Nairobi shrugged off a ratings downgrade and loss of access to
an IMF standby credit facility to raise a Sh202 billion ($2 billion)
bond that added impetus to recent concerns over the rate at which Kenya
is accumulating debt.
The Eurobond, the second in a
span of four years, will cost taxpayers a total of $3.2 billion (Sh323
billion) in interest payments during its lifetime of up to 30 years,
according to early calculations and the International Monetary Fund
(IMF) said Kenya needs a credible plan to tackle its fiscal deficit,
which is the main driver of borrowing.
At Sh323
billion, the interest payments, are equivalent to the cost of building
the Mombasa to Nairobi segment of the standard gauge railway, and is the
clearest indicator of the high cost of borrowing from the international
bond markets, which President Uhuru Kenyatta’s government has preferred
over concessional loans that carry lower interest rate and can be paid
on reducing balance terms.
Kenya pulled through its
borrowing from foreign financial markets despite last week’s credit
ratings downgrade by Moody’s. More bad news came on Tuesday, after the
International Monetary Fund said it had frozen Kenya’s access to a Sh150
billion ($1.5 billion) standby facility last June, after the parties
failed to agree on fiscal consolidation and delay in completing a
review.
The National Treasury said it had issued the bond in two Sh101
billion ($1 billion) tranches of 10 and 30 years, at a coupon of 7.25
per cent and 8.25 per cent respectively.
Interest on
the 30-year tranche amounts to Sh8.3 billion $82.5 million) a year, and
for the 10-year at Sh7.3 billion ($72.5 million), working out to a total
of $2.48 billion and $725 million respectively.
The taxpayers will also have to pay the lenders the principal of $2 billion at the dates of maturity in February 2028 and 2048.
The
value of the interest payments in shillings is also exposed to foreign
exchange risk, where fluctuations in exchange rate could push the cost
of the debt higher should the shilling weaken, or lower if the shilling
gains against the dollar.
Oversubscribed
The
new Eurobond issue was seven times oversubscribed, attracting bids
worth $14 billion (Sh1.4 trillion), which analysts say is an indicator
that international investors considered the pricing generous.
News
that the IMF had suspended Kenya’s access to a precautionary facility
of $1.5 billion (Sh152 billion) since last June would also have played
on investors’ minds as they priced their bids.
“These
Eurobonds were generously priced and priced to clear. Initial guidance
was substantively higher, which led me to believe the government was
seeking to sell $3 billion, but the rate was compressed and we sold $2
billion. The Moody’s downgrade and the IMF facility back and forth
probably pressured the price as well,” said Aly- Khan Satchu, an
independent analyst.
The interest cost, although spread over a long period, will
undoubtedly catch the eye given the recent concern over the cost of
Kenya’s debt.
Kenya is set to spend a record Sh1
trillion—equivalent to Sh54 out of every Sh100 collected in revenue—
servicing debt in the 2018/19 fiscal year, up from Sh658.2 billion in
the current fiscal year and Sh435.7 billion in 2016/17.
The amounts cover both principal maturities and interest payments.
The
Eurobond, which is listed on the London Stock Exchange (LSE), was
arranged by Citi, JP Morgan, Standard Bank of South Africa and Standard
Chartered.
Second issue
It
is Kenya’s second such issue, the maiden one having been the $2.75
billion issued in 2014 in two tranches of five ($750 million) and
10-years ($2 billion).
Attention will now turn to
Treasury secretary Henry Rotich to give finer details of how the
government intends to spend the proceeds of the bond.
President
Kenyatta, on Twitter, promised to ensure prudent, transparent and
efficient utilisation and management of the proceeds to enhance the
social and economic welfare of Kenyans.
The last
Eurobond issue in 2014 raised political noise after the opposition Cord
coalition alleged that the proceeds had been misused, a claim the
Treasury dismissed even though it was unable to provide exact details of
how respective ministries used their share of the money.
The
Treasury said in a statement that the proceeds of this year’s Eurobond
will go towards development spending, although it had indicated that a
portion of it would to retiring maturing foreign debt.
“The
funds will be applied towards the government’s development initiatives
and liability management. We will continue to invest in the
infrastructure and capacity to roll out these programmes,” the statement
said.
Part of the debt likely to be retired by the
proceeds of the 2018 Eurobond is the $750 million tranche of the 2014
issue, which matures in June next year.
In the present
however, the new Sh202 billion loan will push Kenya’s total public debt
up by at least 4.4 per cent, to Sh4.84 trillion from the current Sh4.64
trillion.
The rising level of debt has raised concern,
especially over its effect on Kenya’s struggles to bring down her budget
deficit, which currently stands at 8.9 per cent.
Kenya’s public debt has more than doubled in the last five years, having stood at Sh1.77 trillion in February 2013.
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