Debt is Not Just Debt. The Context of Kenya's Debt Crisis.

Good times bring better times and bad times bring worse times. Unfortunately for Kenya, the debt crisis is pushing good times towards the rearview mirror and, absent serious and urgent reforms, Kenya would move from a debt-distressed country to a debt-destroyed country. For starters, Kenya’s debt-to-GDP ratio is about ~68%, which for many countries would be considered sustainable or even good, but this is not Kenya’s story. Let’s use Japan for comparison and only as a means of explaining why Kenya’s debt pain stings much harder. Assuming Japan and Kenya were similar-sized economies, Kenya would be several times better than Japan, which currently has a debt-to-GDP ratio of about ~226% according to the IMF. Let’s explore why Japan at that rate, which I would hesitate to call sustainable, is by far more trusted than Kenya, and while the first letters of these countries’ alphabets follow each other, that is the farthest they follow each other. Credit markets and much of the financial and investment world make decisions by weighing risk against return. One may make a strong case for the fact that risk is often subjective, and even elaborate models rely on assumptions that cannot be accurately measured. As one commentator noted, Moody’s can be moody when determining the credit rating of a country. However, moody or not, Kenya’s credit rating was recently upgraded to B3 from Caa1, while Japan's credit rating is A1, several gaps apart as shown in the following scale. One could describe Kenya’s credit rating as the best among the worst. Moody’s rating scale: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. Whatever these letters and numbers mean or why they were chosen is of little importance, but they are the weapon that credit markets use to punish poorer countries. It is an irony that the countries in most need end up paying the biggest costs, but that is unlikely to change until the world finds a better formula. This marginal cost is several-fold higher in Kenya than Japan, and as of the writing of this piece, Japan’s 10-year bond yield is 2.257% versus Kenya’s 12.570%, a difference of just over 10%. To put it in perspective, if Kenya borrows $10B it pays $1.2B, while Japan pays $0.2B and can use the extra $1B to serve her people. The cost of borrowing is one part of the story; where you borrow matters too. More than 88% of Japanese debt is owed to its citizens, meaning it is borrowed in the local currency. Comparatively, Kenya’s domestic debt is about 54%. While this is a great improvement from the late 1990s, when most of the debt came from the IMF and the World Bank, it is still far from what is ideal given Kenya’s economic reality. With foreign-denominated loans, Kenya is significantly exposed to foreign exchange risk, where if its currency depreciates or the loan currency appreciates, the real value of its debt could increase substantially. Additionally, Japan will survive a rainy day far better than Kenya in that, when all goes wrong, it can simply print more money and inflate its debt away. While that is not a scenario to wish for, it is far better than lacking options. The trend may be slowly reversing, but Kenya has far more registered voters than taxpayers, which in itself is typical of a number of low- and middle-income countries, but also speaks to the difficulties these countries face. Kenya has grown its tax base about four times from where it was in 2012, but there is much more room for improvement. One limitation poverty imposes on a country is that it has the biggest incentive or temptation to raise taxes, yet few people from whom to tax the little they make. Japan is a high-income country with wealthy citizens, many of whom participate in the tax system; Kenya, on the other hand, has little legroom. Any additional taxes are met with heavy pushback. Kenyans have grown very resentful against tax increases, and one of the most significant upheavals in recent years was triggered by a finance bill that called for additional taxes. This goes to another part of this dilemma: as a lower-income country, Kenya desperately needs more money, taxing more is barely an option, and debt only exacerbates issues. Given the above-mentioned problems, Kenya’s institutions are far from well equipped to bring the stability, credibility, and trust needed for investment and growth. Corruption runs rampant, and accountability remains a word in a dictionary, if not one of the promises of a heaven to come. Given tough economic conditions, politics quickly turns populist in nature and divisive, always finding someone to blame. Solutions and political will become rare, and the result is a normalization of the abnormal. This provides an unattractive environment for investment and more reason why Moody’s will grow even more moody. Japan, by comparison, has stronger institutions that breed trust, stability, and strength. Finally, Japan is a savings surplus country. According to World Bank data, as of 2024 Japan’s current account balance was $194B while Kenya’s was -$1.5B. In other words, Kenya spends more than it earns while Japan earns more than it spends. Given Japan is a savings surplus country, its economy makes more than needed, availing more money that the government can borrow locally at lower interest. The demand for its debt is high, which is good from a borrower perspective. Kenya, on the other hand, spends more than it earns, which means it borrows to survive. It is not all gloom for Kenya. Significant strides have been made over the years, and the Kenya of today is more stable, with highly competent professionals, a youthful population with entrepreneurial, tech-savvy youth who are working to improve their country. While challenges persist and unemployment remains elevated, this discussion in itself is a testament to the fact that every day Kenyans are dreaming and working towards what is possible. The debt problem in Kenya, while unsustainable if maintained, can be solved. It will take fiscal discipline, political will, and jealous safeguarding of the gains made democratically and at the institutional level, while making more and bigger steps toward the promise of a better tomorrow.