Kenya goes slow on quest for sovereign debt amid high fees on global markets

Monday March 25 2019

The National Treasury of Kenya is reviewing the timing of the third Eurobond to avoid taking up more expensive debt. PHOTO FILE | NATION


Kenya’s plan to take a third Eurobond in the first quarter of this year seems to be in limbo as the country grapples with persistent turbulence in the global financial markets and protracted negotiations with the International Monetary Fund for reinstatement of a $1.5 billion standby facility.

Kenya’s Treasury Cabinet Secretary Henry Rotich last year said plans were underway to take a third Eurobond in the first quarter of this year, but that looks unlikely with less than 10 days to the end of March.

It has not helped that the IMF last year downgraded Kenya’s debt distress rating from low to moderate, causing investors to demand higher yields on Nairobi’s new debt.

Economists reckon that Kenya could secure a better deal on the planned sovereign debt with a loosening of global financial conditions and restoration of the suspended IMF standby facility.

“We expect global financial conditions to tighten causing investors to price risks differently. Investors have started demanding higher premiums and the borrowing countries reforms will be key to credit assessment,” said Standard Chartered Bank’s chief economist in-charge of Africa and the Middle East, Razia Khan.

“Most sub-Saharan countries are now seeking IMF programmes to boost investor confidence and their credibility.”


IMF facility

The IMF precautionary facility makes available funds to protect Kenya’s economy from exogenous shocks, besides serving as an assurance to investors in the country’s financial assets.

The National Treasury is now reviewing the timing of the bond to avoid taking up more expensive debt.

Mr Rotich and Principal Secretary Kamau Thugge did not respond to calls and text messages on the Eurobond.

Domestically, increased reports of mega scandals in government, including the latest Ksh21 billion ($210 million) irregular dam construction tenders involving senior Treasury officials, are also seen to be sending negative signals to foreign financial markets.

“The market environment is not favourable, especially after the reclassification of external debt distress to moderate due to increasing refinancing risks,” said analysts at investments management firm Cytonn. “Investors would require higher yields to match the risk profile.”

Cytonn added that the US Federal Reserve’s aggressive tightening of monetary policy regime has exacerbated the rise in yields causing most foreign investors to continue pulling their capital out of frontier markets in the wake of rising US Treasury yields and a strong dollar.

Debt pressure

A delay in taking a third Eurobond is expected to intensify public debt pressure on Kenya, which urgently needs money to pay off maturing debt obligations, including a $750 million Eurobond priced at 5.875 per cent, which is due for payment in June.

A tightening of conditions in foreign markets, coupled with the simmering trade tensions between the US and China have seen investors impose higher premium on risky assets in emerging economies such as Kenya, pointing to the reason Nairobi may be recalibrating its journey to the international debt market.

Last week, Ghana issued a $1 billion sovereign bond priced at 8.95 per cent maturing in 2051, and another one valued at $1.25 billion, priced at 8.125 per cent maturing in 2032.

The country also issued another international bond worth $750 million with a coupon rate of 7.875 per cent maturing in 2027.

Kenya in February last year issued a $2 billion Eurobond in two equal tranches of 10 years at a rate of 7.25 per cent and 30 years at a coupon of 8.25 per cent.

In 2014, Nairobi issued a $2.75 billion sovereign bond, divided into a $750 million five-year bond paying interest of 5.875 per cent and a $2 billion 10-year bond with a yield of 6.875 per cent.

Bloomberg’s African bonds report shows that most African countries have borrowed at an average yield of 8.1 per cent this year, more than any other emerging economic region.

Kenya’s two–year standby facility programme with the IMF expired on September 14 last year but the Fund suspended its renewal after Nairobi failed to meet key conditions, including the scrapping of legal caps on interest rate and imposition of 16 per cent value added tax on petroleum products.

Kenya imposed the 16 per cent levy on fuel was forced to cut that to eight per cent in the wake of massive public resistance.

Parliament knocked down the Treasury’s attempt to repeal the interest rate capping law, leaving the government exposed in its negotiations with the IMF.

Kenya’s High Court recently weeks ruled that the provisions of the Banking (Amendment) Act 2016 which introduced the caps were unconstitutional and gave the National Assembly 12 months to review the legislation.

The Consumer Federation of Kenya has appealed this ruling.

African countries have increased their appetite for foreign debt largely to finance heavy infrastructure developments including modern railway lines and ports.

It is estimated that Africa has the highest Eurobond yields in the world approximated at six per cent compared with South and Central America (5.6 per cent), Central Asia (5.4 per cent), Middle East (5.1 per cent), Eastern Europe (4.7 per cent), North America (4.5 per cent) and Asia pacific (four per cent).