Kenya’s Public Debt

Rising domestic debt maturities in 2023 put pressure on government revenues

Apr 17, 2023

👋 Welcome to The Mwango Weekly by Mwango Capital, a newsletter that brings you a succinct summary of key capital markets and business news items from East Africa.

This week, we cover the state of Kenya’s public debt, the government-to-government oil deal. and mergers and acquisitions.

First off, enjoy a dose of our weekly business news in memes:

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The State of Kenya’s Public Debt

Liquidity Crunch: Moving into the Easter holidays, Members of Parliament reported that they had not received their salaries for March 2023. Some civil servants across the national government and employees in at least half of the counties across the country were yet to receive salaries for the last two months as the government faces cash flow problems. Rising domestic debt maturities in 2023 have put pressure on government revenues, forcing the prioritization of debt repayment to salaries and other operations and maintenance vote heads.

“Over 60% of our tax revenue goes to debt repayment. The implication is that you will have liquidity shocks because it is very precarious.”
Council of Economic Advisors Chairperson, David Ndii

According to Kenya’s 2023 Medium Term Debt Management Strategy, there are heavy maturities of domestic debt in 2023.

“The maturity of domestic debt is highest in 2023 majorly due to maturing short-term government securities. The repayment structure is relatively smooth except for spikes in 2023, 2024 and 2028 due to maturities of international sovereign bonds.”

Across Kenya’s KES 4.5T stock of domestic debt, 14.66% of it was in treasury bills, while 82.9% of it was invested in treasury bonds as of 14th April 2023. This is an improvement to the term structure in January 2013 where 21.5% of government domestic debt was in treasury bills and 78.5% in treasury bonds. Lengthening the maturity profile of domestic debt has helped to mitigate short-term pressure on internal debt repayment.

Implications on Gov’t Debt Holders: Kenyan banks have exposure to government debt through treasury bills and treasury bonds and any default by the government on internal debt could occasion haircuts. In the fiscal year 2022, the 9 major listed banks held a cumulative KES 1.3T in government securities, up 0.4% year-on-year, to account for 19.3% of their consolidated balance sheet [FY 21: 22.2%]. As of Q4 2022, the insurance industry had KES 598.3B - 72% of its investment portfolio - invested in government securities.

“I think right now the biggest risk they face is the interest rate risk and the spillover to credit risks. As banks majorly hold their government securities as available-for-sale, the subsequent mark-to-market losses with higher rates imply marked unrealized losses. For the ongoing cash flow crisis, this will have an impact on banking sector liquidity requirements as the payments are processed in the banking system. The interbank rate has dialled up to a weighted average of 8.5% (Friday 14^th April), up from 6.8% a month ago, which ties to the fact that a squeeze in liquidity with the government’s cash crunch has weighed negatively on the banking sector.”
IC Asset Managers Economist, Churchill Ogutu

Debt, the Elephant in the Elevator: Latest numbers by the CBK show that as of 23rd January 2023, Kenya’s gross public debt stood at KES 9.2T, with KES 4.5T (49%) in domestic debt and KES 4.7T (51%) in external debt.

“We did not have a debt problem until about 10 years ago. When Jubilee came into office, our debt to GDP was 35%. Now it's going towards 70%. The domestic interest was KES 180B. It's now KES 700B. Our external debt-to-export ratio was less than 5%. Now it's approaching 30%. That is crisis levels. It’s a debt issue. Where is this debt? It financed all this infrastructure that Kenyans demand.”
Council of Economic Advisors Chairperson, David Ndii

Restructuring Ruled Out: The significant amount of public debt and the burden it is placing on government revenues due to its servicing costs has occasioned an upsurge in debt restructuring conversation, being seen as a path to managing the current debt situation. Here is how various leaders have positioned themselves on the matter:

“Let me distinguish between two things, insolvency, and illiquidity. You restructure your debt when you’re insolvent. That means you couldn’t pay. We are not insolvent. Our debt is actually payable. We can finance our payments. If you start restructuring debt now, you go where Zambia is, where Ghana is and then we are going to spend the next three or four years in very protracted debt restructuring negotiation. We would not deliver on anything else. It’s a very bad idea.”
Council of Economic Advisors Chairperson, David Ndii

On the campaign trail in 2022, President William Ruto noted that he wouldn’t be restructuring any debt upon election.

“I am not going anywhere near or even having a discussion on restructuring debt. We must pay our debt. We have the capacity to pay our debt.”
President of Kenya, William Samoei Ruto

In the recently-concluded 2023 Spring Meetings in Washington DC in the United States, the head of the IMF Africa Department pointed out that Kenya is not a candidate for debt structuring.

“Kenya is not an economy that we at the IMF are expecting to undertake debt restructuring.”
IMF Director for Africa, Abebe Aemro Selassie

$1.2B Expected Loans: According to the CBK Governor, Kenya expects to receive at least $1.2B between April and May. $250M is expected in April from syndicated loans, while $1B is expected from the World Bank in May for budgetary support.

