President William Ruto recently claimed that the Kenyan government will be able to repay its $2-billion bond to creditors. This Eurobond has a 10-year maturity, which is due late this year.
Indeed, the East African powerhouse is currently sitting on public debts of around $61.5 billion—equal to around 67% of its GDP—with servicing costs ballooning because of the sharp drop in the value of the local currency.
The Governor of the Kenyan central bank, Kamau Thugge, had acknowledged, however, concerns about the country’s ability to repay the 10-year Eurobond when it matures in June. He stated:
“We have the resources, the money that is coming in from the World Bank, from regional institutions, from multilateral institutions. This risk of the Eurobond will, in my view, be completely eliminated. It helps contribute to a strengthening of the shilling.”
The Kenyan Shilling has slumped by about 29% against the dollar over the past year alone, currently hovering around all-time lows of 160 to the greenback.
While Kenya initially planned a buyback, it has recently opted to make two interest payments and repay the principal in full at maturity. This change in strategy came after concerns about the feasibility of the buyback, given the country's debt levels and currency depreciation. Despite the expressed confidence, Kenya still faces challenges. The country’s public debt remains high raising concerns about its long-term fiscal sustainability. What will happen if the Kenyan government ends up defaulting on its bond?
This would likely lead to capital flight, increased borrowing costs for Kenya, and difficulty accessing international financial markets in the future. Rating agencies would likely downgrade Kenya's credit rating, further increasing borrowing costs and damaging its reputation with investors. Bondholders could take legal action against Kenya to recover their losses.
Furthermore, a default could trigger a panic in the foreign exchange market, leading to a sharper depreciation of the Kenyan shilling. This would make imports more expensive and hurt businesses and consumers alike. Higher import prices could lead to higher inflation, further eroding purchasing power and impacting economic growth, and investors might be hesitant to invest in Kenya due to the increased risk associated with a default, hindering economic development.
A default would severely damage Kenya's international reputation and make it more difficult to attract foreign investment in the future. Indeed, international donors might be less willing to provide financial assistance to Kenya due to concerns about its commitment to fiscal responsibility.
So far, we know that Kenya has claimed its unwavering commitment to paying off that loan to avoid default and its potential consequences. The Kenyan government has until June of this year to pay off the bond otherwise, it will set the path to hinder its access to capital markets.