Category Archives: Debt ratings

Kenya’s Money in the Past: IMF Transparency Evaluation

Last week a team from the International Monetary Fund (IMF) released a Report known as the Fiscal Transparency Evaluation Update on Kenya. The country has had an on – and – off history with the IMF and World Bank and one of the key objectives of this report was to estimate Kenya’s balance sheet and take into account all the public sector entities which were believed to have grown significantly since 2014.

Size: The report found that there are 519 entities, including 213 extra-budgetary ones, 47 county governments, social security funds, the Central Bank and 14 financial intermediaries, and 136 public corporations. It estimates that assets are liabilities are 30% greater than in 2014.

The stock of Kenya’s public sector liabilities (mainly pensions) is high (at 30% of GDP) compared to other emerging markets and low-income developing economies and creates potential fiscal risks. Fortunately, it finds that Kenya’s public sector net worth, estimated to be -5% of GDP in 2017-18 is broadly comparable to other similar economies.

It cites some glaring issues. Nairobi County has the largest amount if negative net-assets followed by Mombasa and Isiolo, Garissa, then Murang’a. Nairobi inherited a loan it has been servicing but which still has a Kshs 3 billion balance. Also, Nairobi has guaranteed a Kshs 19.1 billion loan, which is in its books, but this relates to assets that were transferred to another entity – the Athi River Water Service Board.

PPP: Concern about public-private partnerships (PPP) projects: There are 78 PPP’s (67 by the national government and 11 by county governments) in the pipeline, worth $11.4 billion and it notes that no risk analysis is undertaken for pipeline projects, which are sizable and growing in number.

PPP projects are 13% of GDP and half of the amount relates to six projects that are at the procurement stage. These are the Nairobi Mombasa highway, Mombasa petroleum hub, Nairobi – Nakuru – Mau Summit highway, 140MW geothermal at Olkaria, road annuity programs, and a second Nyali bridge project

State Corporations: High-risk public corporations lost Kshs 23 billion in 2017–18. These were topped by Kenya Broadcasting Corporation which lost Kshs 9 billion. Its losses were equal to 436% of revenue and it has a net worth of Kshs -54 billion. Others were Kenya Railways Corporation (which lost 6 billion), Nzoia Sugar Company Limited -3 bn, and South Nyanza Sugar Company -2 bn. Also losing 1 billion each was the National Oil Corporation of Kenya (which was supposed to be an IPO candidate), Chemelil Sugar, Agro-Chemical and Food Co., Muhoroni Sugar, and the Nairobi City Water and Sewerage Co. These ten account for 95% of the loss-making entities.

Oil & Mineral prospects: Kenya has small reserves of natural resources accounting for 3.2% of GDP but non-oil mining could be 10% of GDP by 2030 with oil boosting it by another 1.5%. Neighbour Uganda has better prospects with greater amounts of proven oil (1.7 billion barrels in Lake Albert) and gas reserves and has taken steps to ensure transparency, establishing a sovereign wealth fund and moving towards joining the Extractive Industries Transparency Initiative (EITI). Uganda which has two major upstream projects – a domestic refinery and an export pipeline through Tanzania, is expected to start production after 2023 and reach a peak of 230,000 barrels per day.

Summary: The big headline so far is that approximately 500 projects are stalled with an estimated cost of Kshs 1 Trillion (12% of GDP).

AfDB’s record capital call of $115 billion

The shareholders of the African Development Bank (AfDB) have approved an increase of its capital to support its future development finance and impact across the continent over the next decade.

Meeting in Abidjan, Côte d’Ivoire, in October 2019, the shareholders, representing 80 countries, approved an increase in the AfDB’s authorised capital, from $93 billion to $208 billion. At the end of 2018, the Bank had assets of $47 billion and $58 million of net income.

The voting power of shareholders includes Nigeria (9.3%), Egypt (5.6%), South Africa (5%), Algeria (4.2%), Morocco (3.6%), Côte d’Ivoire (3.7%) and Kenya (1.4%). African nations have a total of 59% of the voting powers, while other nations, including the USA (6.6%), Japan (5.5%), Germany (4.1%) and Canada (3.8%), have total votes of 41%.

