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Why Kenya must watch Ghana’s debt market

Thursday, September 22nd, 2022 04:55 | By
Public debt burden. PHOTO/Courtesy
Public debt burden. PHOTO/Courtesy

Kenyan financial market should pay attention to happenings in Ghana which is restructuring domestic debt amid concerns of a contagion across sub-Saharan Africa.

The World Bank warned earlier this year that more than half of the poorest countries were in a “debt distress or at high risk of it” and the development in Ghana raises concerns among domestic bond holders in the heavily indebted countries, according to data from Bloomberg.

Such countries which includes Tunisia, Pakistan, Egypt, Kenya, Ukraine, Argentina, Bahrain and Namibia have been keen on raising debt from the local markets due to the high interest rates on the international markets hence leaving them with a liquidity crunch.

“For banks, this introduces a risk element to government debt and triggers capital allocation. Kenyan banks should pay attention to this development,” said director at Callstreet Capital George Bodo.

Risks inherent

It therefore means that banks, pension funds and other government investors face the risk of delayed payments, non payment of interest or even default.

However, Kenya’s debt to Gross Domestci Product (GDP) ratio stands at 70 per cent of GDP, which is lower than Ghana’s 84 per cent, the ability to pay debt largely depends on a country’s cashflow, rather than just debt to GDP ratios.

This comes amid concerns that the National Treasury had just Sh93 million as the opening balance by the end of August with analysts saying lack of access to funding was part of the reasons.

“Kenya was priced out of the Eurobond market, that is part of the reason the coffers are empty,” said Churichill Ogutu senior analyst at IC Group, an Africa focused investment bank providing financial advisory.

Bloomberg, the country’s Eurobonds extended its declines in trading. One of the key requirements for an IMF Fund programme is for the nation to restructure its debt.

“And as crises have shown over and over again in recent decades, the financial collapse of one government can create a domino effect — known as contagion in market parlance — as skittish traders yank money out of countries with similar economic problems and, in so doing, accelerate their crash,” says Bloolmberg.

Banks and pension funds that are among the country’s biggest debt investors are preparing to engage in discussion on debt restructuring.

“In cases where a country’s debt is assessed as unsustainable, the IMF is precluded from providing financing, unless the member takes steps to restore debt sustainability, including by seeking a debt restructuring from its creditors,” IMF said.

Sri-Lanka and Lebanon are already in default and investors fear that as the United States moves to hike interest rates by the highest margin in recent years, more countries will struggle to service international debt, forcing them to build up local currency debt.

President William Ruto has introduced austerity measures that have seen the removal of subsidies on maize and petrol in what could endear him to the International Monetary Fund that had before then started issuing conditions for further funding which included scrapping of subsidies.

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