# Kenya's Debt Situation

An episode of [The Mwango Capital Podcast](https://invisiblenetwork.ai/podcast/1583367792), 12 Aug 2024, 1 h 00 min.

Audio: https://api.substack.com/feed/podcast/147610977/db6f693c209e8b187b09f05e9acdee9a.mp3

In this episode recorded on 10.07.2024, our host, Ramah Nyang, is joined by David Rogovic - VP and Senior Credit Officer at Moody’s, Jared Osoro - Economist and Director of Credit Markets at FSD Africa, and Tom Ogada - Programme Assistant at Okoa Uchumi to breakdown Kenya’s debt situation. We also cover the current fiscal challenges, the diminished capacity for fiscal consolidation, the implication of domestic debt restructuring, Moody's assessment of debt exchange, public debt audit, and the credibility of public data. Subscribe to get notified when we make a new post. Key Quotes “We've been talking for a very long time about expanding the tax net. That simply means bringing more people or more economic agents to that tax bracket. The unfortunate reality is that we've been doing so using convenient but not necessarily effective ways and that is leaning more towards indirect taxes consumption-based taxes. We have seen a proliferation of excise duty, and VAT which touches on almost every economic agent. The problem with that is that it may not necessarily lead to the expansion of the tax revenue. In any event, it may actually lead to what you can call a discouraging consumption.” Jared Osoro, Director of the Credit Markets Program at FSD Africa “When we think about the key credit challenge for Kenya from Moody's perspective, yes, the debt burden is high, but debt affordability, which we measure as interest to revenue or interest to GDP is really weak, really high interest to revenue ratio. One of the highest among all the sovereigns that we rate. Of the 143 sovereigns rated, it's in the lowest 10, or the bottom 10 sovereigns. And again, without the revenue measures given the current interest rate environment, given the larger fiscal deficits that we're expecting this year, relative to what was expected prior to the cancellation of these tax measures which should imply higher domestic borrowing, debt affordability will worsen even further.” David, Vice President and Senior Analyst at Moody's Sovereign Risk Group “If you think about this, the balance between a revenue-based fiscal consolidation versus an expenditure-based fiscal consolidation. The revenue-based one gives us more confidence that the narrowing in the fiscal deficit that we would project for this year would continue for the year after and the year after versus the spending cuts this year. If you agree that they are more temporary in nature, then you would expect at some point spending to rise, and without an equal rise in revenue that means larger fiscal deficits in the future.” David, Vice President and Senior Analyst at Moody's Sovereign Risk Group “What we're really looking for is confidence over the fiscal consolidation that limits the deterioration in the debt burden, debt affordability. So whether it's through revenue measures, spending measures, something that gives us confidence that we can comfortably expect to see a narrower fiscal deficit year after year, that's consistent with debt declining or stabilizing at some point in the future that will be really what we're looking for.” David, Vice President and Senior Analyst at Moody's Sovereign Risk Group “Let us fix our expenditure and the leakages that we have so that we can see how we can reduce the fiscal deficit that we have because it is what is informing the kind of borrowing and the debt stock that we are seeing.” Tom Ogada, Programs Assistant at the Civil Society Group, Okoa Uchumi Show Notes 00:00:00 Introduction 00:02:10 Fiscal Challenges and Debt Restructuring 00:15:06 Public Policy Litigation 00:20:08 Diminished Capacity for Fiscal Consolidation 00:25:40 Market Access 00:27:25 Implication of Domestic Debt Restructuring 00:29:59 Public Debt Audit and Credibility of Public Data 00:40:17 Moody's Assessment of Debt Exchange 00:43:19 Debt Service Costs and Improving Ratings 00:51:44 Final Thoughts Get full access to The Mwango Weekly at mwangocapital.substack.com/subscribe

## Transcript

[0:00] SPEAKER_01: Ladies and gentlemen, thank you very much for your time this evening.
[0:02] SPEAKER_01: We don't take it for granted that you're coming,
[0:04] SPEAKER_01: hopefully,
[0:05] SPEAKER_01: the next hour out of your schedule to join this conversation,
[0:08] SPEAKER_01: a rather pertinent one,
[0:09] SPEAKER_01: I think,
[0:09] SPEAKER_01: in the larger scheme of things.
[0:11] SPEAKER_01: For East Africa's largest economy, the last four or five weeks have been extraordinarily challenging.
[0:16] SPEAKER_01: importance for this little slice of East Africa.
[0:18] SPEAKER_01: We have seen the Kenyan government essentially backpedaling on the introduction of
[0:23] SPEAKER_01: a finance bill that at the time they said would raise about 346 billion Kenyan shillings,
[0:27] SPEAKER_01: roughly $2.7 billion in extra tax revenue.
[0:31] SPEAKER_01: But after decades of rampant waste and corruption and questionable expenditure and
[0:36] SPEAKER_01: an endless borrowing spree,
[0:39] SPEAKER_01: Taxpayers eventually said, actually, no, we don't think that this is the right way to go.
[0:43] SPEAKER_01: So that tax bill is essentially off the burn for the time being.
[0:47] SPEAKER_01: Anyway,
[0:47] SPEAKER_01: the question that we'll try to answer today is now that we have this massive pile
[0:51] SPEAKER_01: of debt that we need to deal with,
[0:53] SPEAKER_01: debt service costs on the order of at least two trillion shillings a year for the
[0:56] SPEAKER_01: next three
[0:56] SPEAKER_01: is how essentially do we fix this problem?
[0:59] SPEAKER_01: Is it fixable?
[0:59] SPEAKER_01: And if so, where exactly can it be fixed?
[1:02] SPEAKER_01: To quote Charlie Robertson,
[1:03] SPEAKER_01: who's the head of macro strategy at FIM Partners,
[1:05] SPEAKER_01: he actually told my colleagues about Bloomberg this in a piece that we put out on
[1:08] SPEAKER_01: the terminal and the web today,
[1:10] SPEAKER_01: this decade will be a tightrope for Kenya.
[1:12] SPEAKER_01: So how exactly do we navigate that tightrope without, for lack of a better word, falling off?
[1:16] SPEAKER_01: We'll try and explore that in a bit more detail in the next 60 minutes with my able panelists.
[1:20] SPEAKER_01: We have David Rogovich.
[1:22] SPEAKER_01: He's the vice president and senior analyst at Moody's Sovereign Risk Group,
[1:26] SPEAKER_01: where he's a lead and a backup analyst responsible for quite a few countries in Africa,
[1:29] SPEAKER_01: including our little corner of the world.
[1:31] SPEAKER_01: Jared Osorio is the director of the credit markets program at FSD Africa.
[1:34] SPEAKER_01: Prior to that, he was the director of research and policy at the Kenya Bankers Association.
[1:39] SPEAKER_01: We'll be leaning into his experience from that side of the world over the next 60 minutes.
[1:43] SPEAKER_01: As well, hopefully later on in the session, we'll also be joined by Tom Ogada.
[1:47] SPEAKER_01: He's a programs assistant at the Civil Society Group of Court.
[1:50] SPEAKER_01: He just made some really interesting work in trying to unearth the details of some
[1:54] SPEAKER_01: of the debt contracts that Kenya has signed on to,
[1:57] SPEAKER_01: particularly those relating to the Stand Gauge Realign program.
[2:00] SPEAKER_01: For the record, they actually did win a case on that front in the middle of 2022 to date.
[2:04] SPEAKER_01: The Transport Ministry and the Finance Ministry have refused to comply with that specific court order.
[2:10] SPEAKER_01: I'm going to start with you, Jared, since you're the one on the call at the moment.
[2:13] SPEAKER_01: The argument here that is being made,
[2:15] SPEAKER_01: especially by David Ndi,
[2:17] SPEAKER_01: he's the chair of the Economic Council of Advisors.
[2:19] SPEAKER_01: And essentially what he said earlier today,
[2:21] SPEAKER_01: responding to a tweet on his timeline was,
[2:22] SPEAKER_01: quote,
[2:23] SPEAKER_01: raise revenue or go for debt restructuring.
[2:25] SPEAKER_01: Now,
[2:26] SPEAKER_01: you and I have been in this space for quite a while,
[2:28] SPEAKER_01: and we've heard for the last decade that,
[2:29] SPEAKER_01: oh,
[2:30] SPEAKER_01: we need to essentially raise a lot more revenue left and right.
[2:32] SPEAKER_01: But why has that failed so far?
[2:35] SPEAKER_01: Why is Kenya's tax base, at least on the income side, still incredibly narrow?
[2:39] SPEAKER_01: Thanks, Ram.
[2:40] SPEAKER_02: And thanks for the opportunity to be part of this conversation.
[2:43] SPEAKER_02: You're right in the sense that we've been talking for a very long time about expanding the tax net.
[2:48] SPEAKER_02: That simply means bringing more people or more economic agents to that tax bracket.
[2:53] SPEAKER_02: The unfortunate reality that we've been doing so using convenient,
[2:57] SPEAKER_02: not necessarily effective ways,
[2:59] SPEAKER_02: and that is leaning more towards indirect taxes,
[3:02] SPEAKER_02: consumption-based taxes.
[3:03] SPEAKER_02: We've seen a proliferation of excise duty and VAT, which targets on almost every economic agent.
[3:09] SPEAKER_02: The problem with that is that it may not necessarily lead into the expansion of the tax revenue.
[3:13] SPEAKER_02: In any event, it may actually lead into what you can call a discouraging consumption.
[3:18] SPEAKER_02: Because if you are looking at imposing taxes, this will affect low-income households.
[3:23] SPEAKER_02: The choices in terms of consumption are limited and therefore those taxes end up
[3:27] SPEAKER_02: not being collected because consumption has been inhibited.
[3:30] SPEAKER_02: I think a neater way of doing it was perhaps to look at the structure of the
[3:35] SPEAKER_02: economy more critically and seeing from which pockets
[3:38] SPEAKER_02: Are you going to mobilize tax revenue?
[3:40] SPEAKER_02: If you look at the economy,
[3:42] SPEAKER_02: you can see a few developments that have happened over the last one and a half
[3:44] SPEAKER_02: decade or so that requires one to think very carefully on the tax policy.
[3:49] SPEAKER_02: One is that for a very long time,
[3:51] SPEAKER_02: the agricultural sector,
[3:52] SPEAKER_02: which is the biggest sector in the economy,
[3:54] SPEAKER_02: used to account for slightly more than 25% of GDP.
[3:58] SPEAKER_02: At that point in time, the manufacturing was accounting for about 15% or less than 15% of GDP.
[4:04] SPEAKER_02: Right now, we are talking about agriculture accounting for close to 33% of GDP.
[4:09] SPEAKER_02: And the way agriculture is in Kenya is that 70% of it is smallholder and 30% of it
[4:14] SPEAKER_02: can categorized as commercial agriculture.
[4:17] SPEAKER_02: And this smallholder is very formal.
[4:19] SPEAKER_02: So if you look at tax policy that is simply based on the broader GDP numbers,
[4:23] SPEAKER_02: you're not going to see the tax base necessarily being expanded on the back of that structure.
[4:28] SPEAKER_02: The second aspect is really to look at what you can call the split between formal and informal.
[4:34] SPEAKER_02: We've seen over time informality being entrenched,
[4:38] SPEAKER_02: even in instances where,
[4:39] SPEAKER_02: for instance,
[4:39] SPEAKER_02: the strides that the country has made insofar as financial inclusion is concerned,
[4:43] SPEAKER_02: that being seen as an avenue for indirect taxes.
[4:47] SPEAKER_02: And because of that, many people want to operate in a manner that is informal.
[4:51] SPEAKER_02: And that therefore means that it's not going to be an easy thing to say that you're
[4:54] SPEAKER_02: simply going to tax to expand the tax bracket.
[4:57] SPEAKER_02: So that leads me to the question you asked about David's observation about raising
[5:01] SPEAKER_02: the tax vis-a-vis restructuring.
[5:03] SPEAKER_02: Of course,
[5:04] SPEAKER_02: as I've said,
[5:04] SPEAKER_02: it's not going to be easy unless you're very creative in terms of our tax policy
[5:08] SPEAKER_02: and understanding that tax is elastic.
[5:09] SPEAKER_02: There's a point beyond which you may not necessarily be realizing additional revenue.
[5:14] SPEAKER_02: The option of restructuring is interesting.
[5:16] SPEAKER_02: It's interesting because it's easy to say but difficult to implement because there
[5:20] SPEAKER_02: has to be a lot of clarity as to what kind of restructure one is talking about.
[5:24] SPEAKER_02: If you look at the way the tax has built up over time,
[5:28] SPEAKER_02: we've seen a situation where over the last decade or so,
[5:30] SPEAKER_02: because of our ambitious public investment,
[5:33] SPEAKER_02: we've lumped up our tax,
[5:35] SPEAKER_02: our borrowing,
[5:36] SPEAKER_02: especially externally,
[5:37] SPEAKER_02: considering that our gross domestic savings are not moving in tandem with our
[5:41] SPEAKER_02: investment requirements.
[5:42] SPEAKER_02: And that happens on the back of it.
[5:44] SPEAKER_02: a narrative of a false threat of being filtered between access to those
[5:49] SPEAKER_02: international resources and the cost of those international resources,
[5:52] SPEAKER_02: meaning that it's an easy option to argue that I'd rather get resources externally,
[5:56] SPEAKER_02: even if they're expensive,
[5:57] SPEAKER_02: so that they're able to fund domestic investments.
