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What "Kenya" Do?
Kenya’s fundamentals today may be the most exciting they’ve been in decades. Following a peaceful election last August, President Ruto’s new administration has continuously expressed commitment to fiscal consolidation and structural reform that will improve the sovereign’s credit quality. Kenya is supported by the international community, which wants to help fund its success—as most recently evidenced by the IMF’s announcement it will extend further aid to the country (more on which shortly). So what gives—why do Kenyan asset prices tell such a different story?
With a significantly sized Eurobond maturity just a year away, some investors have concerns about Kenya’s ability or willingness refinance itself on the commercial market. Given its wide credit spreads on top of higher US Treasury yields, the government does seem reluctant to attempt a new commercial issuance.
So what’s a treasury department to do? Several governments have gone the route of default over the past year. But to date, Kenya’s officials are choosing to fight with a three-pronged strategy: reduce the funding need by consolidating the large fiscal deficit; improve the growth outlook via the private sector; and capitalize on several concessional financing sources.
Kenya’s treasury department recently noted the country is on track for a deficit of 5.7% of GDP for the fiscal year ending in June (compared to 6.2% planned) and is targeting a further reduction to 4.1% of GDP for the fiscal year starting in July. On prong two, a privatization bill awaiting parliamentary approval would give the government more latitude to reduce the state’s share of economic activity across a swath of industries. The government is also working to reduce burdens on foreign investors, including cutting the requirement for local business ownership.
On prong three, recent announcements from International Financial Institutions are supportive: Kenya expects to receive $1 billion in policy-contingent aid from the World Bank, and the IMF just announced another roughly $1.1 billion in funding via an extension of an existing economic program and the new Resilience and Sustainability Trust.
A final crucial element is missing but could soon complete the puzzle: currency adjustment. The FX market needs to be allowed to fully adjust to the past few years’ external realities and then continue moving in line with market fundamentals. With a new central bank governor just confirmed by the parliament, there’s no better time to effect that change, which would boost growth, FX-generating exports and foreign investment.
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