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Kenya: Second Reviews Under the Stand-By Arrangement and the Arrangement Under the Standby Credit Facility, and Requests for a New Twenty-Four Month Stand-By Arrangement, and a New Twenty-Four Month Arrangement Under the Standby Credit Facility—Debt Sustainability Analysis Update

Author(s):
International Monetary Fund. African Dept.
Published Date:
March 2016
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Background

1. This DSA consists of two parts: external and public. The external DSA covers external debt of the central government and the central bank, as well as of the private sector; stress tests apply to public and publicly guaranteed (PPG) debt. The public DSA covers total debt—external and domestic—incurred or guaranteed by the central government. Public domestic debt comprises central government debt. Government finance statistics are to be expanded to cover the recently created county governments. In this analysis, total public debt refers to the sum of public domestic and public external debt, but does not cover the entire public sector (e.g., parastatal borrowing without a government guarantee is not covered).

2. Kenya’s overall public debt has increased in the past two years. Gross public debt increased from 44 percent of GDP at end-2013 to 52 percent at end-September 2015. In the baseline, public debt is expected to stabilize around 54-55 percent of GDP in 2017-19 and gradually decline thereafter. Half of Kenya’s public debt is owed to external creditors.

3. Most of Kenya’s external public debt remains on concessional terms, but its commercial component has increased. Nominal public external debt at end-September 2015 was US$14.7 billion (text table), equivalent to 27½ percent of GDP—somewhat above the average for comparable SSA countries (text chart).

  • Multilateral creditors continue to account for nearly half of external credit to Kenya. Debt to bilateral creditors is roughly half to Paris Club creditors, and half to other bilateral creditors, mainly semi-concessional loans from China to finance construction of the first phase (Mombasa-Nairobi) of the Standard Gauge Railway project (SGR; at end-August 2015, some US$2.5 billion was disbursed out of US$3.8 billion contracted). In December 2015, Kenya contracted a further US$1.5 billion, to be disbursed in coming years, for the second SGR phase (Nairobi-Naivasha),
  • Kenya’s commercial financing has two main elements. In 2014, Kenya issued its inaugural sovereign bonds, at 5-year and 10-year maturities, raising US$2 billion in June and a further US$750 million in December 2014.2 More recently, in October 2015, Kenya contracted a two-year US$750 million syndicated loan at LIBOR plus 570 basis points, equivalent to an effective yield of 8 percent.
Kenya: External Public Debt
201220132014September 2015
Billion US$ShareBillion US$ShareBillion US$ShareBillion US$Share
Multilateral creditors5.5657.66.4760.57.0749.27.2149.0
Bilateral creditors2.7128.12.8426.63.8626.94.0827.7
Commercial creditors0.687.00.696.52.8219.62.8119.1
Others (supplier credits)0.181.90.181.70.181.30.171.1
Total (excluding guarantees)9.1394.610.1895.213.9296.914.2796.9
Publicly guaranteed debt0.525.40.514.80.443.10.453.1
Total (including guarantees)9.65100.010.69100.014.36100.014.72100.0
Source: Kenyan National Treasury.
Source: Kenyan National Treasury.

4. Kenya’s gross domestic public debt was 24½ percent of GDP at end-September 2015. Domestic debt is issued mostly in the form of Treasury bonds (75 percent of domestic debt) and Treasury bills (19 percent). Commercial banks hold half of the domestic debt, with nonbanks holding another 42 percent and the central bank holding most of the remainder. The domestic debt is of relatively large size by regional standards (text figure). Rollover risks appear moderate. The average maturity of Kenya’s domestic debt shortened, from 5.8 years in June 2011 to 5.2 years in June 2013 and 4.9 years in June 2014.

