debt Wall

(Bloomberg)

(Bloomberg) -- Kenya needs about $26 billion over the next decade to pay off existing foreign debts and there are fewer options to raise that after the nation abandoned plans to increase taxes following deadly protests, analysts said. 

The forecast by David Ndii, chairman of President William Ruto’s Council of Economic Advisors and posted on his X account, excludes interest of about $1.5 billion annually and illustrates what he terms the “debt-financing wall” that the East African nation has to surmount.

The country is at high risk of debt distress as it looks to finance a budget shortfall of almost $6 billion this fiscal year. It also needs to find $300 million to repay a third of a 2027 eurobond by May next year. 

With dwindling capacity to come up with funds, Moody’s Ratings on Monday cut its assessment on Kenya’s debt by a step to Caa1, or seven notches into junk.

“This decade will be a tightrope for Kenya,” said Charlie Robertson, head of macro-strategy at FIM Partners. “It will need to balance social peace with the need to cut spending and reduce its interest bill.” 

The International Monetary Fund is unlikely to provide Kenya with more support given that it can’t meet goals in its program with the lender, and while attracting equity investment to replace burdensome debt would help lift the pressure, that would be difficult with high global and local interest rates, he said. 

“There are no easy solutions,” Robertson said.

The tax strategy that Ruto abandoned last month would have raised about $2.7 billion and helped cut the nation’s budget deficit to the smallest in at least 15 years. 

In the absence of this, Kenya’s large external funding needs “will necessitate a tight policy stance over the medium term and continued strong support from multilaterals to plug the gap,” said Patrick Curran, senior economist at Tellimer Ltd. It faces “higher domestic funding needs as well, putting pressure on domestic yields and exacerbating issues around debt affordability,” he said.

The protests in Kenya “are a powerful demonstration that drastic measures taken to forestall a debt crisis could undermine political stability, which could in turn rattle investor confidence,” said Biniam Bedasso, a research fellow at Center for Global Development, a Washington-based think tank. “It appears that the government overplayed its hand in its effort to find a fiscal solution for the problem.”

Instead, the National Treasury will slash expenditure by 177 billion shillings ($1.4 billion) and take on more loans to compensate for lower revenue, Ruto said Friday. 

Kenya still has a chance to deal with its debt in a manner that is economically and socially sustainable if it adopts a multi-pronged approach “combining public-expenditure rationalization, broad-based negotiations with its creditors and effective investments to increase growth in the medium term,” Bedasso said.

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