[6:00] SPEAKER_02: But if those resources are not deployed in a manner that is going to generate
[6:03] SPEAKER_02: capacity for the repayment going forward,
[6:06] SPEAKER_02: meaning if the investments are not determined to be economically viable,
[6:10] SPEAKER_02: Then I think you find yourself in a situation where we exactly are.
[6:13] SPEAKER_02: And now the restriction option now means two things.
[6:16] SPEAKER_02: You either discuss with existing lenders and see how they can tweak the profile of
[6:21] SPEAKER_02: the borings or go for a refinancing meeting,
[6:24] SPEAKER_02: talk to other potential lenders who can be able to repackage the proposals.
[6:28] SPEAKER_02: Right now,
[6:29] SPEAKER_02: that suggestion probably needs to be explored because it looks like the tax average
[6:33] SPEAKER_02: is going to be a difficult one.
[6:34] SPEAKER_02: and therefore considering restructuring and whether that be casting the existing
[6:38] SPEAKER_02: lender or even looking at potentially financing as an option.
[6:41] SPEAKER_02: So that's really how I see it.
[6:43] SPEAKER_02: And that's how I can say we have this as part of this conversation.
[6:45] SPEAKER_01: Thank you, Rama.
[6:46] SPEAKER_01: Indeed,
[6:47] SPEAKER_01: and we'll get around to the nitty gritty details of some of that restructuring
[6:50] SPEAKER_01: proposals in a moment.
[6:51] SPEAKER_01: But speaking of refinancing,
[6:53] SPEAKER_01: at this point in time,
[6:54] SPEAKER_01: we're hoping to still get David back on the call in just a bit.
[6:58] SPEAKER_01: So essentially, from Modi's perspective, they can tell us, look, this is why we downgraded Kenya.
[7:03] SPEAKER_01: These are the risks that we see over the medium term for the country.
[7:06] SPEAKER_01: But given how tight capital markets are at the moment,
[7:10] SPEAKER_01: even for the sake of argument,
[7:11] SPEAKER_01: let's say that the Fed does cut rates at some points lower down the line.
[7:14] SPEAKER_01: Maybe they implement that one rate cuts.
[7:16] SPEAKER_01: This year, perhaps we have a bit more later on.
[7:19] SPEAKER_01: What really are Kenya's refinancing options?
[7:21] SPEAKER_01: Because even from the domestic market side,
[7:23] SPEAKER_01: if I'm an external investor,
[7:24] SPEAKER_01: I'm looking at Kenya and your own banks and pension funds and insurance companies
[7:29] SPEAKER_01: are lending to the sovereign.
[7:30] SPEAKER_01: at 15%, at 16% on short-term money, I'd be really reluctant to lend into that market.
[7:36] SPEAKER_01: I think that's a good observation.
[7:37] SPEAKER_02: And what I can say there is that if you're thinking about refinancing,
[7:40] SPEAKER_02: then a good starting point,
[7:41] SPEAKER_02: at least to my mind,
[7:43] SPEAKER_02: is not to look at how to refinance the already existing commercial component of our
[7:47] SPEAKER_02: public debt.
[7:48] SPEAKER_02: Because think about it,
[7:49] SPEAKER_02: the commercial component may appear to be pediatric,
[7:52] SPEAKER_02: but I think there is another angle,
[7:54] SPEAKER_02: especially funds that have come from development financing agencies that have a
[7:58] SPEAKER_02: commercial angle to it,
[7:59] SPEAKER_02: to be the first avenue for considering in terms of refinancing.
[8:02] SPEAKER_02: And the route to go is not necessarily to develop.
[8:05] SPEAKER_02: look at whether the market is now a bit more conducive because of a potential Fed
[8:10] SPEAKER_02: becoming more accommodative.
[8:11] SPEAKER_02: I think going the multilateral route,
[8:12] SPEAKER_02: I know right now the public has no appetite to talk about the bigger multilateral
[8:16] SPEAKER_02: in terms of refinancing.
[8:17] SPEAKER_02: But if you look at some of the infrastructure investments that have been funded by
[8:20] SPEAKER_02: credit or which investments are not viable because of the ten of the loans that are financed,
[8:26] SPEAKER_02: if you go the multilateral route,
[8:28] SPEAKER_02: then probably you are likely to elongate the ten of those loans and probably make
[8:32] SPEAKER_02: them slightly more viable than they already are.
[8:34] SPEAKER_02: The only thing,
[8:35] SPEAKER_02: though,
[8:35] SPEAKER_02: is that the reason why perhaps the government went the route of some of these
[8:39] SPEAKER_02: export import type of commercially related development banks is because perhaps not
[8:44] SPEAKER_02: very many questions were asked.
[8:46] SPEAKER_02: And therefore, the multiraterals are going to ask very difficult questions and also demand some form of
[8:51] SPEAKER_02: policy and structural reforms.
[8:53] SPEAKER_02: So that's really the avenue that I see.
[8:55] SPEAKER_02: So as agreeing with you that going the market is going to be difficult,
[8:58] SPEAKER_02: but I think a good starting point would be really to look at the architecture from
[9:02] SPEAKER_02: the multilateral lending agencies.
[9:04] SPEAKER_02: That's the first avenue.
[9:04] SPEAKER_01: So in short,
[9:05] SPEAKER_01: we need to go back to talking to our usual suspects,
[9:08] SPEAKER_01: the World Bank,
[9:08] SPEAKER_01: the IMF,
[9:09] SPEAKER_01: the African Development Bank.
[9:11] SPEAKER_02: Yeah, I think so.
[9:12] SPEAKER_02: I think so.
[9:13] SPEAKER_02: I think so.
[9:13] SPEAKER_01: All right.
[9:14] SPEAKER_01: With respect to raising domestic tax revenues,
[9:17] SPEAKER_01: I know it still is really interesting to me that we're talking about trying to
[9:20] SPEAKER_01: raise tax revenues,
[9:21] SPEAKER_01: but the only tactic that has been used in the last 10 years,
[9:25] SPEAKER_01: as we simply say,
[9:26] SPEAKER_01: raise the tax rates,
[9:27] SPEAKER_01: right?
[9:28] SPEAKER_01: So we raise the top income tax rate from 30% to 35%.
[9:30] SPEAKER_01: We essentially tinker around the margins with VAT.
[9:34] SPEAKER_01: We increase excise duty,
[9:36] SPEAKER_01: despite the fact that we've seen in more often than not quite a few cases,
[9:40] SPEAKER_01: and the liquor industry is an interesting example of that,
[9:42] SPEAKER_01: You raise the tax rate, it essentially destroys that specific income stream.
[9:46] SPEAKER_01: Isn't there an argument here?
[9:48] SPEAKER_01: Essentially, we've already tried the raise the tax rate route.
[9:50] SPEAKER_01: Isn't there an argument to be made here, Jared, for cutting taxes?
[9:53] SPEAKER_02: I think it's an argument you can make, but that argument has to be supported by evidence.
[9:57] SPEAKER_02: We already have sufficient evidence that
[9:59] SPEAKER_02: increasing tax rates do not necessarily translate into increased tax revenue.
[10:03] SPEAKER_02: That is not to say that if you lower the tax rate, you'll necessarily collect more.
[10:06] SPEAKER_02: I think it has to be a combination of making sure that the tax rates that you house
[10:10] SPEAKER_02: are not necessarily punitive and making people either embed or avoid.
[10:13] SPEAKER_02: And therefore, if you think about lowering the tax rates, and I've seen people make
[10:17] SPEAKER_02: the case of lowering tax rates,
[10:18] SPEAKER_02: the most prominent,
[10:19] SPEAKER_02: of course,
[10:19] SPEAKER_02: being the Institute of Economic Affairs trying to make a case,
[10:22] SPEAKER_02: and accompanied that with a good measure of streamlining tax administration in a
[10:25] SPEAKER_02: way that can lead into more taxes being collected.
[10:28] SPEAKER_02: So it may not be as simple as to say that if you lower the tax rates,
[10:31] SPEAKER_02: you'll necessarily collect more revenue.
[10:32] SPEAKER_02: But the fact is that we have evidence that increasing tax rates does not
[10:37] SPEAKER_02: necessarily translate into increased tax revenue.
[10:39] SPEAKER_01: Indeed.
[10:39] SPEAKER_01: Just to bring our listeners up to speed,
[10:41] SPEAKER_01: we're still hoping to get David over from Moody's and Tomogada as well from Okoro
[10:45] SPEAKER_01: Truby onto the call a little later.
[10:47] SPEAKER_01: Well, let's keep the conversation going.
[10:50] SPEAKER_01: But in the meantime,
[10:50] SPEAKER_01: for our listeners,
[10:51] SPEAKER_01: if you've got questions and ideas that you'd like to put to our panelists,
[10:54] SPEAKER_01: please,
[10:54] SPEAKER_01: by all means,
[10:55] SPEAKER_01: do that.
[10:56] SPEAKER_01: Send them,
[10:56] SPEAKER_01: of course,
[10:56] SPEAKER_01: in the tweet response to the Mongo account spaces,
[10:59] SPEAKER_01: and we'll certainly get to those in just a moment.
[11:01] SPEAKER_01: Jared,
[11:01] SPEAKER_01: just going back to the whole debt restructuring question,
[11:04] SPEAKER_01: because looking at the nature,
[11:05] SPEAKER_01: the structure of the amount of debt that we have,
[11:08] SPEAKER_01: debt service over the next two,
[11:09] SPEAKER_01: three fiscal years,
[11:10] SPEAKER_01: the biggest interest expense is essentially within the domestic market,
[11:15] SPEAKER_01: right?
[11:16] SPEAKER_01: So from my perspective,
[11:17] SPEAKER_01: if I can see the argument why the attention has gone on to euro bonds and foreign
[11:21] SPEAKER_01: commercial debt from TDB,
[11:23] SPEAKER_01: from Exxon Bank of China,
[11:24] SPEAKER_01: and we'll get to those a little later,
[11:26] SPEAKER_01: but isn't there an argument as well to try and lower the cost of servicing domestic debt?
[11:30] SPEAKER_01: And the question then becomes, how do we do that in the least painful way?
[11:34] SPEAKER_02: I think that's a valid question you ask, Rahman.
[11:37] SPEAKER_02: I think it would be simplistic to say that,
[11:39] SPEAKER_01: yes,
[11:40] SPEAKER_02: you can make a case for lowering the cost of domestic tax,
[11:42] SPEAKER_02: but the bigger question is how.
[11:44] SPEAKER_02: I think the route that was going to take us there was not going to be a very fast route,
[11:47] SPEAKER_02: and it was going to be via fiscal consolidation.
[11:50] SPEAKER_02: But you and I know that the fiscal consolidation process
[11:52] SPEAKER_02: Our agenda has more or less collapsed, given what has happened in the recent past.
[11:56] SPEAKER_02: And it has collapsed because, to my mind, it was one-sided lending.
[12:00] SPEAKER_02: When you talk about revenue lending,
[12:02] SPEAKER_02: fiscal consolidation,
[12:03] SPEAKER_02: while you're holding expenditures in business as usual,
[12:06] SPEAKER_02: that was not going to work.
[12:07] SPEAKER_02: I could have imagined you have a strategy of banning the country from both ends.
[12:11] SPEAKER_02: Now that we are where we are,
[12:13] SPEAKER_02: it simply means that the fiscal consolidation path that was aggressive has shifted upward.
[12:17] SPEAKER_02: And that means,
[12:17] SPEAKER_02: therefore,
[12:18] SPEAKER_02: the government has to be willing to live on a higher interest rate regime for longer.
[12:22] SPEAKER_02: And therefore, any expectations of a reduction in tax rates is going to be, at best, very gradual.
[12:27] SPEAKER_02: And you can see the problem.
[12:29] SPEAKER_02: The market,
[12:30] SPEAKER_02: at least to my estimation,
[12:31] SPEAKER_02: is probably reaching,
[12:33] SPEAKER_02: if it has not already surpassed,
[12:34] SPEAKER_02: a threshold beyond which it may actually be reluctant to move.
[12:38] SPEAKER_02: give additional funding to government.
[12:39] SPEAKER_02: And the reason why that may be the case is because any additional resources that
[12:43] SPEAKER_02: the market avails to the government is probably pushing it even faster into a debt
[12:48] SPEAKER_02: and sustainable situation.
[12:49] SPEAKER_02: It's not going to be easy.
[12:50] SPEAKER_02: At the very best, it will be gradual if we have a clear path that is going towards consolidation.
[12:56] SPEAKER_02: And that to me is what I see as usable.
[12:59] SPEAKER_02: Because you're not going to bring interest rate down by decrease.
[13:02] SPEAKER_02: It has to be what's palatable in the market.
[13:04] SPEAKER_02: You must recall that in the recent past, there was an issue by the government that more or less flopped.
[13:08] SPEAKER_02: And it flopped not because the rates were not attractive.
[13:11] SPEAKER_02: The rates were actually, in real time, very attractive.
[13:14] SPEAKER_02: It simply tells you, therefore, that it has reached that threshold.
[13:16] SPEAKER_02: And therefore, a careful think on how we can come back that path of fiscal consolidation.
[13:22] SPEAKER_02: So long as it's balanced and reasonable, that's really going to be the avenue.
[13:25] SPEAKER_01: So essentially, the state can't simply tell people to not lend to it at double-digit rates.
[13:30] SPEAKER_01: They have to demonstrate credibly that we actually don't need to borrow as much money,
[13:33] SPEAKER_01: which brings us back to the original question of cutting spending.
[13:36] SPEAKER_02: That's the point.