Underlying Assumptions

5. This DSA is based on macroeconomic assumptions that are consistent with the framework for the accompanying staff report, notably a modestly weaker outlook and higher external borrowing compared with previous projections:

  • Real GDP growth is modestly weaker in the short term, reflecting the impact of external shocks, but recovers in the medium term (though somewhat less than projected in the September 2015 DSA update). Faster growth in the longer term is predicated on the assumption that the present infrastructure push successfully addresses key bottlenecks.
Kenya: Selected Macroeconomic Assumptions
2014201520162017Long term 1/
Real GDP Growth
Current DSA5.35.66.06.16.5
Previous DSA (September 2015)5.36.56.87.06.8
Primary Fiscal Deficit (percent of GDP)
Current DSA4.65.44.12.60.6
Previous DSA (September 2015)4.85.44.32.70.7
Non-interest Current Account Deficit (percent of GDP)
Current DSA9.77.47.05.55.9
Previous DSA (September 2015)10.29.28.86.55.7
Source: IMF staff estimates.

For current DSA update, average 2021-35. For previous DSA update, average 2021-34.

Source: IMF staff estimates.

For current DSA update, average 2021-35. For previous DSA update, average 2021-34.

  • The primary fiscal deficit is projected to peak in 2015 owing to a frontloading of the SGR-related spending, and then to be brought down in the medium to longer term consistent with the East African Community (EAC) Monetary Union convergence criteria.3 In the long term, the primary deficit would converge to its previously projected level, consistent with keeping the overall deficit below 3 percent while making room for higher interest payments.
  • The current account deficit is estimated to have narrowed in 2015 owing to lower imports of oil products and aircraft. It is projected to narrow further, in 2016 on account of lower oil prices despite an expected peak in SGR-related imports, and in the medium term reflecting fiscal consolidation as well as a pickup in trade as progress is made in regional integration. The current account projections do not include potential exports from recent oil discoveries pending confirmation that these will be commercially viable. Both oil and non-oil exports and imports are lower than previously projected.

External Debt Sustainability Analysis

6. Under the DSA baseline scenario, all external debt indicators remain well below the policy-dependent debt burden thresholds. In this scenario, the debt burden increases over the next 10 years but remains within sustainable bounds (Table 1). The NPV of external PPG debt would peak at 25 percent of GDP in 2016 and remain around this level through 2025, falling gradually thereafter. This trajectory remains well below the 50-percent indicative threshold. The NPV of the debt-to-exports ratio would reach 141 percent in 2016 and ease gradually in following years, remaining well under an indicative threshold of 200 percent.

