Kenya, Zambia face bonds refinancing risks as funding conditions tighten

Frontier market governments in Africa with international bonds due over the next two years may struggle to pay as the bonds are coming due in a tighter refinancing environment, Moody’s Investors Service has noted. International bond issuance by frontier market sovereigns has increased substantially over the past decade, especially in Africa where governments have resorted to external borrowing to fund infrastructural projects and more recently to pay off existing debts and wages.

According to the ratings agency, Kenya, which has international bonds of $750 million and a coupon rate of 5.875 percent maturing in June 2019 and another one in 2020, will prove the most exposed to more costly debt financing.

Kenya is already struggling in a debt cycle that would see the country repay some of its debt with new loans. Earlier in the year, local news platform Business Daily reported the country’s Treasury to have made this known. “Kenya expects that part of the proceeds of the Notes (Eurobond) will be applied to repay all amounts outstanding under the 2015 loan facility and that part of the proceeds may be applied to repay a portion of the amount outstanding under the 2017 syndicated loans and manage the maturity profile of the government’s debt,” the Treasury said. Part of a 10-year $750 million loan the country took from East and South Africa Trade Development Bank (TDB) was used to refinance a maturing 2015 syndicated loan. This tight fix may not end soon.

Moody’s says that if the tighter financing conditions are pronounced and sustained, such a situation would weaken the debt affordability for these countries, and raise their debt burden, especially if local currencies depreciate. Luckily for Kenya, the shilling has steadied against the dollar in recent times.


Moody’s analysis is contained in its just-released report titled “Sovereigns — Frontier markets: Maturing international bonds contribute to exposure to financing risks.” The report reviewed international bond issuance from frontier market governments, defined as governments with a rating of Ba1 or lower and relying on concessional financing for more than 40 percent of their external financing needs. The report covered 40 governments that met this criteria.

Moody’s explains that over the last decade, abundant global liquidity has favoured an increase in international bond issuance by frontier market governments, with about $4 billion of frontier market international sovereign bonds maturing each year from 2019 through 2021.

The ratings agency adds that from 2022-30, refinancing needs will rise to around $7-$9 billion a year, driven by sub-Saharan Africa governments.

For some frontier market sovereigns, international bonds now account for a sizeable share of economy-wide external debt and total government debt. Sharp and sustained rises in financing costs would therefore hurt the credit profiles of these countries. Kenya, for example the National Treasury reports that as at March 2018, more than half ($24.9 billion) of the country’s total public debt came from outside the country, up from $21.6 billion a year before.

Similarly, the Zambian government earlier in the year disclosed external liabilities of $8.7 billion, which analysts say might even be more.

Zambia face high bond refinancing after 2020, and demonstrate limited track records on measures to mitigate refinancing risks. According to Moody’s from 2021-30 particularly, Zambia has a high value of international bonds maturing in relation to its current foreign exchange reserves, and unless these reserves rise markedly, these sovereigns will face significant external refinancing challenges. As at June, Zambia had foreign exchange reserves of $1.8 billion dollars.

However, planned reforms in the southern African country that support fiscal consolidation and reduce external vulnerabilities provide some scope to manage debt obligations, but weak policy effectiveness points to significant institutional hurdles.

Also published on Medium.