[13:37] SPEAKER_02: And remember,
[13:38] SPEAKER_02: at the beginning of this administration,
[13:39] SPEAKER_02: there was a pronouncement that,
[13:41] SPEAKER_02: you know,
[13:41] SPEAKER_02: we are not going to borrow at a certain rate.
[13:43] SPEAKER_02: which meant those who watch the market wonder whether is the government a price
[13:47] SPEAKER_02: taker in this case,
[13:49] SPEAKER_02: or it's basically somebody who sets the price.
[13:52] SPEAKER_02: And I think as it is,
[13:54] SPEAKER_02: based on the fiscal policy or the fiscal levels and also sustainable,
[13:58] SPEAKER_02: the government will continue being a price taker in the market.
[14:00] SPEAKER_02: And that's why I'm arguing that it's very difficult for you to bring them down by a mere pronouncement.
[14:05] SPEAKER_02: It has to be viewed in actions, and those actions have to start from rationalizing expenditure.
[14:10] SPEAKER_02: The only conundrum I see there is that if you have a situation where you're not
[14:15] SPEAKER_02: seeing a vibrant private sector,
[14:16] SPEAKER_02: and there are several indicators that can tell you that the private sector is not
[14:20] SPEAKER_02: optimally
[14:21] SPEAKER_02: Not least by looking at probably the rate at which credit to private sector is
[14:24] SPEAKER_02: growing and where that credit is going.
[14:26] SPEAKER_02: Then you have to contend with the fact that now we've had a public expenditure-led growth model.
[14:32] SPEAKER_02: So if you go that route,
[14:33] SPEAKER_02: it's even going to jeopardize the extent to which the public is going to be
[14:37] SPEAKER_02: aggrieved of growth.
[14:38] SPEAKER_02: And that's the conundrum that I think we have to start thinking about very carefully.
[14:42] SPEAKER_02: The other is really the fact that the risk,
[14:44] SPEAKER_02: and this risk may not necessarily materialize,
[14:47] SPEAKER_02: of what's going on the fiscal side translating into a sovereign problem.
[14:51] SPEAKER_02: Imagine the exposure that the local financial system has with the government in the
[14:55] SPEAKER_02: event that there's a problem.
[14:57] SPEAKER_02: Now that morphs from being a risk to the financial sector.
[15:00] SPEAKER_02: to being a sovereign risk.
[15:01] SPEAKER_02: And that will compound the problem even further.
[15:03] SPEAKER_02: And that's really the dilemma that I'm seeing here.
[15:06] SPEAKER_01: Indeed.
[15:07] SPEAKER_01: Tom Ogada from Okoachumi is now with us on the call.
[15:11] SPEAKER_01: I want to start with
[15:13] SPEAKER_01: Some of the work on the public policy litigation side that you guys have been
[15:17] SPEAKER_01: involved in,
[15:18] SPEAKER_01: specifically the SGR program,
[15:20] SPEAKER_01: because there's a case that was filed years ago,
[15:22] SPEAKER_01: but it essentially got its interesting judgment in June 2022.
[15:26] SPEAKER_01: And essentially,
[15:26] SPEAKER_01: you guys went to court and said,
[15:28] SPEAKER_01: look,
[15:28] SPEAKER_01: the ministries of finance and the ministries of transport have to produce the debt
[15:32] SPEAKER_01: contracts on the SGR and associated project documents.
[15:34] SPEAKER_01: And the plaintiffs, Kelef Kalikfan, Manjirika Konyade, actually win.
[15:38] SPEAKER_01: that case.
[15:38] SPEAKER_01: But to date, as I understand it, neither ministry has complied with the court order.
[15:43] SPEAKER_01: Is that still the case?
[15:44] SPEAKER_01: Tom?
[15:45] SPEAKER_01: This is a very interesting development.
[15:48] SPEAKER_02: And as you've seen,
[15:50] SPEAKER_02: the implementation aspect of the court ruling is really a challenge on the
[15:54] SPEAKER_02: government side or on the state side.
[15:56] SPEAKER_02: And as we have all noted in the country,
[15:59] SPEAKER_02: is that there is no goodwill from the state to honor court orders.
[16:03] SPEAKER_02: And in 2023,
[16:06] SPEAKER_02: Around November,
[16:07] SPEAKER_02: we only saw CS Murkomen trying to run around making noise about the SDR contract,
[16:13] SPEAKER_02: probably making it public.
[16:15] SPEAKER_02: And we all know that there were glimpses that were displayed or that were made
[16:20] SPEAKER_02: public of the contract that was signed.
[16:22] SPEAKER_02: And there was a promise to take it to Parliament.
[16:24] SPEAKER_02: And since then, it has disappeared.
[16:26] SPEAKER_02: And I want to say that there is not much progress.
[16:29] SPEAKER_02: And as our host has noted, there is no goodwill from the state side.
[16:33] SPEAKER_01: Yes.
[16:34] SPEAKER_01: So based on the fights you guys have had in court with the Ministry of Transport,
[16:39] SPEAKER_01: with the Ministry of Finance,
[16:40] SPEAKER_01: because looking at their responses and their arguments in court,
[16:43] SPEAKER_01: it makes for fascinating reading.
[16:44] SPEAKER_01: Because at one point,
[16:45] SPEAKER_01: the Ministries of Finance and Transport are saying,
[16:47] SPEAKER_01: no,
[16:47] SPEAKER_01: these debt contracts essentially state secret.
[16:49] SPEAKER_01: So if we essentially make these public,
[16:52] SPEAKER_01: we're going to be in breach of debt covenants and it's going to cost the country
[16:55] SPEAKER_01: tens of billions of shillings.
[16:56] SPEAKER_01: Give us the
[16:57] SPEAKER_01: The main lessons that you've learned so far in this public litigation journey,
[17:02] SPEAKER_01: because on one hand,
[17:03] SPEAKER_01: the government keeps saying,
[17:04] SPEAKER_01: oh,
[17:04] SPEAKER_01: we're committed to the rule of law,
[17:05] SPEAKER_01: we're committed to the rule of law,
[17:07] SPEAKER_01: but their actions say the complete opposite.
[17:09] SPEAKER_02: Yes,
[17:10] SPEAKER_02: the lessons that we've learned following this push and pull,
[17:13] SPEAKER_02: one is on litigation,
[17:14] SPEAKER_02: the litigation aspect,
[17:15] SPEAKER_02: the litigation aspect and the legal action.
[17:18] SPEAKER_02: We've seen that the judiciary and parliament are the legislative arm of the government.
[17:24] SPEAKER_02: We've seen there is,
[17:25] SPEAKER_02: for lack of a better word,
[17:26] SPEAKER_02: let me say mind game,
[17:27] SPEAKER_02: because when they bring in the aspect of rights to information protection,
[17:32] SPEAKER_02: And which was a challenge and we won on the same on that aspect of protecting information.
[17:38] SPEAKER_02: We see an aspect of trying to do a mind game.
[17:41] SPEAKER_02: They bring one issue here just to make sure that the process does not continue.
[17:45] SPEAKER_02: So actually we are saying the legal action is not as strong as it should be.
[17:50] SPEAKER_02: Because in this case, we've not seen it.
[17:52] SPEAKER_02: And the two ministries that were affected in this case have not done anything.
[17:57] SPEAKER_02: And even after CS More Command promised the public actually to take the SGR
[18:02] SPEAKER_02: contract for debate in parliament,
[18:05] SPEAKER_02: nobody is demanding for that now from the legislative arm of the government.
[18:09] SPEAKER_02: So that is one thing that we've learned,
[18:12] SPEAKER_02: that the process can be so long and tedious when there's nobody doing it.
[18:15] SPEAKER_02: And the lesson that we've also learned from this is the importance of engaging the
[18:20] SPEAKER_02: parliament through Article 211 to demand for information.
[18:24] SPEAKER_02: And that aspect is what has brought us where we are today with the recent development.
[18:29] SPEAKER_02: Based on the debate on the finance bill,
[18:31] SPEAKER_02: the article 211 that gives us that right to demand for information.
[18:36] SPEAKER_02: And there is another development in just the recently signed appropriation bill
[18:42] SPEAKER_02: into an act by the president.
[18:44] SPEAKER_02: And all those are coming in because now we've learned that we have to engage the parliament.
[18:49] SPEAKER_02: And every information or every document or every bill before it is passed,
[18:54] SPEAKER_02: there is a need to engage the public.
[18:57] SPEAKER_02: And it is the public's right also to have this bit of information so that we do
[19:02] SPEAKER_02: what is called public participation.
[19:03] SPEAKER_02: And where we are not convinced of the public who are affected firsthand with
[19:09] SPEAKER_02: everything that is happening,
[19:10] SPEAKER_02: or for example,
[19:11] SPEAKER_02: with the debts,
[19:12] SPEAKER_02: we are the ones going to incur the burden of the debt.
[19:15] SPEAKER_02: So we have the right to participate in this.
[19:17] SPEAKER_02: As I conclude on the same.
[19:19] SPEAKER_02: Another thing that we've learned is the importance of engaging in petitions.
[19:24] SPEAKER_02: Let's say where side engagements with the technocrats has failed.
[19:28] SPEAKER_02: We've also learned that going by the rule of law is really good.
[19:32] SPEAKER_02: So comprehensive petitions is really one key step that has brought us where we are.
[19:37] SPEAKER_02: If we don't stick to the rule of law.
[19:40] SPEAKER_02: I think a lot of these things,
[19:41] SPEAKER_02: because before the case was taken by Wanjiru Gikonyo and the other applicant,
[19:48] SPEAKER_02: we saw in 2014,
[19:50] SPEAKER_02: actually,
[19:50] SPEAKER_02: the state won against the initial petitioners.
[19:54] SPEAKER_02: And we saw some gaps.
[19:56] SPEAKER_02: And that is why in 2020, 2021, we again went back with the same.
[20:02] SPEAKER_02: So comprehensive petitioning is really important.
[20:05] SPEAKER_01: Yes.
[20:05] SPEAKER_01: All right.
[20:05] SPEAKER_01: So again, making sure that your T's are crossed and your I's are dotted.
[20:08] SPEAKER_01: I'd like to introduce David Rogovic.
[20:10] SPEAKER_01: He's from Moody's, as I mentioned at the very start of the call.
[20:13] SPEAKER_01: He's joining us with the Trance account that you're seeing on the call at the moment.
[20:17] SPEAKER_01: So David, you've been listening quite patiently for the last 10, 15 minutes on the call.
[20:21] SPEAKER_01: But I want to start with
[20:23] SPEAKER_01: The notes that you put out in a company,
[20:25] SPEAKER_01: the ratings action that we saw yesterday came in pretty much at midnight and made
[20:29] SPEAKER_01: for fairly interesting reading,
[20:30] SPEAKER_01: kept us pretty much awake all of Wednesday.
[20:33] SPEAKER_01: And one of the things that stood out for me was this.
[20:35] SPEAKER_01: You say that Kenya now has a diminished capacity to implement revenue-based fiscal consolidation.
[20:41] SPEAKER_01: Expound on that.
[20:42] SPEAKER_01: Sure.
[20:42] SPEAKER_03: Thanks, Ramo, for having me here and for taking time to listen.
[20:46] SPEAKER_03: What we meant by that was we're entering 2021.
[20:48] SPEAKER_03: the new fiscal year, right?
[20:49] SPEAKER_03: After a period of, I'd say, significant revenue shortfall, right?
[20:53] SPEAKER_03: The first nine months of last fiscal year,
[20:54] SPEAKER_03: revenues were below target by 220,
[20:56] SPEAKER_03: 230 billion shillings,
[20:58] SPEAKER_03: 1.3% of GDP.
[21:00] SPEAKER_03: So it was quite sizable.
[21:02] SPEAKER_03: And there was an expectation that there would be tax measures that would make up
[21:06] SPEAKER_03: for that shortfall and also go some way towards the government achieving their
[21:10] SPEAKER_03: medium-term revenue target,
[21:12] SPEAKER_03: or at least
[21:12] SPEAKER_03: going in that direction and at a minimum reversing the decline in tax revenue to
[21:17] SPEAKER_03: GDP that we had seen over the past decade prior to the pandemic,
[21:20] SPEAKER_03: through the pandemic.
[21:21] SPEAKER_03: And we saw that decision on the tax measures reversed or decided to cancel the planned tax measures.
[21:27] SPEAKER_03: And in the current social political environment,
[21:30] SPEAKER_03: we don't think there's a capacity to pursue a new tax bill of such large magnitude.
[21:35] SPEAKER_03: That means that the fiscal adjustment that the government's planning is going to be
[21:38] SPEAKER_03: more heavily focused on expenditure cuts.
[21:40] SPEAKER_03: And the reason why we're
[21:42] SPEAKER_03: more doubtful that will materialize is because if you look at spending and what's
[21:45] SPEAKER_03: happened over the past two years or three years,
[21:48] SPEAKER_03: right?
[21:48] SPEAKER_03: We've seen development spending significantly already in the budget that was
[21:52] SPEAKER_03: presented compared to the BPS,
[21:53] SPEAKER_03: for instance,
[21:54] SPEAKER_03: right?
[21:54] SPEAKER_03: And that's going to be cut further with these spending cuts, we assume.
[21:58] SPEAKER_03: For a country in a Kenya stage of development without an improvement in the
[22:02] SPEAKER_03: efficiency of investment and public investment decision-making,
[22:04] SPEAKER_03: we think you'd see a higher level of development spending to meet the country's
[22:08] SPEAKER_03: development spending needs without impairing longer-term growth potential.