Table 1.Kenya: External Debt Sustainability Framework, Baseline Scenario, 2012-20351(In percent of GDP, unless otherwise indicated)
ActualHistorical 6/ AverageStandard 6/ DeviationProjections
2012201320142015201620172018201920202015-2020 Average202520352021-2035 Average
External debt (nominal) 1/28.429.537.242.545.146.246.247.348.051.759.9
of which: public and publicly guaranteed (PPG)19.319.424.028.531.631.330.930.130.127.920.9
Change in external debt1.31.07.75.42.61.10.11.00.71.60.3
Identified net debt-creating flows3.45.65.84.43.31.91.51.51.62.31.6
Non-interest current account deficit8.08.49.75.43.27.47.05.55.45.45.56.15.45.9
Deficit in balance of goods and services13.714.015.513.613.412.112.011.912.012.211.1
Exports21.919.618.218.317.617.818.018.218.318.319.0
Imports35.533.633.731.931.029.930.030.130.430.530.1
Net current transfers (negative = inflow)−5.6−5.7−6.2−6.20.4−6.7−6.7−6.7−6.6−6.6−6.5−6.2−5.5−6.0
of which: official−0.4−0.4−0.5−0.4−0.4−0.3−0.3−0.3−0.3−0.3−0.3
Other current account flows (negative = net inflow)−0.10.10.40.50.30.20.10.00.00.1−0.1
Net FDI (negative = inflow)−0.5−0.9−1.7−0.70.7−1.7−2.3−2.2−2.4−2.3−2.3−2.3−1.9−2.2
Endogenous debt dynamics 2/−4.1−1.8−2.2−1.2−1.4−1.4−1.6−1.5−1.6−1.5−1.9
Contribution from nominal interest rate0.40.50.70.81.01.11.21.21.31.51.7
Contribution from real GDP growth−1.0−1.5−1.4−2.1−2.4−2.6−2.7−2.8−2.9−3.0−3.6
Contribution from price and exchange rate changes−3.5−0.9−1.5
Residual (3-4) 3/−2.1−4.61.91.0−0.7−0.8−1.4−0.5−0.9−0.7−1.3
of which: exceptional financing−0.10.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/30.935.738.339.640.141.642.647.657.5
In percent of exports169.5195.3217.5222.1223.5228.5232.3260.6302.5
PV of PPG external debt17.721.724.824.824.824.424.723.818.6
In percent of exports97.0118.5140.9138.8138.0134.3134.6130.397.6
In percent of government revenues91.1109.5122.2118.6116.5114.5114.4109.384.7
Debt service-to-exports ratio (in percent)39.351.159.328.824.843.133.946.035.948.853.6
PPG debt service-to-exports ratio (in percent)4.04.516.66.48.014.89.113.98.79.710.9
PPG debt service-to-revenue ratio (in percent)4.64.515.65.96.912.77.711.97.48.19.4
Total gross financing need (Billions of U.S. dollars)9.711.513.510.010.011.912.315.817.035.7123.8
Non-interest current account deficit that stabilizes debt ratio6.77.32.02.04.44.55.44.34.84.55.1
Key macroeconomic assumptions
Real GDP growth (in percent)4.65.75.35.22.25.66.06.16.56.56.56.26.56.56.5
GDP deflator in US dollar terms (change in percent)14.93.15.37.67.0−4.6−0.80.61.91.91.60.12.52.52.5
Effective interest rate (percent) 5/1.81.92.72.20.62.22.62.72.82.92.92.73.33.13.1
Growth of exports of G&S (US dollar terms, in percent)11.3−2.33.110.511.21.01.28.39.29.99.06.49.29.89.4
Growth of imports of G&S (US dollar terms, in percent)9.62.911.415.111.6−4.72.43.08.88.99.24.69.29.09.1
Grant element of new public sector borrowing (in percent)19.412.813.113.29.812.913.57.45.26.8
Government revenues (excluding grants, in percent of GDP)18.719.319.419.820.320.921.321.321.621.821.921.9
Aid flows (in Billions of US dollars) 7/1.11.30.80.80.80.80.61.4
of which: Grants0.20.30.30.30.30.30.30.30.30.41.0
of which: Concessional loans0.81.00.50.50.50.50.20.4
Grant-equivalent financing (in percent of GDP) 8/1.41.10.90.80.70.70.50.40.5
Grant-equivalent financing (in percent of external financing) 8/26.118.921.523.219.021.916.816.216.1
Memorandum items:
Nominal GDP (Billions of US dollars)50.454.960.961.464.669.074.881.187.8135.7327.7
Nominal dollar GDP growth20.29.010.90.85.26.88.58.48.36.39.29.29.2
PV of PPG external debt (in Billions of US dollars)10.512.815.716.918.519.721.632.260.6
(PVt-PVt-1)/GDPt-1 (in percent)3.84.71.92.31.72.32.82.01.11.6
Gross workers’ remittances (Billions of US dollars)1.21.31.41.61.61.71.82.02.13.16.6
PV of PPG external debt (in percent of GDP + remittances)17.321.124.224.224.223.924.123.318.2
PV of PPG external debt (in percent of exports + remittances)85.9104.1123.2121.7121.3118.4118.9115.888.2
Debt service of PPG external debt (in percent of exports + remittance)14.75.67.013.08.012.37.78.69.8
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1 + g + ρ + gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate cha

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1 + g + ρ + gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate cha

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

7. The standard stress tests do not indicate breaches of the relevant indicative thresholds, though in one case indicate a temporary near-breach in 2024:

  • The shock that would have the largest impact on the PV of PPG external debt-to-GDP and the PV of debt-to-revenue ratios is a one-time 30-percent nominal depreciation of the exchange rate in 2016—in which case the PV of debt to GDP could increase by 13 percentage points (Figure 1 and Table 2). The depreciation shock results in a near breach of the debt service-to-revenue indicator in 2024, when the bulk of the 2014 sovereign bond is due.
  • The largest medium-term impacts on the PV of debt-to-exports ratio are from temporary shocks to export value growth and to non-debt creating flows. The PV of debt-to-exports ratio would reach around 160 percent in the medium term (compared with a 200 percent threshold) and fall only gradually in the longer term. This ratio also increases steadily under the historical scenario, in which infrastructure gaps—intended to be closed by the present investment push4—are implicitly assumed to continue to constrain output and exports in the longer term.

