Kenya gets 18 months reprieve to renegotiate Libor-based foreign loans

The National Treasury building in Nairobi. Kenya has secured 18 months amnesty to renegotiate the repricing of Ksh376 billion ($3.32 billion) worth of dollar-denominated foreign loan contracts. PHOTO | FILE | NMG

By JAMES ANYANZWA

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Kenya has secured 18 months amnesty to renegotiate the repricing of Ksh376 billion ($3.32 billion) worth of dollar-denominated foreign loan contracts after the

UK Financial Conduct Authority (FCA) extended the period for phasing out of the US dollar-linked London Interbank Offered Rate (Libor) to June 2023.

FCA and ICE Benchmark Administration (the administrator of Libor) announced in March 2021 that the Sterling, Euro, Swiss franc and Japanese yen Libor panels, as well as those for the one-week and two-month US dollar Libor, will cease on December 31, 2021. The remaining US dollar Libor panels will terminate at the end of June 2023.

Kenya’s National Treasury Director of Debt Management Haron Sirma told The EastAfrican last week that the extended period gives the government a breathing space to renegotiate with foreign lenders with a view to reaching an agreement on viable alternative rates, including the Swiss Average Rate Overnight (Saron), Secured Overnight Financing Rate (SOFR) in the US, and the Sterling Overnight Interbank Average Rate (Sonia) in the UK.

“National Treasury in consultation with relevant creditors is working towards a smooth and orderly transition from Libor to alternative rates such as the Secured Overnight Financing Rate for US dollar denominated loans,” said Dr Sirma. Kenya’s discussions with foreign lenders on alternative rates is expected to be concluded by the end of 2022.

According to the official, some creditors may lower the rates further to strengthen bi-lateral economic co-operation while others (commercial creditors) may seek to maintain ‘status’ quo to protect shareholder value.

“Only nine percent of our external loans have variable interest rates,” he said.

Last year, Kenya’s total nominal public and publicly guaranteed debt stock stood at Ksh8.02 trillion ($70.97 billion), accounting for 66.2 percent of the gross domestic product.

Of this, domestic debt stock was Ksh4.03 trillion ($35.64 billion), accounting for 32.5 percent of GDP while external debt stock stood at Ksh4.17 trillion ($36.9 billion) constituting 33.7 percent of GDP.

Lapsed transition

According to the National Treasury’s monthly Debt Bulletin for December 2021, the proportion of external debt denominated in dollars was 67 percent, euro (19 percent), yen (six percent), yuan (six percent) and sterling pound at two percent. Other currencies accounted for 0.2 percent of total external debt.

Libor is computed in five currencies — Swiss franc, euro, pound sterling, Japanese yen and US dollar. The transition to alternative rates linked to Swiss franc, euro, pound sterling and Japanese yen expired in December 31, 2021.

Phasing out of the Libor has become a hot topic in the financial markets because an estimated $350 trillion worth of financial contracts globally have been priced based on it as a reference rate. The repricing of foreign loans has become a matter of urgency among governments seeking protection against a possible increase in cost of debts that were procured based on a reference rate that has now become obsolete.

Financial experts warned that economies, companies, businesses, projects, banks, non-bank financial institutions and customers alike face huge exposure to interest rate risk due to uncertainties surrounding the alternative risk free rates, which calls for renegotiations of these contracts.

Wycliffe Shamiah, the chief executive of the Capital Markets Authority warned that lenders switching to different indices could get higher base rates in the future. He noted that many proposed Libor replacements are country-specific and will not allow for easy comparison between investments across borders.

“Libor was available in multiple currencies while its replacements are denominated in local currencies, which increases the exposure of investors to foreign exchange swings,” said Mr Shamiah.