[22:11] SPEAKER_03: in the country.
[22:12] SPEAKER_03: We don't think development spending is an area where it can be cut on a sustained basis,
[22:16] SPEAKER_03: meaning that you can reduce it for one year or for two years,
[22:19] SPEAKER_03: but at some point that needs to increase.
[22:21] SPEAKER_03: And the same goes with operating and maintenance expenses, right?
[22:24] SPEAKER_03: If you look to areas of cut spending,
[22:26] SPEAKER_03: they're delaying purchases of new cars for the public sector,
[22:29] SPEAKER_03: et cetera,
[22:30] SPEAKER_03: that those aren't sustainable over a multi-year period.
[22:33] SPEAKER_03: And that's why if you think about the balance between a revenue-based fiscal
[22:37] SPEAKER_03: consolidation versus an expenditure-based fiscal consolidation,
[22:39] SPEAKER_03: the revenue-based one gives us more confidence that the narrowing of the fiscal
[22:42] SPEAKER_03: deficit that we would project for this year would continue for the year after and
[22:46] SPEAKER_03: the year after versus the spending cuts this year.
[22:48] SPEAKER_03: If you agree that they are more temporary in nature,
[22:51] SPEAKER_03: then you would expect at some point spending to rise.
[22:53] SPEAKER_03: And without an equal rise in revenue, that means larger fiscal deficits in the future.
[22:58] SPEAKER_03: The second point,
[22:58] SPEAKER_03: and I'll turn it back to you after this,
[23:00] SPEAKER_03: is just we think about the key credit challenge for Kenya from Moody's perspective.
[23:04] SPEAKER_03: Yes,
[23:05] SPEAKER_03: the debt burden is high,
[23:06] SPEAKER_03: but debt affordability,
[23:07] SPEAKER_03: which we measure as interest to revenue or interest to GDP,
[23:11] SPEAKER_03: is really weak,
[23:12] SPEAKER_03: really high interest to revenue ratio.
[23:14] SPEAKER_03: One of the highest among all the sovereigns that we rate,
[23:17] SPEAKER_03: of the 143 sovereigns,
[23:19] SPEAKER_03: it's in the lowest 10 or the bottom 10.
[23:22] SPEAKER_03: sovereigns.
[23:23] SPEAKER_03: And again,
[23:23] SPEAKER_03: without the revenue measures,
[23:25] SPEAKER_03: given the current interest rate environment,
[23:26] SPEAKER_03: given larger fiscal deficits that we're expecting this year relative to what was
[23:30] SPEAKER_03: expected prior to the cancellation of these tax measures,
[23:34] SPEAKER_03: which imply higher domestic borrowing,
[23:36] SPEAKER_01: debt affordability will worsen even further.
[23:38] SPEAKER_01: And just to that point,
[23:39] SPEAKER_01: exactly,
[23:39] SPEAKER_01: there's somewhere else I believe in that same note,
[23:41] SPEAKER_01: you also pointed out that these larger financing needs that might emerge,
[23:45] SPEAKER_01: in other words,
[23:45] SPEAKER_01: the government might actually need to borrow a bit more.
[23:47] SPEAKER_01: in subsequent fiscal years from 26,
[23:49] SPEAKER_01: 27 and so on and so forth,
[23:51] SPEAKER_01: those larger financing needs would risk reducing domestic appetite for government securities.
[23:55] SPEAKER_01: So if I understand you correctly,
[23:57] SPEAKER_01: your argument is that in this scenario,
[23:59] SPEAKER_01: domestic funds,
[24:00] SPEAKER_01: banks,
[24:00] SPEAKER_01: treasury debts might look at government debt and the risk of getting their money
[24:04] SPEAKER_01: back and say,
[24:05] SPEAKER_01: probably we're not going to be actually lending as much to you.
[24:08] SPEAKER_01: And we essentially just going to keep crowding into the shorter end of the curve.
[24:11] SPEAKER_01: So essentially putting money into like T-bills rather than actually giving much
[24:15] SPEAKER_01: longer dated debt five,
[24:16] SPEAKER_01: 10 years out.
[24:17] SPEAKER_03: It's similar to that.
[24:18] SPEAKER_03: We saw something like this last year where there was a liquidity crunch.
[24:21] SPEAKER_03: There was a period where we saw delays in external disbursements lead to some
[24:24] SPEAKER_03: liquidity pressure delays and increase in pending bills.
[24:27] SPEAKER_03: And there was reduced appetite for government securities, right?
[24:30] SPEAKER_03: It was also at a different time where
[24:32] SPEAKER_03: The exchange rate was weakening.
[24:34] SPEAKER_03: There are some other factors, but we see something similar to that could happen again.
[24:37] SPEAKER_03: There's also at some point you reach a point of saturation.
[24:40] SPEAKER_03: We don't think it's there yet.
[24:42] SPEAKER_03: Not with saying the recent auction,
[24:44] SPEAKER_03: but the pressure is there that if you consistently come to the market,
[24:47] SPEAKER_03: the domestic market each year for 3%,
[24:48] SPEAKER_03: 3.5%,
[24:48] SPEAKER_03: 4% of GDP,
[24:51] SPEAKER_03: at some point it does not just crowd out private sector.
[24:54] SPEAKER_03: borrowing and lending investment,
[24:56] SPEAKER_03: but it reached a point where the banks would either demand a higher risk premium or
[25:00] SPEAKER_03: would have less capacity to lend to the government.
[25:02] SPEAKER_03: And that's why fiscal consolidation was important.
[25:04] SPEAKER_03: And one of the reasons why I think Kenya faced such pressure over the past two
[25:08] SPEAKER_03: years when external markets were tighter,
[25:10] SPEAKER_03: global liquidity was tighter,
[25:12] SPEAKER_03: external financial conditions were worse,
[25:13] SPEAKER_03: was that the funding they were getting from the IMF and the World Bank and
[25:16] SPEAKER_03: multilaterals initially was meant to find part of the fiscal deficit.
[25:19] SPEAKER_03: But when the government faced challenges refinancing Eurobond,
[25:22] SPEAKER_03: other external amortizations,
[25:23] SPEAKER_03: they need to divert that external funding they were receiving from multilaterals
[25:27] SPEAKER_03: and use that essentially to repay external debt that was maturing,
[25:30] SPEAKER_03: which then meant that the deficit had to be financed more domestically than would
[25:33] SPEAKER_03: have been in a situation where they had more diverse external funding options and
[25:38] SPEAKER_03: larger external funds.
[25:39] SPEAKER_03: funding sources.
[25:40] SPEAKER_01: David,
[25:40] SPEAKER_01: with respect to market access,
[25:42] SPEAKER_01: because I know the conversation that we've had,
[25:44] SPEAKER_01: and I can see some of the individuals I've had that conversation with on the call,
[25:47] SPEAKER_01: Charlie Robertson from ChemPartners is here,
[25:49] SPEAKER_01: Mark Boland from Reg is also here.
[25:51] SPEAKER_01: And the thing that I always kept coming back to is when you have this conversation
[25:54] SPEAKER_01: in 2022,
[25:55] SPEAKER_01: 2021,
[25:55] SPEAKER_01: Kenya's market access is always going to be a problem,
[25:58] SPEAKER_01: right?
[25:59] SPEAKER_01: The only game in town was multilateral lenders, IMF, World Bank, and so on and so forth.
[26:03] SPEAKER_01: Is that still a problem now?
[26:05] SPEAKER_01: for Kenya,
[26:05] SPEAKER_01: that we're going to have limited access to the markets,
[26:08] SPEAKER_01: given the fact that Moody's has downgraded Kenya down to CAA1.
[26:11] SPEAKER_01: I believe Fitch is having the ratings decision sometime next month as well.
[26:15] SPEAKER_01: It seems to me,
[26:16] SPEAKER_01: at least at face value,
[26:17] SPEAKER_01: that our ability to raise debt in the medium term is going to be highly constrained.
[26:21] SPEAKER_01: Is that your baseline assumption?
[26:23] SPEAKER_03: I would say given the amount of external debt that Kenya has going to do on an annual basis, right?
[26:28] SPEAKER_03: This year, it's a little bit less than 3 billion external, right?
[26:31] SPEAKER_03: Plus interest.
[26:32] SPEAKER_03: And next year, it's a little bit more.
[26:35] SPEAKER_03: The 2028 has the $1 billion euro bond maturity.
[26:37] SPEAKER_03: The assumption always was that at some point in the whole purpose of the fiscal
[26:40] SPEAKER_03: adjustment was to restore or increase investor confidence over the medium term
[26:45] SPEAKER_03: fiscal trajectory to restore or increase confidence that the debt burden would be
[26:48] SPEAKER_03: on a downward trend.
[26:50] SPEAKER_03: that the fiscal deficit will be maintained at a level of somewhere between 3% and 4%, 4.5%.
[26:56] SPEAKER_03: And with that improved confidence, Kenya would be able to access the markets.
[27:00] SPEAKER_03: I don't think countries enter IMF programs and intend to stay there indefinitely.
[27:04] SPEAKER_03: It's temporary.
[27:05] SPEAKER_03: It's meant to either get through a liquidity crunch or to help with improving the
[27:09] SPEAKER_03: fundamentals to have market access.
[27:11] SPEAKER_03: And so the assumption has been and is still that
[27:15] SPEAKER_03: Kenya will need to access external markets,
[27:18] SPEAKER_03: commercial markets through Eurobonds,
[27:20] SPEAKER_03: other sources of external funding to meet the sizable maturities that it has coming due.
[27:24] SPEAKER_01: Indeed.
[27:25] SPEAKER_01: David, don't go away.
[27:25] SPEAKER_01: I've got one more question for you,
[27:27] SPEAKER_01: but I just want to turn to some of the feedback and debates that we're getting into
[27:30] SPEAKER_01: the timeline.
[27:31] SPEAKER_01: George Berlandi had an interesting question saying, please ask this on my behalf.
[27:34] SPEAKER_01: Is the Auditor General essentially saying that the debt is odious or what?
[27:37] SPEAKER_01: And he's essentially quote cheating.
[27:39] SPEAKER_01: A story that I believe was published in the Daily Nation where the auditor general
[27:44] SPEAKER_01: is basically saying that the government can't show projects which are funded with
[27:47] SPEAKER_01: at least 1.1 trillion shillings of external debt.
[27:51] SPEAKER_01: In response to that,
[27:52] SPEAKER_01: Dixon Magetja,
[27:53] SPEAKER_01: a friend of the space and of course the Mango account,
[27:55] SPEAKER_01: is pointing out and saying,
[27:56] SPEAKER_01: look,
[27:57] SPEAKER_01: The usage of the debt can be obvious, but the debt itself cannot be.
[28:01] SPEAKER_01: An example he gives us is,
[28:02] SPEAKER_01: this is like saying that your bank loan is odious because you chose to divert the
[28:07] SPEAKER_01: loan proceeds and used it for something else like running off to have a whole bunch
[28:11] SPEAKER_01: of parties over in Bali or Naibasha.
[28:13] SPEAKER_01: David, one last question for you before I move on to other matters altogether.
[28:17] SPEAKER_01: Looking at the
[28:19] SPEAKER_01: perspectives?
[28:19] SPEAKER_01: Well,
[28:19] SPEAKER_01: a lot of our Euro bonds,
[28:20] SPEAKER_01: like the one that's coming during 2028 and the 2031 as well,
[28:23] SPEAKER_01: they're all sorts of cross default clauses that are baked into those specific bonds.
[28:28] SPEAKER_01: So in the event,
[28:29] SPEAKER_01: hypothetically,
[28:29] SPEAKER_01: the event that we have a domestic debt restructuring program,
[28:33] SPEAKER_01: would that be deemed to be a ratings negative event?
[28:36] SPEAKER_01: And would it be enough of a trigger for these cross default clauses?
[28:40] SPEAKER_03: I won't say much on the cross-the-ball clauses.
[28:42] SPEAKER_03: You just look at each Euro bond individually to see if there are cross-the-ball clauses.
[28:45] SPEAKER_03: I don't think there would be with domestic debt restructuring.
[28:48] SPEAKER_03: But the thing is,
[28:50] SPEAKER_03: when we typically have ratings,
[28:51] SPEAKER_03: we have a rating on the local currency and on the foreign currency debt.
[28:54] SPEAKER_03: Typically, almost always, they're the same.
[28:56] SPEAKER_03: In some cases, they can be one notch different.
[28:59] SPEAKER_03: I can give you a few examples in a minute.
[29:01] SPEAKER_03: But the reason why they're the same is that it's very rare that you see a
[29:04] SPEAKER_03: government restructure its domestic debt without restructuring its external at the
[29:08] SPEAKER_03: same time or vice versa.
[29:10] SPEAKER_03: You can think of different scenarios,
[29:12] SPEAKER_03: but yes,
[29:13] SPEAKER_03: the domestic debt is where...
[29:14] SPEAKER_01: Like Ghana coming to mind,
[29:15] SPEAKER_01: for example,
[29:15] SPEAKER_01: because they started with the domestic side and then eventually went to the foreign debt.
[29:19] SPEAKER_03: Exactly.
[29:19] SPEAKER_03: But it was always planned.
[29:21] SPEAKER_03: I think the domestic debt in Ghana's case, the domestic restructuring moved ahead first.
[29:24] SPEAKER_03: It was planned that way.