Figure 1.Kenya: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2015–2035 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Non-debt flows shock; in d. to a One-time depreciation shock; in e. to a Non-debt flows shock and in figure f. to a One-time depreciation shock.

Table 2.Kenya: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–35(In percent)
Projections
20152016201720182019202020252035
PV of debt-to GDP ratio
Baseline2225252524252419
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/2223242525262931
A2. New public sector loans on less favorable terms in 2015-2035 22226272728283027
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20172225262626262520
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/2225262726262519
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20172224242424242318
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/2227313130302719
B5. Combination of B1-B4 using one-half standard deviation shocks2225272727272518
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/2235353535353426
PV of debt-to-exports ratio
Baseline11914113913813413513098
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/119132132136139144158161
A2. New public sector loans on less favorable terms in 2015-2035 2119146149152151155163142
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201711913813713713313413097
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/119142165164159159151109
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-201711913813713713313413097
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/119156172170165164149100
B5. Combination of B1-B4 using one-half standard deviation shocks11914315915815315214298
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/11913813713713313413097
PV of debt-to-revenue ratio
Baseline11012211911611511410985
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/110115113115119122132140
A2. New public sector loans on less favorable terms in 2015-2035 2110126127128129131137123
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201711012312412312112111589
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/11012112712512212211485
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-201711011811611411211210783
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/11013514714414113912587
B5. Combination of B1-B4 using one-half standard deviation shocks11012513012812512511482
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/110171168166163163156121
Debt service-to-exports ratio
Baseline681591491011
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/671381281014
A2. New public sector loans on less favorable terms in 2015-2035 268891491116
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-2017681591491011
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/68171116101212
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017681591491011
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/68161115101311
B5. Combination of B1-B4 using one-half standard deviation shocks6815101591211
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/681591491011
Debt service-to-revenue ratio
Baseline6713812789
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/66117107812
A2. New public sector loans on less favorable terms in 2015-2035 267771281014
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201767138138910
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/67138128910
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20176712812789
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/671391381110
B5. Combination of B1-B4 using one-half standard deviation shocks6712812899
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/610181117111214
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/55555555
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

8. Under the probability approach applicable to borderline cases, debt burden indicators remain below the relevant thresholds in the baseline and stress-test scenarios. The estimated probability of external debt distress remains below 10 percent for all variables under all stress tests (Figure 2), compared with the relevant thresholds (ranging from 12.5 percent for the PV of debt to exports, to 15.2 percent for the debt service to revenue ratio.

Figure 2.Kenya: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2015–2035 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Non-debt flows shock; in d. to a One-time depreciation shock; in e. to a Non-debt flows shock and in figure f. to a One-time depreciation shock

9. The authorities intend to rely on concessional external financing while maintaining a limited window for borrowing on commercial terms, in order to minimize costs and refinancing risks. Concessional financing is complementing private investment, domestic revenues, and public investment financed through nonconcessional sources. The African Development Bank is financing power connections to take full advantage of the expanded energy capacity. The World Bank is financing capacity building at the Ministry of Energy to prepare for the eventual exploitation of oil and oil products. The authorities currently envisage the share of commercial borrowing to increase gradually over time.

10. Commercial borrowing needs to be managed carefully to minimize the impact of repayment spikes. Kenya’s multilateral and bilateral borrowing, which accounts for most of the external debt, has smooth repayment profiles. However, recent commercial borrowing entails large repayment needs in 2017 for the syndicated loan, and in 2019 and 2024 for the sovereign bond issuance. The authorities had intended the October 2015 syndicated loan as a one-off operation, taking pressure off the temporarily disturbed domestic market; but in the event of a more permanent substitution of external for domestic finance, longer maturities would be needed to avoid bunching of repayments.

