Kenya’s Debt Crossroads: Bank of America Presents 4 Choices
In an August report, the Bank of America (BofA) assessed Kenya’s debt predicament and concluded that the government must take action to prevent an imminent loan default.
In its report, BofA provided the country with four methods to avoid a default, including austerity measures requiring budget cuts and an increase in foreign exchange buffers.
Bond buybacks and syndicated loans are two other options enumerated by the lender in its global research.
BofA explained how the International Monetary Fund and World Bank had provided Kenya with temporary relief: “Kenya is unlikely to default in the next 12 to 18 months due to access to external financing, but there are no other near-term positive catalysts.”
BofA estimates that Kenya would not have been able to fulfill its loan repayment obligations in the absence of IMF and World Bank loans due to dwindling foreign currency reserves.
The Ksh203 billion in loans given to Kenya by two multilateral lenders in June and July, according to BofA, bolstered foreign reserves and led to an increase in the trading price of floated bonds.
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Ruto has already implemented austerity measures to reduce government spending, which will contribute to a reduction in borrowing. However, the effects of this are not yet known.
In November 2022, the President pledged to reduce the budget deficit by cutting non-essential expenditure on travel, advertising, and training for all ministries, agencies, and government-owned institutions.
According to BofA, foreign exchange buffers will be attained through external financing, which will develop gross foreign exchange reserves. One method to achieve this will be for the World Bank to disburse a loan to Kenya in the first quarter of 2024 instead of the second.
A partial Eurobond repurchase was one of President Ruto’s strategies for managing the debt crisis. Moody’s, a global rating agency based in New York, United States, had warned Kenya that the purchase of Eurobonds before their June 2024 maturity date would be considered a default.
BofA, on the other hand, supports Ruto’s proposal to purchase the bonds early.
Kenya secured a Ksh72 billion syndicated loan arranged by a consortium of five international financiers in July of last year. As a means to avoid default, BofA advises Kenya to continue looking for syndicate loans.
Kenya’s Debt Crossroads: Bank of America Presents 4 Choices