[29:25] SPEAKER_03: And if you looked at our ratings after the restructuring was done on the local
[29:28] SPEAKER_03: currency side,
[29:29] SPEAKER_03: we raised the local currency rating by one notch above the external rating because
[29:33] SPEAKER_03: in contrast to maybe some of the other rating agencies,
[29:35] SPEAKER_03: we don't have a rating for selected default where the country's in default.
[29:39] SPEAKER_03: We have our rating would then at that point speak to the expected losses for bondholders.
[29:43] SPEAKER_03: So while the restructuring is still taking place in Ghana, for instance.
[29:47] SPEAKER_03: Our rating speaks to the losses that we expect bondholders to incur through that restructuring.
[29:51] SPEAKER_03: So we don't have a default level rating.
[29:53] SPEAKER_03: We maintain a rating in Ghana's case, CAA3, CA here, CAA1, we're in a different situation.
[29:59] SPEAKER_01: One last question for you, David.
[30:00] SPEAKER_01: With respect to our domestic revenue forecast,
[30:04] SPEAKER_01: because the thing that always irritates us,
[30:06] SPEAKER_01: at least on the domestic side,
[30:07] SPEAKER_01: is we look at the revenue forecasts that come out of treasury and they're often
[30:11] SPEAKER_01: extraordinarily ambitious,
[30:12] 15%,
[30:12] 17%.
[30:13] SPEAKER_01: In some cases, there are 20% increases in
[30:16] SPEAKER_01: tax revenue lines on VAT and excise and personal income tax and corporate income tax,
[30:20] SPEAKER_01: which is completely out of sync with the reality and the data that we see coming
[30:25] SPEAKER_01: out from other parts of the economy.
[30:27] SPEAKER_01: You look at company results and you've got a problem over there where firms are
[30:30] SPEAKER_01: reporting a decline in net earnings.
[30:32] SPEAKER_01: So from your perspective as Moody's, do you see that
[30:35] SPEAKER_01: Do you run into the same credibility problem when you're trying to gauge Kenya's credit worthiness?
[30:40] SPEAKER_01: Because on one hand, they'll say we'll be able to get to use this last fiscal year as an example.
[30:45] SPEAKER_01: Initially, they were saying we're going to raise 2.7 trillion shillings in tax revenue.
[30:48] SPEAKER_01: The final number is actually a hell of a lot lower than that,
[30:51] SPEAKER_01: closer to 2.2,
[30:52] SPEAKER_01: 2.3 trillion Kenyan shillings.
[30:54] SPEAKER_01: So how much of a credibility deficit does our public data have?
[30:58] SPEAKER_03: I'll talk about the public data first and say,
[31:01] SPEAKER_03: in terms of data transparency,
[31:02] SPEAKER_03: data quality,
[31:03] SPEAKER_03: I would actually say the opposite,
[31:04] SPEAKER_03: that Kenya is one of the more transparent,
[31:06] SPEAKER_03: more sovereign,
[31:07] SPEAKER_03: especially below investment grade at this rating level.
[31:10] SPEAKER_03: In terms of data quality, it's quite good.
[31:12] SPEAKER_03: You're talking about the audit,
[31:13] SPEAKER_03: the audit general reports before Treasury publishes on a quarterly basis,
[31:16] SPEAKER_03: updates showing relative fiscal performance,
[31:19] SPEAKER_03: weekly reports from the central bank in terms of reserves,
[31:22] SPEAKER_03: bond auction results,
[31:23] SPEAKER_03: everything.
[31:24] SPEAKER_03: So the data quality, in Moody's opinion,
[31:27] SPEAKER_03: perspective is quite good that's actually from a policy maker perspective it's
[31:31] SPEAKER_03: quite strong there is challenge with revenue assumptions and fiscal policy
[31:35] SPEAKER_03: affecting this as we would call it where you write revenue assumptions every year
[31:38] SPEAKER_03: are very ambitious and then we see shortfalls in revenue and then that being met by
[31:44] SPEAKER_03: cuts to development spending and
[31:46] SPEAKER_03: And we do track budget performance.
[31:48] SPEAKER_03: So relative to the original budget,
[31:49] SPEAKER_03: relative to the supplementary budget,
[31:51] SPEAKER_03: but those can be passed late in the year.
[31:52] SPEAKER_03: So the significance of the supplementary two,
[31:54] SPEAKER_03: for instance,
[31:55] SPEAKER_03: you would expect the numbers to be closer to those estimates,
[31:57] SPEAKER_03: but we would compare it to the original budget.
[31:59] SPEAKER_03: And over time, you do see exactly what you said.
[32:01] SPEAKER_03: There's a trend of underperforming.
[32:03] SPEAKER_03: Except for,
[32:03] SPEAKER_03: I think it was two years ago in what fiscal year ending June,
[32:07] SPEAKER_03: 2022,
[32:07] SPEAKER_03: where they outperformed,
[32:09] SPEAKER_03: maybe it was 2022 where they outperformed.
[32:11] SPEAKER_03: Besides that, it's been a consistent trend where ordinary revenue and
[32:14] SPEAKER_03: and total revenue have underperformed slightly.
[32:16] SPEAKER_03: And when you set spending against those elevated revenue forecasts,
[32:20] SPEAKER_03: that's where you see some of the pressure and you see that emerge in different
[32:22] SPEAKER_03: areas through the growth in pending bills,
[32:25] SPEAKER_03: through larger fiscal deficits,
[32:26] SPEAKER_03: through the accumulation of debt over time.
[32:28] SPEAKER_03: So it's certainly a factor.
[32:30] SPEAKER_03: It's certainly been a factor in credit profile for quite some time, but it's not a new feature of
[32:35] SPEAKER_01: can use credit credit profile indeed i want to move on to the question around this
[32:39] SPEAKER_01: task force that the executive decided to set up sometime last week and on the 6th
[32:43] SPEAKER_01: of july in defense of the establishment of said task force this is what again david
[32:48] SPEAKER_01: the chair of the council of economic advisors said quote the public debt audit is
[32:52] SPEAKER_01: not a statutory
[32:54] SPEAKER_01: audits.
[32:55] SPEAKER_01: The Auditor General, he says, does that every year.
[32:57] SPEAKER_01: They'd be repeating themselves.
[32:58] SPEAKER_01: And he says this task force will advise on public financial management architecture.
[33:03] SPEAKER_01: The Auditor General,
[33:04] SPEAKER_01: he says,
[33:04] SPEAKER_01: is part of that PFM architecture,
[33:05] SPEAKER_01: and therefore they cannot be reviewing themselves.
[33:07] SPEAKER_01: And I want to bring that question to Dickson McGetcher.
[33:10] SPEAKER_01: He's got several years of experience in FX and credit markets with a deep understanding of how
[33:14] SPEAKER_01: our domestic capital markets work as well.
[33:17] SPEAKER_01: Dixon, we've had audits in the past to build on the argument that is being made here by David Dean.
[33:21] SPEAKER_01: We've had audits of public debt in various aspects of public debt over the years.
[33:25] SPEAKER_01: But based on what we already know from the reports that have come out of the years,
[33:30] SPEAKER_01: what immediate action can we take?
[33:32] SPEAKER_02: I think I'm one of those in the camp that are not exactly sure what the audit is
[33:36] SPEAKER_02: supposed to achieve,
[33:38] SPEAKER_02: because my take has been the debt we have in our books is legitimate in the sense
[33:42] SPEAKER_02: that
[33:42] SPEAKER_02: When we borrowed it,
[33:43] SPEAKER_02: we went to the borrowers and told them,
[33:45] SPEAKER_02: look,
[33:45] SPEAKER_02: we want to borrow X,
[33:46] SPEAKER_02: Y,
[33:46] SPEAKER_02: Z.
[33:46] SPEAKER_02: And the people who borrowed that had the mandate to borrow that cash.
[33:49] SPEAKER_02: That money,
[33:49] SPEAKER_02: if it was initial loans,
[33:51] SPEAKER_02: for example,
[33:51] SPEAKER_02: the Euro bond,
[33:51] SPEAKER_02: it's already been applied and we've gone and refinanced it.
[33:54] SPEAKER_02: So at this point in time,
[33:55] SPEAKER_02: if we went and look at all the debt that we are holding,
[33:58] SPEAKER_02: the question is,
[33:58] SPEAKER_02: is that debt legitimately had by the people who are holding that debt?
[34:01] SPEAKER_02: The answer is yes.
[34:02] SPEAKER_02: Now, if the question is, how did we apply the funds that led us to acquire all that debt?
[34:07] SPEAKER_02: That's a different audit altogether.
[34:09] SPEAKER_02: And I'm not sure we should be auditing debt.
[34:10] SPEAKER_02: We should be auditing the expenditure that are good towards that debt.
[34:13] SPEAKER_01: So let me just interject briefly there to go back to the arguments that we had a
[34:17] SPEAKER_01: little earlier with Tom and all the work that Komo Basinokoji and me have done on
[34:20] SPEAKER_01: SGR contracts,
[34:21] SPEAKER_01: right?
[34:21] SPEAKER_01: Yes, we went...
[34:22] SPEAKER_01: to the Exim Bank of China and said, guys, we'd like to borrow the better part of $6 billion.
[34:26] SPEAKER_01: Brilliant.
[34:27] SPEAKER_01: They gave us the money.
[34:27] SPEAKER_01: The quality of our negotiating team aside,
[34:30] SPEAKER_01: and the fact that they essentially agreed to some clauses that frankly don't make
[34:32] SPEAKER_01: any sense from a taxpayer's perspective,
[34:34] SPEAKER_01: isn't there an obligation for those authorities to say,
[34:37] SPEAKER_01: look,
[34:37] SPEAKER_01: we negotiated this debt.
[34:38] SPEAKER_01: Here's all the relevant documentation.
[34:40] SPEAKER_02: So you could do that and you could always push back.
[34:44] SPEAKER_02: But the question always becomes,
[34:45] SPEAKER_02: why are you giving the value that you are for and that you are doing on certain
[34:49] SPEAKER_02: costs to us as debt?
[34:50] SPEAKER_02: Now, if those terms of those agreements are legit, then the question really is back to your officials.
[34:56] SPEAKER_02: Were they prudent to borrow that cash?
[34:58] SPEAKER_02: Did they use it prudently?
[35:00] SPEAKER_02: Did they have the capacity to negotiate and all that?
[35:02] SPEAKER_02: So in a sense, the question then becomes, it's not about the debt itself.
[35:06] SPEAKER_02: What you should be questioning is all the money that we have borrowed, how was it used?
[35:10] SPEAKER_02: Was it used prudently?
[35:11] SPEAKER_02: Was it used efficiently?
[35:12] SPEAKER_02: But even if it wasn't used efficiently,
[35:14] SPEAKER_02: are you going to have any recourse to say,
[35:15] SPEAKER_02: look,
[35:16] SPEAKER_02: I borrowed this money at a floating rate of five or plus.
[35:19] SPEAKER_02: Now it's over plus X amount.
[35:21] SPEAKER_02: And at that time, labor was 2%.
[35:22] SPEAKER_02: Now it's 6% or 5% and the cost has become excessively high.
[35:26] SPEAKER_02: I didn't know what I was doing.
[35:27] SPEAKER_02: I'm not sure that's a legitimate question you're going to push back.
[35:30] SPEAKER_02: And when it comes to the SGR,
[35:32] SPEAKER_02: again,
[35:32] SPEAKER_02: because we've never seen the contract,
[35:33] SPEAKER_02: probably it's always been said that we had collateral against that.
[35:36] SPEAKER_02: So maybe that's why we've not really been able to push back.
[35:38] SPEAKER_02: So if you push against self-service in the loan, then maybe the collateral will get called.
[35:42] SPEAKER_02: And ultimately, that will be considered a default anyway in terms of the debt that you're holding.
[35:46] SPEAKER_02: So for the sake of argument,
[35:47] SPEAKER_01: because I'm looking at the,
[35:49] SPEAKER_01: this is the 2024,
[35:49] SPEAKER_01: the auditor notes for the 2022 annual report at Kenya Pulse Authority.
[35:54] SPEAKER_01: And the auditor is basically pointing to non-disclosure of a contingent liability.
[35:58] SPEAKER_01: And that's related to the $3.6 billion borrowed and then online to Kenya Relios for the SGR.
[36:03] SPEAKER_01: So if I understand you correctly,
[36:04] SPEAKER_01: you're saying that,
[36:04] SPEAKER_01: look,
[36:04] SPEAKER_01: if we essentially keep pushing and saying,
[36:06] SPEAKER_01: look,
[36:06] SPEAKER_01: we need full disclosure on X,
[36:07] SPEAKER_01: Y,
[36:08] SPEAKER_01: Z,
[36:08] SPEAKER_01: on all these contracts and project documents,
[36:10] SPEAKER_01: if that breaches some sort of clause,
[36:13] SPEAKER_01: in the Exim Bank of China contracts,
[36:15] SPEAKER_01: would that essentially be treated as a default event by other bondholders?
[36:18] SPEAKER_02: Only if you're not servicing it.
[36:19] SPEAKER_02: Because as far as they're concerned, it's a legitimate debt.
[36:22] SPEAKER_02: You got value for money, whether it was expensive, that's secondary.
[36:25] SPEAKER_02: The question is, did you have the capacity and legal mandate to borrow that cash?
[36:29] SPEAKER_02: If the answer is yes, then you're liable for it.
[36:31] SPEAKER_02: So ideally,
[36:32] SPEAKER_02: we could push back and go and say,
[36:33] SPEAKER_02: look,
[36:34] SPEAKER_02: all these public officials,
[36:35] SPEAKER_02: you misused the funds,
[36:36] SPEAKER_02: you procured weirdly,
[36:37] SPEAKER_02: the costs were elevated and all those things.