11. Private sector external debt is tentatively estimated at about 13–15 percent of GDP. Estimates of private sector external debt stocks used in this DSA are based on the results of the Foreign Investment Survey (FIS), which covers assets and liabilities in stock and flow terms for 2012 and 2013 (for the private sector, including banks and nonfinancial enterprises). The published results are aggregates of survey responses and do not reflect estimation or scaling; thus, the published responses reflect lower bounds on asset and liability positions. The Kenyan Bureau of National Statistics is scheduled in spring 2016 to produce its initial International Investment Position estimates and to revise historical information on the financial accounts of the balance of payments, drawing on information from the FIS.

12. As noted in previous DSAs, recent resource discoveries represent upside potential to Kenya’s external position. Kenya is currently a net importer of petroleum products. Significant oil resources were discovered in Kenya in 2014. Oil and gas exploration activities are so far continuing, despite the weakness in oil prices since late 2014. In the event that recent discoveries are found to be commercially viable—which could be influenced by oil price movements—Kenya’s medium- to long-term external position could improve significantly.

Public Debt Sustainability Analysis

13. In the baseline scenario, public debt continues to increase in 2015 and stabilizes in 2017–19 before the projected medium-term fiscal consolidation sets debt on a declining trajectory. In 2015, overall public debt is projected to have risen by another 3½ percentage points of GDP, to 52.7 percent of GDP. In subsequent years, on the basis of a primary deficit below 3 percent of GDP by 2017 and declining further thereafter, public debt eases to 50 percent of GDP after 2020 (Table 3). In PV terms, the public debt-to-GDP ratio would remain stable around 48–49 percent through end-2019, falling gradually thereafter. The authorities’ medium-term debt anchor is 45 percent in PV terms (within the EAC convergence criterion threshold of 50 percent). The PV of public debt-to-revenue ratio would ease from 227 percent in 2015 to 215 percent in 2020 (Table 4).

Table 3.Kenya: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–35(In percent of GDP, unless otherwise indicated)
Actual5/ AverageStandard 5/ DeviationEstimateProjections
2012201320142015201620172018201920202015-20 Average202520352021-35 Average
Public sector debt 1/41.744.149.252.755.155.054.653.652.445.035.4
of which: foreign-currency denominated19.319.424.028.531.631.330.930.130.127.920.9
Change in public sector debt1.52.45.13.52.4−0.1−0.4−1.0−1.2−0.7−1.0
Identified debt-creating flows−0.11.63.15.52.60.8−0.9−1.4−1.7−1.4−0.9
Primary deficit2.33.04.61.71.65.44.12.61.30.70.42.40.50.90.6
Revenue and grants19.119.819.920.220.721.321.721.721.922.122.2
of which: grants0.40.50.50.50.40.40.40.40.30.30.3
Primary (noninterest) expenditure21.422.824.525.624.923.923.022.422.322.623.1
Automatic debt dynamics−2.4−1.4−1.50.1−1.6−1.8−2.2−2.1−2.1−1.9−1.8
Contribution from interest rate/growth differential−1.3−0.9−1.3−1.4−1.7−1.9−2.1−2.2−2.2−1.6−1.5
of which: contribution from average real interest rate0.41.40.91.21.31.31.21.11.11.20.7
of which: contribution from real GDP growth−1.8−2.2−2.2−2.6−3.0−3.2−3.3−3.3−3.3−2.8−2.2
Contribution from real exchange rate depreciation−1.0−0.5−0.21.60.10.0−0.10.10.1
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes1.60.82.0−2.0−0.1−0.90.60.30.50.6−0.1
Other Sustainability Indicators
PV of public sector debt42.945.848.348.548.547.947.040.933.0
of which: foreign-currency denominated17.721.724.824.824.824.424.723.818.6
of which: external17.721.724.824.824.824.424.723.818.6
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/13.314.919.118.116.616.213.813.912.410.08.8
PV of public sector debt-to-revenue and grants ratio (in percent)215.4226.6233.0227.6224.0220.6214.6185.0148.5
PV of public sector debt-to-revenue ratio (in percent)221.1231.8237.8232.0228.1224.5218.0187.6150.6
of which: external 3/91.1109.5122.2118.6116.5114.5114.4109.384.7
Debt service-to-revenue and grants ratio (in percent) 4/28.029.240.029.729.434.128.331.626.021.717.9
Debt service-to-revenue ratio (in percent) 4/28.730.041.030.430.034.728.832.226.422.018.1
Primary deficit that stabilizes the debt-to-GDP ratio0.70.7−0.51.91.72.81.71.81.61.31.8
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)4.65.75.35.22.25.66.06.16.56.56.56.26.56.56.5
Average nominal interest rate on forex debt (in percent)1.51.42.51.60.42.22.82.83.03.13.32.93.94.4
4.0
Average real interest rate on domestic debt (in percent)2.36.63.31.54.03.74.04.74.43.73.5
4.03.30.8
2.3
Real exchange rate depreciation (in percent, + indicates depreciation−5.9−2.9−0.9−4.27.76.8
Inflation rate (GDP deflator, in percent)9.45.07.58.63.86.96.75.85.45.55.35.95.15.15.1
Growth of real primary spending (deflated by GDP deflator, in percen5.912.613.33.25.410.12.92.22.33.86.04.66.86.86.7
Grant element of new external borrowing (in percent)19.412.813.113.29.812.913.57.45.2
Sources: Country authorities; and staff estimates and projections.

