Kenya's double-digit debt costs sign of the tough times

Kenya has just taken a calculated risk that paying more than 10% on a new international bond is worth it to avoid a default later in the year, even though history is littered with examples of this kind of gamble ending in tears.

While interest rates have shot up everywhere over the last couple of years, a double-digit borrowing cost remains one of the most obvious warning signs that not all is well in a country.

Kenya’s hand was forced to a large degree, as it was facing the possibility that it wouldn’t be able to cover a $2 billion bond payment looming in June. It took a punt, when capital markets suddenly reopened for frontier markets this year, to buy back most of that bond and issue a new $1.5 billion note that it doesn’t need to worry about until 2029, when repayments start.

Kenya’s swerving of default was greeted with relief, despite the high price – a 10.375% effective interest rate, or yield in banking speak. That is well above the 6.875% that the 2024 bond had offered.

“The priority for many of these countries is to get over the liquidity hump,” said Francesc Balcells, Chief Investment Officer for emerging market debt at FIM Partners, explaining that the effective closure of borrowing markets for the last two years had left some nations desperate.

“Issuing at 10% is not a good thing… Where this is two-three years down the road? That is tomorrow’s question,” he said, referring to how investors as well as policymakers seemed to be concentrating for now on the next bond getting paid.

History doesn’t look favourably, though, on those who need to stump up these kinds of interest rates.

Six of the 15 countries that issued bonds with coupons at or above 9.5% after 2008 have since defaulted, analysts at Morgan Stanley have pointed out – Venezuela, Lebanon, Mozambique, Suriname, Ukraine, Ghana and Ecuador.

“A 40% default outcome for countries having issued bonds above 9.5% doesn’t bode well,” the bank’s analysts said, adding that Angola, Nigeria and El Salvador could sell 10%-yielding bonds this year and perhaps even Egypt, Argentina and Ecuador.

RISING TIDE

The potential rise of a new 10% club owes much to the broad-based rise in debt levels and interest rates.

A borrowing-fuelled infrastructure drive is partly why Kenya’s debt-to-GDP ratio now tops 70%. Credit ratings agency Fitch estimates it will spend almost a third of its government revenues just on interest payments this year.