[36:39] SPEAKER_02: But that's not the question for the dirty hole.
[36:41] SPEAKER_02: That's the question for the officials who transacted that.
[36:43] SPEAKER_02: Maybe the contractors,
[36:44] SPEAKER_02: if they paid eight bucks or whatever it is,
[36:45] SPEAKER_02: that's what you're supposed to push back for.
[36:47] SPEAKER_02: And remember, the Exim Bank was not really the contracting party.
[36:50] SPEAKER_02: The Exim Bank was just a bank that gave the cash.
[36:52] SPEAKER_02: So there'd be another party that was contracted to actually be the rolling line and deliver the project.
[36:56] SPEAKER_02: And they deliver based on the cost they gave.
[36:58] SPEAKER_02: If they did, then ultimately, why would you go back and default on the bank?
[37:02] SPEAKER_02: And the bank, all they did was agree to finance a proposal that both you and the contractor agreed on.
[37:06] SPEAKER_02: The question again is, what exactly do we want to achieve with the debt audit?
[37:09] SPEAKER_02: Is it to prove that we do owe the debt?
[37:12] SPEAKER_02: Or is it, are we trying to say that this money was not well spent?
[37:15] SPEAKER_02: In which case, maybe we should not have borrowed.
[37:17] SPEAKER_02: That's a different conversation because then you'll be like,
[37:19] SPEAKER_02: yeah,
[37:19] SPEAKER_02: then if you answer that question and say,
[37:20] SPEAKER_02: maybe it wasn't used well,
[37:22] SPEAKER_02: you still owe the debt.
[37:23] SPEAKER_02: So the debt will not become odious because of how you spent it.
[37:26] SPEAKER_02: That really is my point.
[37:27] SPEAKER_01: Tom,
[37:27] SPEAKER_01: I want to give you the right of reply on that one,
[37:29] SPEAKER_01: because I know you guys have been putting in a fair bit of work on SGR-related contracts.
[37:33] SPEAKER_02: Yes, thank you.
[37:35] SPEAKER_02: Those are very interesting comments there.
[37:38] SPEAKER_02: But from where I sit and our coalition,
[37:41] SPEAKER_02: I think if we want to argue that the debts that we've acquired this far,
[37:45] SPEAKER_02: we've seen value for money.
[37:47] SPEAKER_02: If I agree with that, I'll be lying to my fellow countrymen here.
[37:50] SPEAKER_02: Because let's take,
[37:52] SPEAKER_02: for instance,
[37:53] SPEAKER_02: the euro bond,
[37:53] SPEAKER_02: the one that was paid by the end of June,
[37:55] SPEAKER_02: that was cleared by the end of June.
[37:57] SPEAKER_02: We know that it was around $1 billion could not be accounted for.
[38:00] SPEAKER_02: Yes.
[38:01] SPEAKER_02: And if that part could not be accounted for, then how can we say that we got valuable money?
[38:06] SPEAKER_02: Because it means that money,
[38:08] SPEAKER_02: it was nowhere in our treasury and meaning it was not used in the development
[38:12] SPEAKER_02: projects that it was intended to go to.
[38:14] SPEAKER_02: I'll argue this way on this.
[38:15] SPEAKER_02: One,
[38:16] SPEAKER_02: the reason why an audit is really important,
[38:19] SPEAKER_02: debt audit,
[38:19] SPEAKER_02: because that is our stance currently,
[38:21] SPEAKER_02: even before the president's
[38:23] SPEAKER_02: came up with the task force.
[38:25] SPEAKER_02: Our stand was that there is a need for public debt audit.
[38:29] SPEAKER_02: And the reason is because we know even today that the president last week said that
[38:35] SPEAKER_02: in a round table with the media,
[38:37] SPEAKER_02: he said that he is foreseeing that we are going to borrow more now.
[38:41] SPEAKER_02: We are going to borrow $1 trillion to finance the current budget 2024-2025.
[38:45] SPEAKER_02: And that means in the future, we are still going to borrow.
[38:48] SPEAKER_02: But if we don't audit the previous debts, then we might go into the future blindfolded.
[38:53] SPEAKER_02: And that is what Kenyans are asking for.
[38:56] SPEAKER_02: And I think that is what is also in the Public Finance Management Act,
[39:00] SPEAKER_02: because there is a need for transparency when acquiring the debts.
[39:04] SPEAKER_02: And we need to know, first of all, the process of how these loans were acquired.
[39:08] SPEAKER_02: Because if we don't ask these questions, then we will go into the future with similar problems.
[39:14] SPEAKER_02: And nobody will know
[39:15] SPEAKER_02: the amounts.
[39:16] SPEAKER_02: There are Kenyans who don't even know the rates at which we acquired these debts.
[39:20] SPEAKER_02: We don't even know who negotiated them because the legislative members of
[39:25] SPEAKER_02: parliament who are supposed to be the representatives of the people did not
[39:29] SPEAKER_02: participate in the process of acquiring the debts.
[39:31] SPEAKER_02: Then how transparent is this?
[39:33] SPEAKER_02: Because we know it is the central bank and the CS treasury.
[39:37] SPEAKER_02: That is, they are the ones who know who
[39:40] SPEAKER_02: and at what rate they acquired the debts.
[39:42] SPEAKER_02: I was reading somewhere yesterday that in the previous reports,
[39:46] SPEAKER_02: between 2010 and I think 2021,
[39:48] SPEAKER_02: there are a number of loans that were acquired and the Auditor General was not informed.
[39:55] SPEAKER_02: I think around 14 loans.
[39:56] SPEAKER_02: The office were only informed later after the loans had been acquired.
[40:00] SPEAKER_02: So if we go into the future with this kind of bleak approach,
[40:04] SPEAKER_02: I think we are saying we let us just go back into the hole.
[40:08] SPEAKER_02: My stand on this is we need to do an audit.
[40:10] SPEAKER_02: Though the question is the task force that was formed,
[40:13] SPEAKER_02: it is not constitutional because we know what the constitution says on that.
[40:16] SPEAKER_01: Yes, thank you.
[40:17] SPEAKER_01: David,
[40:17] SPEAKER_01: I want to come back to you with respect to the question of if we're going to try
[40:20] SPEAKER_01: and buy time,
[40:21] SPEAKER_01: essentially try and ease a bit of pressure on our immediate cash flow problems,
[40:25] SPEAKER_01: the main chunk of money that we have to spend on debt service is in the domestic side.
[40:29] SPEAKER_01: And arguably, we're in a situation here where
[40:32] SPEAKER_01: The central bank could perhaps,
[40:33] SPEAKER_01: as an agent of the finance ministry,
[40:35] SPEAKER_01: engage in some sort of domestic bond switch program.
[40:39] SPEAKER_01: How does that then get factored into your assessment of Kenya's liquidity pressure over the medium term?
[40:44] SPEAKER_03: So when the CDK did the switch auctions in 2020,
[40:49] SPEAKER_03: we viewed them favorably at that time because there was excess liquidity in the market.
[40:53] SPEAKER_03: Banks were willing to extend duration given low interest rates, and it was completely voluntary.
[40:58] SPEAKER_03: We have a definition for what we deem distressed exchanges or default by using
[41:02] SPEAKER_03: another term and a coercive exchange or exchange that is not voluntary,
[41:07] SPEAKER_03: that's distressed,
[41:08] SPEAKER_03: essentially that wouldn't be made if they weren't for the risk that the creditor is
[41:13] SPEAKER_03: not repaid and modified terms of a new bond are not equal to the old one.
[41:17] SPEAKER_03: We would deem that distressed event or distressed exchange and a default that
[41:21] SPEAKER_03: likely would have negative credit implications.
[41:24] SPEAKER_03: So if there were some sort of exchange where it wasn't,
[41:27] SPEAKER_03: if it was voluntary,
[41:28] SPEAKER_03: you wouldn't have any concerns over it.
[41:29] SPEAKER_03: But if there were somehow, I'll give you an example.
[41:32] SPEAKER_03: Argentina did a domestic exchange, exchanging local currency bonds and dollar bonds for new bonds.
[41:38] SPEAKER_03: And the new bonds were inflation linked,
[41:41] SPEAKER_03: just like the old ones were,
[41:42] SPEAKER_03: but there was no premium added to it.
[41:44] SPEAKER_03: There wasn't the old one.
[41:45] SPEAKER_03: There was no put option as well.
[41:46] SPEAKER_03: So there are a few reasons why we determined that was a distressed exchange at
[41:50] SPEAKER_03: default in the case of Argentina,
[41:51] SPEAKER_03: because,
[41:52] SPEAKER_03: again,
[41:52] SPEAKER_03: we deemed that the terms were not equal to the old ones,
[41:56] SPEAKER_03: again,
[41:56] SPEAKER_03: because there was no risk premium added to extending the maturity given the terms
[42:00] SPEAKER_03: of the existing notes.
[42:01] SPEAKER_03: That would be a risk if the exchange were not completely voluntary.
[42:04] SPEAKER_03: If they are voluntary, there's no concern there.
[42:07] SPEAKER_03: But I would say on the domestic side,
[42:09] SPEAKER_03: the high cost of domestic borrowing of newly issued debt is really one of the
[42:13] SPEAKER_03: challenges that Kenya faces today.
[42:15] SPEAKER_03: If you look at the amount of treasury bonds maturing this year, I think it's $320 billion.
[42:20] SPEAKER_03: And if you look at the average coupon on those bonds, the average interest rate is 11.7%.
[42:25] SPEAKER_03: So that's $37 billion in interest.
[42:27] SPEAKER_03: If you roll that over,
[42:28] SPEAKER_03: just rolling it over,
[42:29] SPEAKER_03: keeping the debt stock the same,
[42:30] SPEAKER_03: that same $322 billion at,
[42:32] SPEAKER_03: let's say,
[42:32] 17%.
[42:34] SPEAKER_03: Your interest bill is $55 billion.
[42:36] SPEAKER_03: So an extra $16 billion just on rolling over maturing debt.
[42:40] SPEAKER_03: And then you add on top of that, financing a deficit.
[42:43] SPEAKER_03: Again, this is an additional challenge.
[42:45] SPEAKER_03: For a country like Kenya that grows at 10% nominal, so real 5% and inflation 5% or deflator 5%.
[42:50] SPEAKER_03: If you want to stabilize debt at 60%, you could have a 6% fiscal deficit, right?
[42:55] SPEAKER_03: Barring any exchange rate movements.
[42:56] SPEAKER_03: But if you have nominal interest rates of 17%,
[42:59] SPEAKER_03: that creates a much bigger challenge in terms of stabilizing debt and debt sustainability.
[43:03] SPEAKER_01: And to your point,
[43:04] SPEAKER_01: actually,
[43:04] SPEAKER_01: the central bank governor did speak about need to essentially credibly lower rates
[43:08] SPEAKER_01: in the market.
[43:09] SPEAKER_01: For any of our listeners,
[43:10] SPEAKER_01: you can essentially just go back to YouTube to look at the last Monetary Policy
[43:13] SPEAKER_01: Committee meeting.
[43:14] SPEAKER_01: It's on the CBK's channel on YouTube.
[43:16] SPEAKER_01: It's pretty much towards the last 10, 15 minutes of that entire session.
[43:20] SPEAKER_01: David, I want to come back to you.
[43:21] SPEAKER_01: There's an interesting question that's come up here from JSK.
[43:23] SPEAKER_01: I'm going to rephrase what he's saying here.
[43:25] SPEAKER_01: What is written is, what if the government reconsidered adopting the withdrawn finance bill next week?
[43:29] SPEAKER_01: After the dialogue, can Moody's then review the ratings?
[43:32] SPEAKER_01: But to essentially expand the question,
[43:34] SPEAKER_01: I guess the bigger question here is,
[43:36] SPEAKER_01: what would Moody's need to see?
[43:38] SPEAKER_01: What sort of policy actions and trends would Moody's need to see that would then be ratings positive?
[43:43] SPEAKER_03: The way the question is phrased is an interesting way to think about it.
[43:46] SPEAKER_03: But in general terms,
[43:48] SPEAKER_03: right,
[43:48] SPEAKER_03: what we're looking to see to first with a negative outlook,
[43:51] SPEAKER_03: the first logical step would be a stable outlook,
[43:53] SPEAKER_03: although at this rating level,
[43:55] SPEAKER_03: an upgrade is not unheard of.
[43:56] SPEAKER_03: I think we're far away from that given the negative outlook,
[43:59] SPEAKER_03: regardless of whether it's through expenditures or
[44:01] SPEAKER_03: re-reversal of the revenue measures.
[44:03] SPEAKER_03: What we're really looking for is confidence over the fiscal consolidation that
[44:07] SPEAKER_03: limits the deterioration in the debt burden and debt affordability.
[44:09] SPEAKER_03: So whether it's through revenue measures,
[44:11] SPEAKER_03: spending measures,
[44:11] SPEAKER_03: something that gives us confidence that we can comfortably expect to see a narrower
[44:15] SPEAKER_03: fiscal deficit year after year.
[44:17] SPEAKER_03: that's consistent with debt declining or stabilizing at some point in the future,
[44:20] SPEAKER_03: that will be really what we're looking for and ties into a number of factors that
[44:23] SPEAKER_03: ties into revenue measures like the question asks about,
[44:26] SPEAKER_03: also ties into the quality of the adjustment on the spending side,
[44:29] SPEAKER_03: how credible it is,
[44:30] SPEAKER_03: and it goes to the cost of debt.
