Kenya is weighing the possibility of returning to the international debt market without the International Monetary Fund’s vote of confidence, opening up the country to paying a higher risk premium for the planned $2.5 billion Eurobond.
Central Bank Governor Patrick Njoroge last week said Nairobi was not desperate to renew a $1.5 billion IMF precautionary facility even as the government struggles to raise money to meet its maturing debt obligations, including the $750 million needed to pay part of the initial Eurobond in June this year.
The IMF facility expired in September last year after the Kenyan government failed to meet key conditions, including a repeal of the interest rate cap and imposition of 16 per cent value added tax on petroleum products.
African countries with running IMF-funded programmes usually benefit from discounted yields on their Eurobonds because foreign lenders tend to view such programmes as a vote of confidence in such economies.
South Africa’s Standard Bank has warned in a recent market report that Kenya’s failure to secure an IMF-funded programme will see the market attach a premium to its sovereign bond issue.
“Even though the Kenyan government only completed the first review of the IMF Standby programme and did not complete any of the subsequent ones, the market continued to treat Kenya as if its performance was in line with the programme. That seems to have changed after the government failed to secure a repeal of the interest rate capping law,” the Standard Bank report says.
Last week, Cote d'Ivoire cancelled plans to issue Eurobonds this year, citing turbulence in the international financial markets, including the trade dispute between China and the US.
It argued that investors have more recently demanded higher rates on African sovereign bonds, while the ongoing trade war between the world’s largest economies has led to a drop in appetite for risk assets.
China’s slowdown and trade dispute with the US, coupled with continued uncertainty over Britain’s exit from the European Union are dragging back the global economy.
Cote d'Ivoire had planned to sell at least $2 billion in Eurobonds this year but Prime Minister Amadou Gon Coulibaly said conditions on the international financial markets were not favourable.
Instead, he said, the country would raise $1.5 billion from the regional market and $856 million through direct loans from international banks.
The average yield on dollar bonds of African countries is estimated to have risen by more than 160 basis points in January 2019 since issuance in March 2018.
Kenya has quietly gone slow on the issuance of its third Eurobond over uncertainties in global financial markets and its protracted negotiations with the IMF over the suspended $1.5 billion precautionary facility.
The government is however in desperate need of money to pay off other maturing debt obligations, including a $750 million Eurobond priced at 5.875 per cent that is due for payment in June.
Economists argue that Kenya could secure a better deal for the planned sovereign debt if it goes to the market with a running IMF standby programme as this would boost investor confidence in the country.
On the homefront, increased reports of mega scandals including the alleged loss of Ksh21 billion ($210 million) in irregular payments for dam construction tenders are also sending negative signals to foreign lenders.
Two weeks ago, 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.
Accra 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 coupon of 7.25 per cent and 30 years at a coupon rate of 8.25 per cent.
In 2014 Kenya issued a $2.75 billion sovereign bond, with a $750 million five-year segment paying interest of 5.875 per cent and a $2billion 10-year bond with a yield of 6.875 per cent.