Special bond money to go into roads, energy and water

The investment climate in Kenya is set to improve drastically following a flotation of an infrastructure bond recently.

The first of its kind, the bond is worth Ksh31.6 billion ($405 million) and is expected to be invested in energy, water and roads in the current financial year.

Despite fears that the market could fail to absorb such a huge amount of money, it was oversubscribed by over 18 per cent — a clear signal that there is still a huge demand for fixed income even with the small returns.

According to the Central Bank of Kenya, 19.2 per cent of the proceeds will be used to fund roads projects, 54.26 per cent will be invested in energy and the rest in water, sewerage and irrigation.

Experts say the move will see Kenya’s business climate improve significantly, especially at such a time when the country has adopted a new constitution that seeks to check perennial problems of political instability.
“With a new constitution in place, the work ahead for Kenya is to invest heavily in business-friendly policies to spur growth and enhance the country’s competitiveness,” said Prof Michael Chege, an adviser at Treasury.

Prof Chege says with the ongoing infrastructure development, accelerated growth is likely to be achieved as exports, which have been on a declining trend, will shoot up.

The nine-year infrastructure bond received 781 bids worth $479 million against the $405 million on offer.

According to the CBK, the weighted average for the successful bids was 7.293 per cent and overall bids 7.737 per cent, favourably comparable to other interest rates in the market. This lies between the lowest 5.75 per cent and highest 13 per cent of the bids in the market.

Most banks split bids quite intensively and stagger them in the range of six per cent to 11.25 per cent. It is only through the availability of long-term finance that interest rates will respond to investment opportunities and the development challenges of this country,” Prof Ndung’u says.

The government has managed to raise a total of $705 million from the first three bonds issued to date.

The first, amounting to $253 million, was issued early last year, and the second bond of $241 million in December 2009 and the third one worth $217 million was issued in March this year.

World Bank statistics put this year’s growth at four per cent up from last year’s 2.6 per cent in 2009.

This has been pegged on strong rains experienced early in the year. However, the Washington-based institution says the recovery could be faster if the country invested more in its infrastructure.

The bank argues that the country’s infrastructure deficit is constraining exports, posing a great challenge to economic growth.

While the export of goods have shown mixed results, services exports have increased from eight per cent in 2000 to 12 per cent of the gross domestic product in 2009.