Kenya Glimmer Defies Debt Shadow

The Nairobi Stock Exchange leads African Frontier Markets, with a first quarter advance of over 5% in USD terms on the MSCI Index, despite a Covid-19 third wave lockdown this week.  The USD 23 billion exchange, dominated by 5 shares which account for 80% of capitalization, is likely to retreat sharply as the new pandemic shutdown in Nairobi and four surrounding counties lacks both an end-date as well as any sign of government fiscal support.  The top five shares – particularly telecom Safaricom and East African Breweries – are the most popular among overseas buyers who have also been buyers of the big banks.

The Central Bank of Kenya reports that banking sector profits were up 14% year-on-year in January while credit to the private sector rose 9.7% from a year earlier, the highest level in six years.  However, non-performing loans have reached 14.5% — up 28% from a year earlier — and are expected to worsen on the new lockdowns.  The tourism sector, which accounts for nearly 9% of GDP, is unlikely to recover this year, particularly with the slow vaccine rollout in Europe. The new shutdown will further pressure bank balance sheets.  Since March 2020 banks have restructured 57% of interrupted loans, according to the central bank. It has held rates at 7% since September and extended until June the deadline for borrowers whose loans were restructured but are again in arrears to reach repayment agreements. Officially-backed loan repayment schemes may again be on the table if the economy worsens, and the monetary authority said that it has further room to cut rates.

As the country awaits IMF board approval of a new three-year, USD 2.4 billion standby agreement, inflation is rising, but is still within the central bank’s 5% +/- 2.5% target band, on higher transportation costs which surged 18% from a year ago on increasing oil prices.  Growth was flat in 2020 and earlier projections of a 5% or stronger rebound for this year are being revised down in the wake of the new lockdowns.  The government’s deficit for the fiscal year ending in June is expected to near 9% of GDP, which it plans to narrow to 7.5% in FY 2022.  General government debt is nearing 70% of GDP, with half of it in foreign currency.

Fitch Ratings, which just retained its B+ rating with a negative outlook, noted that the sovereign faces USD 3.6 billion, 3.3% of GDP, in sovereign debt servicing in FY 21/22.  However, after averaging 7.3% of GDP in the past decade, the current account gap dropped to 4.6% in February on lower import costs and resilient exports and remittances.  In the year through February, remittances soared 11.4% to USD 3.15 billion, according to central bank data.  After rejecting the G-20’s Debt Service Suspension Initiative in 2020, Kenya has reversed course. However, due to its outstanding Eurobonds and previewed pre-election issuance in the coming months, it remains unlikely it will apply for debt restructuring under the G-20 common framework as it fears international market lockout.

The highly anticipated IMF loan, along with continued low interest rates domestically, should provide a cushion despite the elevated debt and deficit levels. Last year Kenya received USD 739 million under the fund’s Rapid Credit Facility to address pandemic needs.  A new cross-country survey by InfoTrack Public Policy found that 81% of Kenyans said the level of the country’s foreign debt makes them “feel anxious, fearful, or angry.”  In an effort to attract needed funds, jump start growth, and increase bond market liquidity, the Nairobi Securities Exchange announced it will promote green bond listings and launch a new tax-free infrastructure bond.  The National Treasury has indicated that it hopes heavy international issuance in the next two years can be avoided through IMF and other multilateral assistance, particularly after Standard & Poor’s cut the sovereign rating to B from B+ earlier this year which will raise borrowing costs.  With elections scheduled for 2022, the pattern of fiscal largess will repeat as the government creates jobs and tries to reboot the economy, threatening the IMF program as happened in 2015 when a previous one was dashed. Foreign portfolio investors once half of trading are again dabbling, and could return in earnest as candidate platforms roll out to include privatizations that may recall pre-pandemic/debt distress enthusiastic inflow waves.

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