[44:32] SPEAKER_03: So in either case,
[44:34] SPEAKER_03: whether you're looking at more higher revenue or lower spending and better quality
[44:38] SPEAKER_03: to the expenditure adjustment,
[44:39] SPEAKER_03: back to what I previously said in my last statement about the cost of debt,
[44:43] SPEAKER_03: we would need to see,
[44:44] SPEAKER_03: it's likely we need to see the cost of new borrowings
[44:46] SPEAKER_03: coming down and in a way that's credible, like you said, like the CPK governor mentioned.
[44:50] SPEAKER_03: And I think there are some factors that would support that, right?
[44:53] SPEAKER_03: Notwithstanding the last few weeks and the recent developments, inflation is back within target.
[44:57] SPEAKER_03: The exchange rate has, after a long period of breaching, has strengthened and now has stabilized that.
[45:02] SPEAKER_03: the 130 level, plus or minus.
[45:04] SPEAKER_03: These are two positive factors.
[45:06] SPEAKER_03: If we didn't have the uncertainty on the fiscal side,
[45:08] SPEAKER_03: at some point we would see rate cuts and we'd see lower domestic borrowing costs,
[45:12] SPEAKER_03: presumably.
[45:12] SPEAKER_03: Especially if we saw lower net fiscal financing needs, at least from the domestic market.
[45:17] SPEAKER_03: It remains to be seen at this point, but something that would also support
[45:20] SPEAKER_03: the sovereign state affordability.
[45:21] SPEAKER_01: Dixon, I want to bring you in on that question of incredibly lowering the cost of domestic debt.
[45:26] SPEAKER_01: And I know this is a debate that we've had in the past,
[45:28] SPEAKER_01: because if I look at it from the perspective of someone who's essentially sitting
[45:31] SPEAKER_01: on the fund side,
[45:32] SPEAKER_01: I understand the risks that I'm taking on here in terms of lending money to the state.
[45:36] SPEAKER_01: I would like a much higher yield.
[45:38] SPEAKER_01: And in some instances,
[45:39] SPEAKER_01: the state is probably the only game in turn,
[45:40] SPEAKER_01: given where private sector credit demand is at the moment.
[45:43] SPEAKER_01: But given all the constraints we have right now,
[45:45] SPEAKER_01: short of fairly aggressive spending cuts,
[45:47] SPEAKER_01: and those obviously will have their own
[45:48] SPEAKER_01: downsides.
[45:49] SPEAKER_01: How can we get to that point where we actually start seeing T-bill rates and T-bond
[45:53] SPEAKER_01: rates at auctions start to fall?
[45:55] SPEAKER_02: Thanks, Rama.
[45:55] SPEAKER_02: I think to me, it feels on some level we are deliberately not using all the levers we have on the table.
[46:01] SPEAKER_02: It's always been said that you can only default on your domestic debt if you
[46:05] SPEAKER_02: voluntarily choose to,
[46:06] SPEAKER_02: in a sense,
[46:06] SPEAKER_02: because you can always print yourself out of that.
[46:09] SPEAKER_02: The challenge we are facing right now in the market,
[46:11] SPEAKER_02: and I think it was alluded to by a previous speaker,
[46:13] SPEAKER_02: is that we've been using partly domestic resources to finance foreign currency obligations.
[46:18] SPEAKER_02: If you look at the debt evolution over the last three fiscal years,
[46:21] SPEAKER_02: we were at around $38 billion in total foreign currency debt.
[46:25] SPEAKER_02: Right now, it's at $39 billion.
[46:26] SPEAKER_02: If you factor,
[46:27] SPEAKER_02: we've used most of the offshore sort of flows that we got to all over the maturing
[46:32] SPEAKER_02: principal and principal.
[46:33] SPEAKER_02: We want to increase our debt by $1 billion,
[46:36] SPEAKER_02: which then means that given that we have financed the net interest costs,
[46:39] SPEAKER_02: not the principal,
[46:40] SPEAKER_02: the net interest costs,
[46:41] SPEAKER_02: this particular fiscal year is about $2 billion.
[46:42] SPEAKER_02: Last year was about nearly a similar amount.
[46:45] SPEAKER_02: So we spent about $3 or $4 billion of domestic resources to pay those fiscal debts.
[46:51] SPEAKER_02: And if you look at the cash flow impact of that,
[46:53] SPEAKER_02: the way it will work is that you will take domestic revenues,
[46:57] SPEAKER_02: taxes,
[46:57] SPEAKER_02: so to speak,
[46:58] SPEAKER_02: which Treasury then will buy those dollars from CBK,
[47:01] SPEAKER_02: and then CBK will give them dollars on their payoffs.
[47:03] SPEAKER_02: And out of that equation, they'll always leave the money market short of that amount.
[47:07] SPEAKER_02: Because remember,
[47:08] SPEAKER_02: when you pay,
[47:09] SPEAKER_02: usually in a normal financing situation,
[47:11] SPEAKER_02: when you,
[47:12] SPEAKER_02: for example,
[47:12] SPEAKER_02: buy bills and the government spares back the cash in the economy,
[47:15] SPEAKER_02: the cash flow is sort of neutral because it's coming from the private side to the
[47:19] SPEAKER_02: public and back to the private side.
[47:20] SPEAKER_02: In this particular case,
[47:21] SPEAKER_02: you're taking liquidity from the private side to the public and it doesn't come
[47:24] SPEAKER_02: back because it goes to buy dollars.
[47:26] SPEAKER_02: Now that has left a structural deficit in the banking books where we have a
[47:30] SPEAKER_02: significant amount of reverse triples that have been rolled over.
[47:33] SPEAKER_02: With the central bank, I think the figure right now is about 225, 250 billion.
[47:38] SPEAKER_02: Now,
[47:38] SPEAKER_02: given that this has become structural and it's lasted for so long,
[47:41] SPEAKER_02: we've seen the gap between the policy rate and where we start seeing folks buying bills.
[47:46] SPEAKER_02: And this is because there's a huge chunk of guys who are borrowing this reversely per cash.
[47:50] SPEAKER_02: And right now that's close to 5% of all deposits.
[47:53] SPEAKER_02: And since that is short term in nature, it's 28 days.
[47:56] SPEAKER_02: The highest sort of turnout on that is 28 days.
[47:59] SPEAKER_02: Then you have folks who then don't have a lot of market fixed terms.
[48:03] SPEAKER_02: You cannot use very short term liabilities or debt make that one to buy a longer
[48:07] SPEAKER_02: term assets because then you create gaps in your balance sheet.
[48:10] SPEAKER_02: For a smaller amount, it's doable.
[48:12] SPEAKER_02: As that amount increases, that becomes untenable.
[48:14] SPEAKER_02: And for most folks then have what we call a maximum cumulative outflow cap,
[48:18] SPEAKER_02: which then would mean they can't buy that.
[48:20] SPEAKER_02: Which then means that guys have now been forced to buy only the three months paper.
[48:23] SPEAKER_02: And the only reason why then people would go and buy longer term paper is only if
[48:27] SPEAKER_02: they think there's a chance that basically yields will come down and they will have
[48:30] SPEAKER_02: duration gains.
[48:31] SPEAKER_02: For example,
[48:31] SPEAKER_02: if you go buy a bond at 18%,
[48:33] SPEAKER_02: you'd only buy that if you think yields are going to come down because you're
[48:36] SPEAKER_02: already cutting quite a bit of risk from the balance sheet side.
[48:39] SPEAKER_02: Even that this amount has become structural.
[48:41] SPEAKER_02: Then you're having an issue where you've lost a bit of the banking side,
[48:44] SPEAKER_02: guys who would have been natural buyers of paper because they have this liquidity
[48:48] SPEAKER_02: gap being stuck on the very near end.
[48:50] SPEAKER_02: And in which case,
[48:50] SPEAKER_02: to me,
[48:51] SPEAKER_02: I would think if the central bank was to actively then participate on the short end,
[48:55] SPEAKER_02: which would then be either by increasing the tenor of the reverse reports maybe to
[48:59] SPEAKER_02: one year,
[49:00] SPEAKER_02: which then would allow some of the market players.
[49:02] SPEAKER_02: to then be able to participate in the government securities.
[49:05] SPEAKER_02: Because there's a huge anomaly in the fact that your policy rate is quite far from
[49:08] SPEAKER_02: where people are buying paper.
[49:09] SPEAKER_02: And when they buy that paper,
[49:10] SPEAKER_02: you can see they're trying to arbitrage between the reverse report around 15% to
[49:14] SPEAKER_02: bills at 16%.
[49:15] SPEAKER_02: And if you get an event shock,
[49:17] SPEAKER_02: like maybe they were ever being taken back,
[49:20] SPEAKER_02: the fiscal funding program being taken back,
[49:23] SPEAKER_02: or even the Moody downgrade that happened,
[49:24] SPEAKER_02: The guys' first reaction would be probably we might see yields back in higher.
[49:28] SPEAKER_02: And if that were the case, then you see more reluctance for guys to buy paper.
[49:31] SPEAKER_02: And then you'd see guys trying to stick to the near end of the three months,
[49:34] SPEAKER_02: which increases the rate of fire risk and obviously then makes it harder for the
[49:37] SPEAKER_02: diamond to borrow.
[49:38] SPEAKER_02: And that creates a negative feedback loop because then yields go even higher.
[49:41] SPEAKER_01: Looking at what's been happening in the debt markets over the last three,
[49:44] SPEAKER_01: four weeks,
[49:44] SPEAKER_01: you get a situation where people just bunch off on the 91-day T-bill.
[49:47] SPEAKER_02: And that's pretty much it.
[49:48] SPEAKER_02: That's where they stick to.
[49:49] SPEAKER_01: Exactly.
[49:50] SPEAKER_02: And now the question then comes,
[49:51] SPEAKER_02: why can't we do some form of either that,
[49:54] SPEAKER_02: funding the,
[49:55] SPEAKER_02: increasing the reverse repo amount so that you can anchor the near-term rates on
[49:59] SPEAKER_02: your policy rates and you provide enough liquidity to cover that.
[50:02] SPEAKER_02: And the other bit will be considering doing some twist operations like India does,
[50:05] SPEAKER_02: where you sell short-hand paper and you buy long-hand paper.
[50:08] SPEAKER_02: This is because government is not legally allowed to buy paper in Kenya.
[50:11] SPEAKER_02: They can fund the government up to the 5% of the ODI.
[50:15] SPEAKER_02: 5% of the audited accounts as an OD, but they can't fund the government directly.
[50:18] SPEAKER_02: However,
[50:19] SPEAKER_02: they could do a twist operation where they would buy long-term paper and buy
[50:22] SPEAKER_02: short-term paper on a cash flow neutral situation,
[50:25] SPEAKER_02: which is net no funding,
[50:27] SPEAKER_02: but maybe get that back stopped by Treasury in case there are any losses coming
[50:31] SPEAKER_02: from that,
[50:31] SPEAKER_02: which obviously unlikely given that they're making quite a bit of money from the
[50:34] SPEAKER_02: reverse triples,
[50:35] SPEAKER_02: so we should be able to fund that.
[50:36] SPEAKER_02: That would generate liquidity on the far end of the paper.
[50:40] SPEAKER_02: And this, to me, is just a bridge.
[50:42] SPEAKER_02: Because, look, if you think about it, the borrowing program this fiscal year is about $300 billion.
[50:47] SPEAKER_02: That's how much the government is planning to borrow.
[50:50] SPEAKER_02: But the interest they're going to pay out on that paper is $800 billion.
[50:54] SPEAKER_02: So by the end of the year,
[50:55] SPEAKER_02: government will have spent $800 billion in service and interest coupon and only
[50:57] SPEAKER_02: borrow back $300 billion of that.
[50:59] SPEAKER_02: So there'll be $500 billion left out of that,
[51:01] SPEAKER_02: which means organically,
[51:02] SPEAKER_02: naturally,
[51:02] SPEAKER_02: that would cover that gap that might arise there.
[51:05] SPEAKER_02: And then at that particular point in time,
[51:06] SPEAKER_02: they can unwind all these measures that they would have been putting in place
[51:09] SPEAKER_02: between them.
[51:09] SPEAKER_02: Ideally,
[51:10] SPEAKER_02: we've said the central bank can intervene in markets and they do intervene in the
[51:14] SPEAKER_02: FX market to reduce volatility.
[51:16] SPEAKER_02: But when the breakdown in the bond market,
[51:18] SPEAKER_02: we are seeing the government hands are tied and they allow market to get into a
[51:21] SPEAKER_02: feedback loop until you get to a different scenario.
[51:24] SPEAKER_02: And then you turn around and then manage again, interest rates and coupons as you respect your loans.
[51:28] SPEAKER_02: It doesn't look like a very wise decision.
[51:29] SPEAKER_02: I think if that were to happen, then I would even up the rating agencies.
[51:32] SPEAKER_02: If you have a situation where,
[51:34] SPEAKER_02: you know,
[51:34] SPEAKER_02: the government is still staying within its fiscal limits and they are providing
[51:37] SPEAKER_02: bridge liquidity to maintain the cost of that debt and provide liquidity from the
[51:42] SPEAKER_01: government until this imbalance is clear.
[51:44] SPEAKER_01: Because we've been having this conversation for the better part of 60 minutes now.
[51:46] SPEAKER_01: So I essentially want to move to close it.
