The Bank of America (BofA) in an assessment of Kenya’s debt situation has revealed in an August report that the government must institute measures to prevent an imminent loan default.
BofA in its report gave the country four ways to avoid a default which included austerity measures that would necessitate budget cuts and increasing foreign exchange buffers.
Other options as outlined by the lender in its global research include bond buybacks and syndicated loans.
“Kenya is unlikely to default in the upcoming 12-18 months due to access to external financing, but there are no further near-term positive catalysts,” BofA explained how the International Monetary Fund and World Bank had given Kenya temporary relief.
Were it not for the loans advanced to Kenya by the IMF and World Bank, BofA estimates that Kenya would not have been able to meet its loan repayment obligations due to dwindling foreign currency reserves.
The Ksh203 billion loans given to Kenya by the two multilateral lenders in June and July BofA noted it strengthened foreign reserves and led to floated bonds to trade higher.
On budget cuts, Ruto has already instituted austerity measures to reduce government spending which will subsequently lead to less borrowing. However, the impact of this is yet to be seen.
In November 2022, the President vowed to cut the budget deficit by reducing non-essential spending on travelling, advertising and training for all ministries, agencies and other government-owned institutions.
Foreign exchange buffers according to BofA will be attained through external financing which will build gross forex reserves. One of the ways to attain that will be to have the World Bank disburse a loan to Kenya in Q1 2024 rather than the planned Q2.
A partial buyback of Eurobond was one of President Ruto’s ways of managing the debt crisis. Moody’s, a global rating agency based in New York, USA, had warned Kenya that the buyback of Eurobond before its maturity date in June 2024, would be classified as default.
BofA on the other hand, advocates Ruto’s plan of buying back the bonds prematurely.
On syndicated loans, Kenya in July last month secured a Ksh72 billion syndicated loan arranged by a consortium of five international lenders. BofA advises Kenya to continue looking for syndicate loans as a way to avoid default.
