Bank of America: Kenya unlikely to default despite financing risks

Kenya is facing challenging times as it navigates through external financing hurdles and increased pressure from credit rating agencies, but according to a report by the Bank of America, the country is unlikely to default in the next 12 months. The positive policy thrust and support from international institutions such as the IMF and World Bank are providing a cushion for Kenya's economy. Tatonga Rusike, Sub-Saharan African Economist at Bank of America, shed light on the ongoing situation during a recent interview with CNBC Africa. One of the major concerns highlighted in the report is the looming repayment of the June 2024 euro bond worth two billion dollars, which presents a significant financing challenge for Kenya due to limited access to international markets. The three major credit rating agencies, Fitch, S&P, and Moody's, have all placed negative outlooks on Kenya's credit ratings, with Moody's downgrading the country to B3. This has generated discontent from Kenya's leadership, including President William Ruto. Despite these challenges, Bank of America remains optimistic about Kenya's ability to meet its debt obligations, albeit with some uncertainties and risks along the way. To address the imminent financing pressures, Kenya has outlined several options, including buybacks, syndication loans, and increasing foreign exchange buffers. The country plans to buy back half of the 2024 euro bonds before the end of the year, a move aimed at reducing risk. However, this process must be carefully managed to avoid triggering a technical default and maintain the confidence of investors and rating agencies. Rusike emphasized the importance of consulting with rating agencies to ensure a smooth buyback process. In addition to buybacks, accessing external financing from multilateral partners and syndication loans can bolster Kenya's foreign exchange reserves and mitigate the risk of default. Looking ahead, Kenya's economy must focus on fiscal consolidation to weather the storm of FX downturns and fiscal tightening. The government has made significant strides in reducing fiscal deficits over the past few years, aiming to stabilize debt-to-GDP ratios and achieve a primary surplus. By keeping inflation low and stable, Kenya can further strengthen its economic fundamentals. The country's current account deficit is narrowing, supported by improvements in tourism, diaspora remittances, and agricultural exports. These real economy factors, combined with prudent fiscal and monetary policies, can help Kenya sustain growth and build resilience in the face of financing challenges. Bank of America's report underscores the importance of proactive measures and robust policy frameworks to safeguard Kenya's financial stability amidst evolving global economic conditions.