The path to the seventh capital increase began back in January 2018 and has gone through several steps including interactions and progress review updates with shareholders and partners that were summarized at the 2019 AfDB annual meetings in Malabo, Equatorial Guinea.

The last capital increase was in 2010. Some of the highlights of the funding during the sixth period include the establishment of agro-industrial zones across Ethiopia and arranging $1 billion in finance for South Africa’s Eskom to expand its generation and transmission capacity. There was also the Sene-Gambia bridge, which was the realization of a 40-year dream to connect two countries, the 895-kilometers Addis-Mombasa highway and the expansion of Namibia’s Walvis Bay port to become a regional logistics hub.

A bank study of the impact of its $1.4 billion investments in East Africa region, between 2013 and 2015, found that this had resulted in the addition of $1.2 billion to the economies of the different countries and created over 380,000 jobs

The new funding, which will be called up from shareholders between 2020 and 2025, is intended to finance the Bank’s High 5 priorities and maintain its AAA rating with the top rating agencies. Over the next decade, the AfDB plans to double the funding efforts towards energy and agriculture, with targets to allocate 25% and 20% respectively, to the two sectors by 2031.

The Bank has lined up a three-year pipeline of projects to lend to, including $15 billion in 2020 and $13.6 billion in 2021. Some of the planned projects are targeted at improving continental transport networks, supporting climate change initiatives, and increasing access to electricity and water. One of them is a “Desert-to-Power” initiative that aims to transform the climate-fragile Sahel region into the largest solar zone in the world that will generate 10-gigawatts and impact 250 million people.

10 Points from AfDB 2019 in Malabo

The African Development Bank (AfDB) Group held their 2019 series of annual meetings from 11 to 14 June in Malabo, Equatorial Guinea with the theme of “Regional Integration”

Highlights of the meetings:

1. Fast growth is not Enough: A key theme of the week was that the stellar growth levels in Africa (over 4%) were still not enough to create enough jobs and produce sufficient food on the continent.

2. High 5’s:  Regional Integration is one of the development priority themes (‘ High 5s’) that the Bank had adopted at its 2016 meetings in Lusaka, Zambia alongside (to) “Light up and power Africa”, “Feed Africa”, “Industrialise Africa”, and “Improve the quality of life of the people of Africa.”

3. It is Capital Raising time for the Bank and is organs. There are advanced talks towards a 7th general capital increase, the first since 2010, for the African Development Bank, which will be concluded in September.

A few months ago, Canada provided temporary callable capital of up to $1.1 billion to stabilize the AAA rating of the Bank.

There are also ongoing negotiations for a 15th replenishment of the African Development Fund.

4. Visa Index: The Bank’s Africa Visa Openness Index ranks how accessible African countries are to visitors from within the continent in terms of requiring travel visas and tracks developments by different countries to improve the ease of travel for fellow African citizens.

5. Low intra-Africa trade:  Ahead of the African Continental Free Trade Area (AfCFTA) which comes into force in July 2019, the potential economic benefits of full implementation were highlighted, with the greatest beneficiaries of the increased trade likely to be countries in the Central Africa region.

Africa has 54 countries; Alone they are not very competitive, but together, under the Continental Free Trade Agreement, they are a market of $3.4 trillion

 

Also see the regional economic outlook reports by the Bank.

6. Debt levels in Africa: There was some discussion about the levels and types of debt across Africa and their potential burden versus the growth and infrastructure needs of individual countries. Also the Bank affirmed its support to help countries negotiate better financing terms, get better deals for extractive resources, minimize currency risks, and to enable them to mobilize their own resources domestically.

7. Asia-models for Africa: At the AfDBAM2019, Korea and India showcased their partnerships with the Bank including on agricultural transformation, enhancing food security and scaling financing across Africa.

