A man counts Kenyan banknotes at a counter. Kenya is hoping to benefit
from a strategy by the London Stock Exchange (LSE) to develop offshore
local currency bond markets that allow emerging markets countries to tap
into international investors using local currencies. PHOTO | FREDRICK
ONYANGO | NMG
Kenya is planning to ease the pressure on debt servicing by borrowing in the local currency at the international market.
With
all indications that Kenya will maintain its unbridled appetite for
accumulating debt, the National Treasury is developing a policy to
obtain international credit using local currency.
Currently, Kenya’s public debt stands at $50 billion and is projected to hit $60 billion by 2020 and $70 billion in 2022.
Benefits
Raising
funds using the local currency would reduce Kenya’s dependency on
foreign currency and the resultant impacts of external shocks and
volatilities that often lead to higher debt servicing costs.
Another
key benefit would be reduced need for precautionary reserve holdings:
Less foreign currency exposure requires lower precautionary reserve
holdings and stabilises the reserve amount, which in return reduces the
risk of exchange rate fluctuation of the local currency.
Kenya is hoping to benefit from a strategy by the London Stock
Exchange (LSE) to develop offshore local currency bond markets that
allow emerging markets countries to tap into international investors
using local currencies.
The country’s success in
issuing bonds using the shilling at the international markets could be a
sign for other East African nations to follow, considering they are
also grappling with servicing ballooning debt.
The LSE,
which has given African countries a platform to mobilise funds for
investing in infrastructure projects, says raising funds in
international markets in hard currencies to fund projects in the local
currency leaves countries vulnerable to currency risk and impacts debt
servicing.
This year, Kenya, Nigeria and Egypt have
floated sovereign bonds at the LSE, raising a combined $8.5 billion debt
that was accumulated mainly in the US dollar.
“One
potential problem with raising capital on international markets is the
currency exposure. Borrowing in non-local currency to fund projects that
are financed and generate returns in the local currency, creates an
unwelcome mismatch.
“This can be costly, particularly
when currency movements become volatile,” states an LSE report on
developing local currency bond markets for Africa.
Interest
The
report adds that one solution that has been generating interest from
governments of emerging market economies has been the potential to float
bonds in their local currencies, both in onshore markets where
governments can tap local institutional investors and in offshore
markets where they have greater access to a global investor base.
A
local currency bond is one that is denominated in a country’s local
currency (such as the Kenyan shilling), instead of being issued in hard
currency.
It means that an international investor will
take on the currency risk instead of the issuer and will have to convert
hard currency to the local currency prior to buying and when selling
the security.
Kenya, which has been feeling a heavy
burden from servicing loans procured in hard currencies wants to be
among the first African nations to benefit from the local currency bond
markets.
Treasury Cabinet Secretary Henry Rotich said
such a strategy would shield the country from recurring international
currencies volatility.
“We are working on a policy that enables us to do this,” he said.
According
to the Annual Public Debt Management Report 2018, Kenya’s total
external debt, which was $24.9 billion as at the end of June 2018, is
dominated in the US dollar, the euro, the Chinese yuan, the Japanese Yen
and the pound sterling pound at 71.7 per cent, 14.9 per cent, 6.2 per
cent, 4.3 per cent and 2.7 per cent respectively.
Other currencies accounted for a mere 0.3 per cent of the portfolio.
High exposure
The
exposure to hard currencies led to the International Monetary Fund has
raising the red flag on the country’s vulnerability to currency and
interest rate risks.
“The foreign exchange risk is
high, since 50.9 per cent of the total debt is denominated in foreign
currency,” states the debt management report.
The report adds that during the financial year ending June 2018, Kenya spent $2.3 billion to service external debt.
Njuguna
Ndung’u, the executive director of the African Economic Research
Consortium, says that with debt servicing increasing sharply and
becoming a serious burden for some sub-Saharan African countries, it is
time to ask the question on whether Africa is choking on debt.
“The
worsening fiscal positions, together with rising debt servicing costs,
have ignited concerns about debt sustainability in Africa,” he said.
Mr
Ndung’u, a former Central Bank of Kenya governor, added that the pace
of debt accumulation on the continent is “too fast” and could become
unmanageable.
Data from the World Bank shows that the
average public debt in sub-Saharan Africa rose from 37 per cent of gross
domestic product in 2012 to 57 per cent in 2017.
Containing the increasing burden of debt has become urgent for the majority of African nations.
Kenya
will not be reinventing the wheel, considering that a number of
emerging market economies have taken advantage of the local currency
bond markets to raise funds at the international markets.
India,
China, Indonesia, Brazil, Colombia and Russia are among countries that
have offered international bonds in their respective local currencies to
attract foreign investors who are seeking to diversify their currency
portfolio but are deterred by local capital controls and are more
comfortable with international law, disclosure requirements and clearing
mechanisms.
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