Opinion and Analysis
The Treasury: Analysts say demand for Kenya’s Eurobond reflects abundant liquidity in global financial market. Photo/FILE
By George Bodo
In Summary
- Despite the fact that investors may continue their bullishness on Kenya’s long term fundamentals, there are still underlying risks mainly from structural weaknesses that will need to be addressed for the country to continue enjoying such low US dollar borrowing rates.
Kenya has just successfully tapped into the
international debt markets. The country’s debut Eurobond secured bids
worth $8.8 billion (Sh770 billion) a record level for Africa, and will
accept $2 billion.
The bond was issued in two tranches; 2019 tranche which
attracted bids worth $2.5 billion and the 2024 tranche which attracted
bids worth $5.5 billion.
The Government will accept $500 million for the
2019 tranche at a cost of 5.875 per cent per annum and another $1.5
billion for the 2024 tranche at a cost of 6.875 per cent annually.
The low Eurobond valuations have beat market
expectations especially given that pre-issue consensus largely predicted
costs to hover in the region of eight per cent.
But most importantly, this is a measure of
confidence in the country’s long term economic outlook. Already, the
Government projects a nine per cent compounded annual growth rate in
Gross Domestic Product (GDP) in the three year period between 2014 and
2017.
It also cements the country’s position as the
economic hub of the larger East, Central and Southern Africa region; in
fact, the expected GDP rebasing will likely make Kenya the third largest
economy in sub-Saharan Africa, behind Nigeria and South Africa.
But most importantly, it is a sign that investors
are likely to continue looking at the country’s growing insecurity
problems as more of short term risks and not likely to negatively impact
long term fundamentals. And this is further evident in the stock market
where foreign investor activities continue to remain strong.
For the period between January and May 2014,
foreign investor participation levels rose to 51 per cent on average
terms, compared to 46 per cent in a similar period of 2013. There has
been growing insecurity since the year began with the worst case being
the killing of at least 50 people when unknown militants attacked
people, hotels and a police station in Mpeketoni, near Lamu.
The biggest concern has been centred on possible
investor flight out of Kenyan assets. But that may not be the case given
the performance of the Eurobond and the stock market.
However, despite the fact that investors may
continue their bullishness on Kenya’s long term fundamentals, there are
still underlying risks mainly from structural weaknesses that will need
to be addressed for the country to continue enjoying such low US dollar
borrowing rates.
First is fiscal indiscipline; as it is, the
government’s overall expenditures are projected at Sh1.58 trillion (or
34.1 per cent of GDP) in the coming financial year 2014/15, up from
Sh1.47 trillion (or 35.3 per cent of GDP) in the current financial year
2013/14.
Additionally, the government aims to lower
recurrent expenditure to 18.7 per cent of GDP from 20.4 billion per cent
in the previous year. However, with the experience of 2013/14, this
will not be the case and recurrent expenditure will likely take centre
stage and account for a lion’s share of total revenues.
Secondly, a significant portion of the Kenya’s
economy remains unrecorded and hence not captured into the tax system.
In 2012, the Kenya National Bureau of Statistics estimated that
approximately 82.5 per cent of employment was in the informal sector.
In one of the Eurobond pitch documents, the
Treasury stated, as a key risk, that the informal economy is not
recorded and is only partially taxed, resulting in a lack of revenue for
the government, ineffective regulation, unreliability of statistical
information (including the understatement of GDP and the contribution to
GDP of various sectors) and inability to monitor or otherwise regulate a
large portion of the economy.
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