“We are not very worried because we have significant flows coming in. This compensates for the $1.2 billion we couldn’t get from the market last year.”
CBK Governor, Patrick Njoroge

Eurobond Market: IC Asset Managers Economist, Churchill Ogutu had a few notes to share on the market action last week:

Kenya Eurobonds declined in the week, registering a weighted average performance of -0.4%, with yields trending higher by a weighted average increase of 12.1bps. The Eurobonds performance was largely broad-based across African names, with the risk-off sentiment that has been prevalent following the banking sector instability last month.
We think FX, and fiscal concerns, will continue driving idiosyncratic risks. For Kenya specifically, it is less clear what’s the strategy towards the upcoming KENINT 6.875% 2024 (USD 2.0B) maturity. It now boils down to the messaging; GoK informing the market that its borrowing needs in the international market in FY 2023/24, will purely be towards refinancing the KENINT 6.875% 2024 (USD 2.0B).

Here is what the CBK Governor had to say about the upcoming maturity of the $2B KENINT 2024 Eurobond debt.

“The government has many options. They are keeping them close to their chest.”
CBK Governor, Patrick Njoroge.

With regards to the performance of Eurobond yields, here is what the Deputy President had to say about the new government-to-government oil deal and Eurobond yields.

“Through this arrangement, the country is set to realize greater macroeconomic benefits namely [...], floating exchange rate regime supported by higher levels of foreign reserves which will act as an effective shock absorber to external economic shocks that will further reinforce investor confident, stronger credit ratings for Kenya, and lower yields for the Eurobonds.”
Deputy President of Kenya, Rigathi Gachagua

Oil Imports Under New G2G Deal Arrive

170K Tonnes of Product: Deputy President Rigathi Gachagua last week received 2 oil tankers at the Mombasa port, the first shipment under the new Government-to-Government oil deal. The MT Front Capella had 83,000 Tonnes of Jet A-1 fuel, while the MT Norddolphin had 89,191 tonnes of diesel and petrol.

Today, we received our maiden petroleum imports under the government-to-government arrangement. It is an important milestone for our country and our economy. Through this arrangement, the country is set to realize greater macroeconomic benefits namely the accumulation of additional foreign exchange reserves of approximately 3 billion US dollars in the next 6 months, sustained build-up of foreign exchange reserves, and a reduction of speculation tendencies in the foreign exchange market.”
Deputy President of Kenya, Rigathi Gachagua

Eased Pressure: Under the new arrangement, the locally nominated OMC - in this case, Gulf Energies - will have to source US dollars before the end of 180 days to effect the payments. According to the Deputy President, this is expected to bring down the demand for the US dollar in the market by about $3M - $5M.

“All those Kenyans, business people and investors who have been hoarding US dollars for speculation purposes, please, offload your dollars to the market today and tomorrow. It’s very honest advice from a truthful man. With what has happened, about 3-5 million dollars will be available in the market, the demand for the dollar will come down and the shilling will gain. Those who have been hoarding dollars hoping that it will continue going up, it will go down starting today. Therefore, if you have a few dollars that you are still holding, please let them go to the market and you will come to thank me for it after a week or two.”
Deputy President of Kenya, Rigathi Gachagua

Apr/May Pump Prices: EPRA has maintained the prices of super petrol, diesel and kerosene at KES 179.3, KES 162, and KES 145.94, per litre, respectively. The price of diesel has been cross-subsidized with that of petrol, and the subsidy on kerosene was down 37.2% from the last review to KES 17.12 per litre. The mean monthly exchange rate of the USD-KES as quoted by EPRA stood at 139.61 from 133.98 in February. Murban crude oil prices are down 3% to $82.63 in March 2023, while the mean exchange rate as quoted by EPRA has depreciated by 21.8% over the same period.

Mergers and Acquisitions

Cactus Catina Acquires Maisha MFB: The Competition Authority of Kenya approved the acquisition of 55.8% shareholding in Maisha Microfinance Bank (MFB) Kenya by Cactus Cantina Investment Limited. Maisha MFB controls less than 10% of the market share in the Microfinance Banking market.

Lion Investment Acquires IXAfrica Data Centre: Lion Investment Bidco Limited has received approval from the CAK to acquire and subscribe to majority shares in IXAfrica Data Centre Limited. IXAfrica does not operate in Kenya and post-transaction, there will be no effect on the existing structure and concentration of the market for colocation of data centres in Kenya.

General Cargo acquires Rongai Workshop and Transport: The transaction received approval and will see General Cargo Services Limited - a player in logistics and transportation, acquire 100% of Rongai Workshop and Transport Limited which mainly focuses on freight service of imports and export containers and cargo. The resultant entity has a market share of 3%.

Weekly Capital Markets Wrap

The NSE: In Week 15 of 2023, Umeme was the top gainer, up 20.9% week-on-week to KES 15.05, while Liberty was the top loser, down 16.4% to KES 3.71. The NSE 20 and NSE 25 indices fell by 1.9% and 2.1% to 1,613.9 and 2,920.6 points, respectively while the NSE All Share Index edged lower by 2.4% to 111.6 points. Equity turnover was down 32.5% to KES 1.03B while bonds turnover inched higher by 37.4% to KES 8.2B.

