Kenya, Uganda and Tanzania are turning to financial markets to finance their budgets, including the sale of sovereign bonds, as the European debt crisis forces governments to slash spending and curtail aid to Africa.
The three East African nations will give details in their budgets tomorrow of how they plan to finance fiscal deficits in the year through June 2011 to help fund railways and power plants, and compensate for a slowdown in donor aid.
They are under pressure to lift investment to help sustain economic growth that is forecast by the African Development Bank at 6 percent in East Africa this year, the fastest of any region on the continent. Kenya and Tanzania are considering selling their first global bonds in the fiscal year beginning July 1, while Uganda may follow Kenya’s lead in issuing domestic infrastructure bonds.
“Donor aid is mostly on the decrease as donor countries find themselves in serious trouble,” said Ridle Markus, Africa strategist for Barclays Plc’s Absa Group Ltd. in Johannesburg. “We’ll be looking for how these East African countries can fund their budgets given fiscal pressures.”
Kenyan Finance Minister Uhuru Kenyatta and his Ugandan counterpart Syda Bbumba are scheduled to give their budget speeches at 2:30 p.m. local time, while Tanzania’s Mustafa Mkulo is due to speak at 4 p.m.
Age of Austerity
U.K. Prime Minister David Cameron is planning the deepest public-spending cuts since the 1980s to rein in a deficit that ballooned to more than 11 percent of gross domestic product in the year through March. Germany’s Chancellor Angela Merkel pledged on June 7 to trim 81.6 billion euros ($97.7 billion) in federal spending between 2011 and 2014. Greece, Spain, Portugal, Ireland and Italy have also announced austerity measures.
“We gradually want to get rid of the donor dependency syndrome,” Mkuloa said on June 2. The government plans to cut foreign loans and grants to about 25 percent of fiscal spending in the year through June 2011, from 39 percent this year, he said.
Uganda expects budget support grants and loans to drop to 790 billion shillings ($345 million) next fiscal year from 1.06 trillion this year, according to a draft budget issued on May 21.
Kenya, the biggest economy in the region, revived a plan this year to sell an international bond of $500 million to fund renewable energy projects. Tanzania also plans to raise the same amount in a Eurobond sale in 2010-11, Mkulo said on Jan. 28. Uganda’s central bank Governor Emmanuel Tumusiime-Mutebile has said the country is unlikely to sell bonds abroad.
“Deficits have crept up gradually and in Uganda and Tanzania there’s been a decline in donor aid,” David Cowan, a sub-Saharan Africa analyst at Citigroup Inc., said by phone from London yesterday. “A trend we’ll see in all three budgets is significant deficits and how they plan to finance that.”
Government debt levels are low enough to give the three countries room to seek external funding. Kenya’s government debt was 44.7 percent of GDP at the end of last year, Tanzania’s was 37.1 percent and Uganda’s was 22.2 percent, said Cowan.
“Kenya can still borrow to finance growth,” Nikhil Hira, head of tax at Deloitte LLP’s East Africa unit, said in an interview in Kenya’s capital, Nairobi, yesterday.
The European debt crisis, which has reduced investors’ appetite for riskier assets, may affect the timing of borrowing abroad. Kenya’s shilling dropped 5.3 percent against the dollar in the first five months of the year, Uganda’s currency plunged 14 percent and Tanzania’s shilling fell 7.4 percent.
Budget deficits in the three countries will probably reach between 4 percent and 5 percent of GDP in the year beginning July 1, said Cowan. Kenya’s shortfall probably climbed to 6.2 percent this year, Uganda’s reached 2.4 percent and Tanzania’s eased to 5.1 percent, according to estimates from the International Monetary Fund.
Expanding the electricity supply is a priority for all three countries. Tanzania, Africa’s fourth-biggest gold producer, needs $2 billion to help boost power capacity over the next five years, the Citizen reported on March 24, citing Energy Minister William Ngeleja. Only 14 percent of the population currently has access to electricity, according to the newspaper.
Kenya scheduled power cuts between Aug. 6 and Oct. 22 last year after low water levels at hydroelectric dams cut capacity to about 30 percent. The government plans to build power plants to generate 1,500 megawatts by 2019.
“Growth is picking up and will probably stay strong,” said Cowan. “But then you run into the electricity shortages again, which brings you back to the infrastructure story and the need to invest more. The budgets will concentrate on infrastructure spending and agriculture.”