Refers to gross debt of the central government, including CBK obligations to the IMF, excluding government deposits.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

Refers to gross debt of the central government, including CBK obligations to the IMF, excluding government deposits.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.Kenya: Sensitivity Analysis for Key Indicators of Public Debt, 2015–35
Projections
20152016201720182019202020252035
PV of Debt-to-GDP Ratio
Baseline4648484948474133
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages4646464748495153
A2. Primary balance is unchanged from 20154649525660637796
A3. Permanently lower GDP growth 1/4649495050494853
A4. Fix primary balance ex-SGR4648495153545758
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-204650535455555453
B2. Primary balance is at historical average minus one standard deviations in 2016-2014647484848474133
B3. Combination of B1-B2 using one half standard deviation shocks4647484949494744
B4. One-time 30 percent real depreciation in 20164658585857565044
B5. 10 percent of GDP increase in other debt-creating flows in 20164658585857564838
PV of Debt-to-Revenue Ratio 2/
Baseline227233228224221215185148
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages227223215216220222230236
A2. Primary balance is unchanged from 2015227239245259275289350434
A3. Permanently lower GDP growth 1/227234231230229226216240
A4. Fix primary balance ex-SGR227232231236243247260262
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-20227242249251253251243239
B2. Primary balance is at historical average minus one standard deviations in 2016-201227229226223220214184148
B3. Combination of B1-B2 using one half standard deviation shocks227229227227227225211198
B4. One-time 30 percent real depreciation in 2016227280272266262255226199
B5. 10 percent of GDP increase in other debt-creating flows in 2016227280272266262254218171
Debt Service-to-Revenue Ratio 2/
Baseline3029342832262218
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages3030342731262629
A2. Primary balance is unchanged from 20153029343035323953
A3. Permanently lower GDP growth 1/3030342932272528
A4. Fix primary balance ex-SGR3029342833282927
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-203030363135302829
B2. Primary balance is at historical average minus one standard deviations in 2016-2013029342831262218
B3. Combination of B1-B2 using one half standard deviation shocks3030352832272424
B4. One-time 30 percent real depreciation in 20163031403238312930
B5. 10 percent of GDP increase in other debt-creating flows in 20163029373437312621
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

14. The projected debt path remains well below the relevant LIC DSA public debt benchmark, but this result is qualified by limits to the coverage of the debt statistics. The baseline scenario debt trajectory is below the relevant LIC DSA public debt benchmark—in PV terms, 74 percent of GDP, applicable for LICs whose CPIA score for quality of policies and institutions is assessed as strong—above which the risk of public debt distress is heightened. However, this public debt benchmark applies conceptually to the widest possible coverage of the public sector, and ideally should include the obligations of regional and local governments, and government-controlled enterprises (especially in cases where the government owns more than half of the voting shares). The measured public debt path excludes legacy debts of the pre-devolution county governments (whose size is not yet fully clear) as well as borrowings of state-owned enterprises. In addition, public debt should include planned annuities intended to finance road construction: although the annuity obligations may not necessarily be classified as debt under local law, they nevertheless represent public debt obligations according to international (GFS) methodology.