[51:49] SPEAKER_01: I want to give all my speakers who are still on the panel,
[51:51] SPEAKER_01: Tom,
[51:51] SPEAKER_01: David,
[51:52] SPEAKER_01: Jared,
[51:52] SPEAKER_01: and Dixon,
[51:53] SPEAKER_01: in one minute or less,
[51:55] SPEAKER_01: your closing thoughts on this debt conundrum that Kenya has at the moment.
[51:59] SPEAKER_01: How do we fix it?
[52:00] SPEAKER_01: How can we start to credibly fix it?
[52:02] SPEAKER_01: within the next one year?
[52:03] SPEAKER_01: Jared, let's start with you, then David, then Tom and Dixon.
[52:06] SPEAKER_02: As I said earlier, there are no quick fixes.
[52:09] SPEAKER_02: If you're looking at how to fix it within the next one year or so, it's going to be a big challenge.
[52:13] SPEAKER_02: And I'll go beyond what Dixon has said and argue that the current debt and high
[52:18] SPEAKER_02: interest rate,
[52:18] SPEAKER_02: at least in the domestic front,
[52:19] SPEAKER_02: is more than a liquidity problem.
[52:22] SPEAKER_02: If you look at the market, the market is not necessarily very tight on liquidity.
[52:25] SPEAKER_02: It's just that they're probably looking at who potentially they're lending from there.
[52:28] SPEAKER_02: having their own caution.
[52:29] SPEAKER_02: So even if the CPK was to do the gymnastics,
[52:32] SPEAKER_02: it may not necessarily address the problem until you start seeing traction,
[52:36] SPEAKER_02: at least on the fiscal side.
[52:37] SPEAKER_02: And that brings me to two real thoughts that I want to conclude with.
[52:40] SPEAKER_02: The first one is really on the mix of policy between the fiscal side and the
[52:44] SPEAKER_02: monetary policy side,
[52:46] SPEAKER_02: and what you can call the division of labor.
[52:48] SPEAKER_02: If we put the burden of having fiscal sustainability
[52:51] SPEAKER_02: on the gymnastics that the central bank can do and not necessarily what the fiscal
[52:55] SPEAKER_02: policy can do in terms of streamlining budgeting process to make sure we get value
[52:59] SPEAKER_02: in money and all that,
[53:00] SPEAKER_02: then probably we're going to be stuck here for long.
[53:02] SPEAKER_02: The second is really on the whole issue of early warning.
[53:04] SPEAKER_02: And that's something that I've been thinking about.
[53:07] SPEAKER_02: It appears that more of the debt sustainability analysis that comes out,
[53:11] SPEAKER_02: especially from the IMF and World Bank,
[53:13] SPEAKER_02: is not giving sufficient value warning.
[53:15] SPEAKER_02: It's like you're sustainable until you're not.
[53:17] SPEAKER_02: And that is something that I think we have to start looking critically as to
[53:20] SPEAKER_02: whether that can be complemented with the internal capacity to be able to pick
[53:25] SPEAKER_02: distress from afar.
[53:26] SPEAKER_02: I know the rating agencies come in,
[53:27] SPEAKER_02: but I think in my view is that they come in at the point where it's a bit late.
[53:32] SPEAKER_02: like now the downgrade.
[53:33] SPEAKER_02: It just came the other day where we are.
[53:35] SPEAKER_02: And finally,
[53:36] SPEAKER_02: I think the whole issue of moving the framework from a death ceiling to what you
[53:40] SPEAKER_02: can call an amino anchor.
[53:42] SPEAKER_02: The thought around it needs to be very clear whether it's still going to address the problems we have.
[53:45] SPEAKER_02: From a product policy perspective,
[53:47] SPEAKER_02: direction.
[53:47] SPEAKER_02: I think it makes sense,
[53:48] SPEAKER_02: but I think the need for details on how that will help is something that we really
[53:51] SPEAKER_02: need to think about because the reason why sometimes we don't get the revenues that
[53:55] SPEAKER_02: we anticipate is not because of anything other than the fact that we have
[53:59] SPEAKER_02: assumptions that are not correct,
[54:00] SPEAKER_02: especially assumptions around the way the economy will grow.
[54:02] SPEAKER_02: So if you get it wrong from that point of view,
[54:05] SPEAKER_02: then even having a nominal anchor around GDP is not going to work.
[54:07] SPEAKER_02: So I think some of those thoughts need to start filtering in right now that we have
[54:11] SPEAKER_02: this window to look through at what has happened and what's like up and going forward.
[54:15] SPEAKER_02: So those are really my closing thoughts.
[54:16] SPEAKER_01: Let's not waste this crisis and the difficulties that he does present.
[54:19] SPEAKER_01: So David.
[54:20] SPEAKER_01: Yeah.
[54:20] SPEAKER_03: Thanks very much.
[54:21] SPEAKER_03: I appreciate the openness of this question or giving me time at the end.
[54:25] SPEAKER_03: What I would say,
[54:26] SPEAKER_03: notwithstanding the downgrade yesterday,
[54:28] SPEAKER_03: is that ratings can and do change with fundamentals.
[54:32] SPEAKER_03: And were there an improvement in Kenya's fiscal situation and the liquidity situation,
[54:37] SPEAKER_03: ratings can move up.
[54:38] SPEAKER_03: You can look across to the western part of Africa,
[54:41] SPEAKER_03: Ivory Coast,
[54:41] SPEAKER_03: a country that looked where they were a decade ago.
[54:44] SPEAKER_03: Now they're rated BA2, being upgraded earlier this year.
[54:47] SPEAKER_03: With fiscal policy and policy in general in place,
[54:50] SPEAKER_03: that is consistent with sustaining the high growth that Kenya's economy has in
[54:54] SPEAKER_03: terms of potential.
[54:55] SPEAKER_03: And if it's consistent with an improvement in that trajectory,
[54:59] SPEAKER_03: from Woody's perspective,
[55:00] SPEAKER_03: the rating would improve over time.
[55:02] SPEAKER_02: Tom, yes, I would not go far from what the speakers have said, but there is no short-term fix for this.
[55:09] SPEAKER_02: We are already deep into the debt mess.
[55:12] SPEAKER_02: I think we are in serious debt distress, to my understanding.
[55:17] SPEAKER_02: And I want to say that however much Dickson would say that the debt that we are
[55:21] SPEAKER_02: seeing today is not odious.
[55:23] SPEAKER_02: I want to be clear to my fellow countrymen here that in my position or in our position,
[55:30] SPEAKER_02: it is odious because we can't see the value in the SGR project,
[55:35] SPEAKER_02: for example.
[55:37] SPEAKER_02: We can see value because the returns are not there.
[55:39] SPEAKER_02: In various projects that we were told we were borrowing for,
[55:42] SPEAKER_02: we don't see the returns and we can't really count that this,
[55:46] SPEAKER_02: we've done this with this debt.
[55:47] SPEAKER_02: So I would say that the first thing is a fix,
[55:51] SPEAKER_02: maybe a gradual process that we need to think about is on how we can spend within
[55:55] SPEAKER_02: our means.
[55:56] SPEAKER_02: Because we've seen what Modi is saying is that we have to reduce the fiscal deficit
[56:00] SPEAKER_02: for our credit rating to increase.
[56:03] SPEAKER_02: And I'll say that if our government or if our policymakers start thinking and the
[56:08] SPEAKER_02: technocrats of ways for us to spend within our means,
[56:12] SPEAKER_02: that would be one way to go.
[56:13] SPEAKER_02: I know it cannot be realized in the short term,
[56:16] SPEAKER_02: in one year,
[56:17] SPEAKER_02: because we saw the president talking about austerity measures.
[56:20] SPEAKER_02: And the next two days is saying that we are now going to borrow one more trillion to fund our budget.
[56:27] SPEAKER_02: So my parting shot is let us fix our expenditure and let us fix the leakages that
[56:35] SPEAKER_02: we have so that we can see on how we can reduce the fiscal deficit that we have,
[56:39] SPEAKER_02: because it is what is informing the kind of borrowing and the debt stock that we
[56:44] SPEAKER_01: are seeing.
[56:45] SPEAKER_01: Thank you.
[56:46] SPEAKER_01: Dixon Magetja,
[56:47] SPEAKER_01: you've got the closing words on this space for us and the ongoing conversation that
[56:50] SPEAKER_01: we're having on debt in less than a minute.
[56:52] SPEAKER_02: Okay.
[56:52] SPEAKER_02: To me, it looks incredulous that we don't have a balance of payment crisis.
[56:56] SPEAKER_02: Most of local credit debt is held by domestic holders,
[57:00] SPEAKER_02: which means that the interest paid is still paid back to the economy.
[57:03] SPEAKER_02: And ideally, we have very low inflation.
[57:05] SPEAKER_02: We have falling credit extension, so very low risk of inflation.
[57:09] SPEAKER_02: Ideally,
[57:09] SPEAKER_02: the fact that we are not using any monetary stimulus or yield control to anchor the
[57:14] SPEAKER_02: cost of that debt,
[57:15] SPEAKER_02: which is the genesis of most of the problems at this point in time,
[57:18] SPEAKER_02: given that we've,
[57:19] SPEAKER_02: on some level,
[57:20] SPEAKER_02: reduced the fiscal deficit from the 8.5% we were paying down to 5.6% last year.
[57:25] SPEAKER_02: And if you remove the extra cost we paid on the interest because of the higher yields,
[57:29] SPEAKER_02: that would have been close to 4.4%.
[57:31] SPEAKER_02: So if we were to anchor...
[57:33] SPEAKER_02: the cost of this interest on debt,
[57:35] SPEAKER_02: we could easily have the fiscal deficit stay below 4% for this particular year.
[57:39] SPEAKER_02: The fiscal anchors that Jared mentions are very important if you're going to go
[57:42] SPEAKER_02: down this path,
[57:43] SPEAKER_02: because ideally you don't want to open a flood gateway and then that is used
[57:47] SPEAKER_02: instead of using the central bank,
[57:48] SPEAKER_02: instead of using the fiscal tools that you need to measure.
[57:50] SPEAKER_02: But given that the imbalance in the market right now is coming from debt repayments,
[57:54] SPEAKER_02: from the fact that we've used domestic resources to pay foreign currency debt,
[57:57] SPEAKER_02: which have left the market short of liquidity,
[57:59] SPEAKER_02: which is why they're not buying paper.
[58:00] SPEAKER_02: I feel like there's a low-hanging fruit where you could just bridge that gap, have the market come back.
[58:06] SPEAKER_02: $300 billion that we need to borrow is such a small amount based on historical
[58:09] SPEAKER_02: amounts that central bankers have borrowed from domestic markets.
[58:12] SPEAKER_02: In the past, we borrowed up to $700 billion, $800 billion.
[58:14] SPEAKER_02: When balance sheet on the banks were much lower.
[58:16] SPEAKER_02: So the issue is not really the amount we want to borrow.
[58:18] SPEAKER_02: It's just that there is a sequencing issue right now because there's such a huge
[58:22] SPEAKER_02: gap in the reverse market.
[58:23] SPEAKER_02: People are then not willing to buy paper,
[58:24] SPEAKER_02: which then creates the fear that Unobi would finance or the yield curve would go higher,
[58:28] SPEAKER_02: which then makes bidding behavior too.
[58:30] SPEAKER_02: go higher and then that place negative feedback loop.
[58:32] SPEAKER_02: So I feel like if we bridge this liquidity issue and have the yield curve anchored
[58:37] SPEAKER_02: and then we move to efficient targeting and we use the cost of money to do that.
[58:40] SPEAKER_02: So if you say 13% is the correct policy rate,
[58:43] SPEAKER_02: why are we not prepared then to anchor the whole curve there?
[58:45] SPEAKER_02: And then we manage inflation if that manifests itself.
[58:48] SPEAKER_02: as opposed to sleepwalking into a default,
[58:51] SPEAKER_02: given the fact that you're saying you cannot lend your own currency.
[58:54] SPEAKER_02: So to me, I think that's an anomaly, and I think that is what we should do.
[58:57] SPEAKER_02: That would allow us to fund the government,
[58:59] SPEAKER_02: and if we fund the government,
[59:00] SPEAKER_02: we'll remove the crowding out issue,
[59:02] SPEAKER_02: commercial loan rates will come lower,
[59:03] SPEAKER_02: which then will boost revenues,
[59:05] SPEAKER_02: and then you have that feedback loop.
[59:06] SPEAKER_02: So to me, I think that's a low-hanging fruit.
[59:08] SPEAKER_02: If we did that, I think in a few months, we'd be out of this crisis.
[59:11] SPEAKER_01: Lots of food for thought there.
[59:12] SPEAKER_01: And in fact,
[59:13] SPEAKER_01: you've actually also answered some of the questions that we're getting in response
[59:16] SPEAKER_01: to the space that we're holding at the moment.
[59:18] SPEAKER_01: I'd like to say a big thank you to all my speakers today,
[59:20] SPEAKER_01: Dixon Mugecha,
[59:21] SPEAKER_01: Jared Osoro,
[59:21] SPEAKER_01: Tom Ogada,
[59:22] SPEAKER_01: and of course,
[59:22] SPEAKER_01: David Grobovich as well.
[59:24] SPEAKER_01: This conversation on figuring out where we find the headroom to fix our debt issues
[59:28] SPEAKER_01: in terms of both debt service and debt stock is by no means over.
[59:32] SPEAKER_01: And I'm sure we'll be having more conversations in the future.
[59:34] SPEAKER_01: It's not here yet.
[59:35] SPEAKER_01: on the Mango Capital spaces, certainly on the Twitter accounts that all our speakers have had here.
[59:40] SPEAKER_01: Thank you very much for your time and attention.

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