Might Kenya go the Ghana way?
Dec 20, 2022 9:00 PM
A sovereign debt default is a rare thing. We were all brought up believing in the notion that all government debt is risk-free. At university, we were introduced to the remarks of a former chairman of Citibank, Walter Wriston, who infamously said that “countries don’t go bust”.
What happened in Ghana on Monday, when the government suspended payments on external debts, including syndicated loans and Eurobonds, should be a wake-up call for us. Kenya must urgently prepare to take bold and unpopular decisions to prevent our debt obligations from spiralling out of control.
Indeed, what Accra did is enough to trigger a stampede and dumping of African paper. It seems to me that we must urgently initiate debt restructuring negotiations with the lenders.
A sovereign default as implemented in Ghana is a very risky thing. It can precipitate capital flight, a stock market crash, the crumbling of pension funds or the collapse of banks. Granted, our debt distress situation and fiscal crisis may not be as extreme as Ghana’s.
But most of the fundamentals—the size of the fiscal deficit, debt to GDP ratios, the percentage of ordinary revenues to the cost of debt service—are not too far apart. When you study recent developments in this space between Ghana and Kenya, the parallels are just too many.
On December 4 this year, Ghana forced domestic bondholders to exchange their instruments for longer-term paper and to accept haircuts on interest payments.
In July and November, our National Treasury also implemented conversions and debt switches on domestic paper. Treasury bondholders were asked to convert or switch their two-year Treasury bonds and three-year Treasury bills worth Sh87.8 billion, which were set to mature in January 2023, into a six-year medium-term infrastructure bond. We were avoiding a looming cash crunch and, therefore, opted to ask creditors to switch short-term paper for longer-dated securities.
While one can argue that what we did here with the conversions and switches was not comparable to what happened in Ghana because our National Treasury did not enforce haircuts, the ordinary pensioner who had been expecting cash in January next year from maturing bonds was forced to bear the brunt.
Numbers almost identical
The parallels don’t stop there. When you examine the numbers—such as the share of foreign currency-denominated loans to total debt; and the share of borrowings from concessional sources compared to loans borrowed from commercial creditors, especially Eurobonds and syndicated loans—the numbers are almost identical.
The disease Ghana is suffering from and the doctor treating Ghana—the IMF—is the same as Kenya’s. The pill the IMF will prescribe for the disease will also be the same for both countries. I see us getting into an even deeper relationship and engagement with the IMF.
As a distressed debtor, you need the IMF’s stamp of approval to signal to private investors that you are pursuing sound policies and are committed to paying your debts. The Fund has, over the years, assumed the role of a fiscal disciplinarian for distressed sovereign borrowers.
The problem is that bail-out loans come with the condition that you introduce painful reforms—budget cuts, tax hikes, privatisation and market reforms aimed at maximising forex earnings and freeing pub public revenues for external debt servicing. When you default, the playbook for the IMF is the same for all its clients: “You must impose haircuts on your debts first before we bail you out.”
This is what has happened in Ghana.
Is Kenya headed the Ghana way? Well, we have never defaulted before and I don’t want to shout “Fire!” in a crowded hall. The ticking time bomb and the biggest challenge in the medium term for us are the $2 billion (Sh246 billion) 2024 Eurobond maturities that will be crystallising in under 18 months.
According to the latest official statistics on debt, the projections are that, as a consequence of the 2024 Eurobond maturities, total maturities on the country’s stock of external debts will rise exponentially to nearly twice the annual average to a massive Sh475.5 billion.
Last year, the National Treasury initiated engagements with holders of external commercial debts where it sought to negotiate a re-profiling of debts and major amendments to facility agreements. The efforts did not yield fruits.
We must not continue burying our heads in the sand and looking for scapegoats. The structural economic problems we face today were not created by credit rating agencies. Urgent action is needed to prevent a Ghana-style meltdown.
My parting shot is a famous Kiswahili saying that loosely translates to “When you see your neighbour or twin being shaved, start wetting your hair for your time is nigh.”