8. Different forms of development finance by the Bank: 

  • Toward Financial Inclusion

  • Integration of Africa

  • The Environment

  • Food Security

  • Disaster Relief

  • Clean Energy

  • They also have plans for an affirmative action finance facility for women in Africa (AFAWA).

9. Transformational Infrastructure Projects funded by the bank include ports, highways, bridges and border-crossing stations across different countries.

10. Malabo Image: Host nation, Equatorial Guinea, used the forum to shed an image about the country that is full of old stereotypes to one of economic diversification, transformation and infrastructure. President Obiang attended the opening of the AfDBAM2019 which were chaired by the country’s Minister of Finance, Cesar Abogo, who is just 39 years old.

(a) Parallel events during AfDBAM2019: 

  • Africa Investment Forum last year which at its inaugural AIF forum in 2018 in Johannesburg secured  $38 billion of investments for 40 projects across Africa.

  • African Banker Awards

(b) Next meeting: Following these first-ever meetings to take place in Central Africa, the next annual meetings of the bank will be in a year’s time in Abidjan, Côte d’Ivoire – the bank’s headquarter city, where they the election of the Bank President will be the main agenda item.

China and Africa’s Infrastructure Developments

Excerpts from a piece by Andrew Alli, the former Africa Finance Corp (AFC) CEO, in his debut column for Quartz Africa on separating myths and realities of the role of China in Africa’s infrastructure developments.

China firms funded, built and operate Kenya’s new railway.

  • China’s was the fourth largest foreign investor in Africa spending about $40 billion in 2016, according to UNCTAD’s World Investment 2018 report, behind the US ($57 billion), the UK ($55 billion), and France ($49 billion).
  • Construction contracts are backed by Chinese financial institutions—like China Export -Import Bank and Sinosure – looking to support the exports or sales of Chinese products and services. The mission of these financing entities is to support jobs and income generation in China, as well as to support more strategic objectives of the Chinese government.
  • Chinese companies are surprisingly risk-averse when it comes to Africa – most Chinese financiers will not consider a project without insurance from Sinosure, the Chinese government-owned political risk insurer, or other similar institutions. In turn, Sinosure often requires a guarantee from the government of the country in which the project is located. (e.g. – with Kenya’s Standard Gauge Railway construction, the contracts specify that there will be insurance cover of 6.93% of the commercial loan – done by a Chinese firm, SinoSure, to take care of nonpayment). Sinosure insurance and other financing costs do not come cheap, which leads to the point that Chinese firms are not necessarily cheaper than firms from other countries – and while the bare construction costs of certain projects may seem cheaper, even after equalizing for quality, there are other costs that may apply including the insurance and other financing costs mentioned before, and costs associated with local content. 
  • It is true Chinese firms prefer to use all-Chinese inputs. If you want local workers and contractors, you will have to make that a negotiating point.
  • While some work done by Chinese firms can indeed be shoddy,  this doesn’t have to be the case.  For example, while a Western firm may tell you a bridge will cost you, say, $300 million. A Chinese firm may tell you that you can have a $300 million bridge, or a $250 million one.- and things that may be taken for granted in other parts of the world can be negotiable when dealing with a Chinese firm. You have to be careful to specify the quality that you want and the standards that you would like the project to be built to. You also need to be very specific about the environmental and social standards you want the project to adhere to.
  • For too long the number of firms willing to engage in, and finance, projects in Africa has been very limited, meaning that competition has also been limited leading to high prices and a lack of innovation. The increase in interest by Chinese firms has increased the amount of competition, forcing prices down overall and improving quality. The bleating of companies being forced out of cozy monopolies is probably one cause of the constant refrain we hear about the “dangers” of Chinese interest in Africa. We shaved the costs of that project in Ghana by over 20% from initial quotes by running a competitive process involving a Chinese firm.
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Moody’s places Kenya’s B1 rating on review for downgrade

Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade.

 

Excerpts

The decision to place the rating on review for downgrade was prompted by the following key drivers:

  •  Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
  • Government liquidity pressures risk rising in the face of increasingly large financing needs
  • Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics

Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.

Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.

A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.

What Next?

Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.

Or

Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.