T-Bills: In the short-term public debt markets, the weighted average interest rate of accepted bids for the 91-Day, 182-Day, and 364-Day instruments were 10.072%, 10.428%, and 10.932% respectively. The total amount on offer was KES 24B with the CBK accepting KES 27.4B of the received bids. The aggregate performance rate was 122.59% and the acceptance rate was 114%. Investors mostly piled into the 91 Days paper which had a 621.94% performance rate. Notably the 91-Day interest rate is up by 68 basis points to 10.072% after crossing 10% in the previous auction.

T-Bonds: Across the tap sale on IFB1/2023/17 infrastructure bond, total bids received at face value were KES 5.1B. The CBK accepted bids totalling KES 5.1 bringing the weighted average rate of accepted bids to 14.399%. On aggregate, the performance was 51.2%. IC Asset Managers Economist, Churchill Ogutu had a few notes to share on the market action in the domestic debt market last week:

But the FY2022/23 fiscal outturn is not inspiring. Cumulative 9M figures point to tax revenue will underperform at the end of the fiscal year. This telegraphs a wider fiscal deficit outturn, assuming no contractionary Supplementary budget is introduced at the tail end of the fiscal year. That said, the domestic borrowing outturn leaves a lot to be desired.
The Tap Sale missed its target, but we think this was self-inflicted. Back on the heels of the prior week’s dismal primary bond auction, CBK announced a TAP Sale to run throughout this week. What the market interpreted was some sense of desperation, considering that there is an ongoing primary bond sale (closing in the coming week). We have seen in some quarters that a dearth in liquidity as the proximate cause of the dismal TAP Sale. We push back against that school of thought going by the outsized demand of T-bills in the week’s auction particularly for 91-day tenor.
This brings us to the overarching bifurcation in the markets; although the government would like to see its domestic borrowing funded by T-bills, as envisioned in the Medium-Term Debt Management Strategy reports, the near-term fiscal concerns have resulted in a higher-than-targeted preference for T-bills. We believe the appetite for T-bills will remain elevated, dealing a blow to FY 2022/23 borrowing plans.

Other Market Gleanings

🫴🏽 | TransCentury Completes Rights Issue | TransCentury’s KES 2.063B Rights Issue, in which 1.876B shares were on issue at a price of KES 1.1 per share, recorded an aggregate subscription performance rate of 40.13%. The listing and trading of fully paid new shares will start on April 26th 2023.

🗳️ | CIC to Dispose of Land | Shareholders will on the 5th May 2023, at the firm’s 44th AGM that will be held virtually, be required to ratify an ordinary resolution to consider the sale of 200 acres of land in Kiambu County. Under consideration will also be, in the interest of unlocking better value, the decision to sell the land as 50 acres blocks, or further subdivide the blocks into smaller pieces.

🧾 | Sanlam Cuts FY 22 Loss By 90% | In FY 22, the Gross Earned Premium fell by 15.4% year-on-year to KES 10.2B. Investment income edged higher by 15.8% to reach KES 3.4B, and the Total Revenue was KES 11B, down 11.4%. Net benefits and claims fell by 15% to KES 7.3B, accounting for 89.2% of the Net Earned Premium [FY 21: 93.3%]. Operating expenses were down 21.2% to KES 1.8B, and the net result for the year was a KES 54M loss compared to that of KES 542M incurred in FY 21.

💰 | Diaspora Remittances | In March 2023, remittances totalled $357M, up 1.8% year-on-year. On a month-on-month basis, the remittances edged higher by 15.5%, and the cumulative 12-month remittances to the month ending March 2023 reached $4.02B, up 2.8% year-on-year.

👨‍💼 | Management Changes |

KCB Group has appointed Annastacia Kimtai as the new Managing Director (MD) for KCB Bank Kenya. This is the first time the Kenyan Banking Unit is having a dedicated MD.
Following the resignation of Mr. Lawrence Kibet as Company Secretary of Sasini PLC, Nairobi Business Ventures, and Eveready East Africa PLC, Ms. Victoria Cherotich has been appointed as the new Company Secretary in the three firms effective 1st April 2023.
Jumia Group has appointed Charles Ballard as the new CEO of Jumia Kenya effective March 2023.

🚀 | Taifa-1 Mission Launch | On Saturday, Kenya launched Taifa-1, the country’s first Earth Observation satellite, off Vandenberg, California, in the US; on the Transporter-7 Mission aboard a Falcon-9 Rocket owned and operated by SpaceX Technologies. Kenya’s most recent satellite launch was in 2018 when it launched its first nano-satellite. Data by Space in Africa shows as of 2022, more than 50 African satellites have been sent to space.

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📉 | Inflation Edges Lower in Ghana, the US | Ghana inflation for March 2023 was down to 45% from 52.8% recorded in February 2023. Food inflation fell to 50.8% from 59.1% while Non-Food Inflation was 40.6%, down from 47.9% in February 2023. In the United States, the CPI for March 2023 was 5%, down 100 basis points from February 2023.