15. Excluding a fixed-primary-balance scenario that is distorted by temporary factors, the alternative scenarios and bound tests indicate that the projected paths for public debt indicators remain within the relevant thresholds (Table 4 and Figure 3). Under a standard scenario that keeps the primary balance unchanged from its 2015 level, the PV of public debt to GDP would remain on a steady upwards trajectory, remaining permanently above the EAC convergence criterion reference value and exceeding the 74 percent benchmark by the mid-2020s. Since the 2015 primary deficit is boosted by temporary SGR-related spending, Figure 3 also includes a scenario fixing the primary balance excluding SGR-spending. In this case, public debt in PV terms increases more gradually, remaining below 60 percent of GDP and within sustainable bounds, but above 50 percent of GDP (the EAC convergence criterion threshold).

Figure 3.Kenya: Indicators of Public Debt Under Alternative Scenarios, 2015-2035 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.

2/ Revenues are defined inclusive of grants.

Main Findings and Conclusions

16. This DSA finds that Kenya continues to face low risk of external debt distress, but margins are narrower. Standard stress tests suggest scenarios in which external debt would increase, but remain within sustainable bounds. But the safety margins to the indicative thresholds are lower than previously. A large exchange rate shock continues to represent a significant risk to external debt. The authorities intend to continue making use of concessional resources to the extent possible—which is beneficial from both cost (present value) and maturity perspectives. Commercial borrowing needs to be managed carefully to minimize the impact of repayment spikes. Given the bunched repayments in coming years, strong debt management capacity will be especially important. In the medium term, the authorities’ planned fiscal consolidation will help limit external borrowing requirements. In the longer term, the debt outlook will be influenced by the payoff from the present efforts to close infrastructure gaps and address bottlenecks that have constrained growth and exports in the recent past.

17. Overall public debt remains sustainable, as long as the authorities implement their medium-term fiscal consolidation plans. The baseline public debt path remains consistent with the EAC convergence criteria (deficit and debt) and below the relevant public debt benchmark, subject to coverage issues. Recent increases in public debt reflect increased borrowing to address infrastructure needs, and the related temporarily high primary deficits. Standard stress-testing scenarios show that if the primary deficit were to remain at current levels, public debt would remain on an upward path. These scenarios are more pessimistic than the authorities’ stated policy intentions—which are to reduce the primary deficits in the medium term consistent with the convergence criteria for the EAC monetary union—but also highlight the need to follow through on the intended medium-term fiscal consolidation.

18. The authorities see their program of externally financed infrastructure investments as improving prospects for growth in output and exports, and consistent with debt sustainability. The authorities plan to continue their infrastructure push balanced with maintaining debt sustainability. They agree that they remain at low risk of external debt distress. However, they emphasize that their externally financed infrastructure investments will address bottlenecks that have constrained past growth and export performance.

1Kenya’s policies and institutions are classified as “strong” under the World Bank’s Country Policy and Institutional Assessment (CPIA) Index (average score in 2012–14: 3.84). The relevant indicative thresholds for this category are: 50 percent for the NPV of debt-to-GDP ratio, 200 percent for the NPV of debt-to-exports ratio, 300 percent for the NPV of debt-to-revenue ratio, 25 percent for the debt service-to-exports ratio, and 22 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt.
2The June 2014 issuance comprised two tranches: a five-year $500 million bond at a yield of 5.875 percent, and a 10-year $1.5 billion bond at 6.875 percent. In December 2014, Kenya added $250 million to the five-year tranche at a 5.0 percent yield and $500 million to the 10-year tranche at 5.9 percent.
3The EAC Monetary Union Protocol provides for fiscal convergence criteria, including a ceiling on the fiscal deficit (defined including grants) of 3 percent of GDP; and a ceiling on the gross public debt of 50 percent of GDP in net present value terms. The other macroeconomic convergence criteria include a ceiling on headline inflation (8 percent) and a floor on reserve cover (4.5 months of imports). The fiscal plans outlined in the authorities’ budget policy statement are consistent with Kenya meeting the EAC convergence criteria by 2021.
4IMF Country Report No. 15/31 estimated that the planned increase in public investment would add around 1 percentage point to annual real GDP growth over the medium term.

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