Polls trigger rethink on Kenya's second sovereign bond

The National Treasury building in Nairobi. Kenya is reviewing its plans to take up the second foreign currency-denominated debt in less than three years. PHOTO | FILE 

By JAMES ANYANZWA

In Summary

• Kenya plans to borrow about $600 million from foreign lenders in the 2016/2017 fiscal year to finance its ballooning development budget and partly bridge its fiscal deficit.
• The failure by Nairobi to consolidate public finances and stabilise the public debt-to-GDP ratio and a marked deterioration in the political and security environment is undermining the country’s long-term growth performance and could trigger a “negative” rating.
• Kenya issued a sovereign bond worth $2 billion to finance its public infrastructure projects and at the same time enable local companies to borrow from foreign markets.
• The country’s opposition made claims that the was misused by key figures in government.

Kenya is reviewing its plans to take up the second foreign currency-denominated debt in less than three years in the face of political jitters linked to the 2017 general election.

There are fears that perceived political risk, exchange rate risk as a result of a strong dollar, and alleged misappropriation of the previous sovereign bond proceeds will make the proposed bond too expensive.

Kenya plans to borrow about $600 million from foreign lenders in the 2016/2017 fiscal year to finance its ballooning development budget and partly bridge its fiscal deficit (excluding grants) projected at $5.38 billion in the current financial year.

If successful, it will be the second time that the country has raised funds from the international capital markets in less than three years.

But, according to the rating agency Fitch, the failure by Nairobi to consolidate public finances and stabilise the public debt-to-GDP ratio and a marked deterioration in the political and security environment undermining the country’s long-term growth performance and could trigger a “negative” rating.

“Kenya’s general election is a year away, but there are signs of heightened political tensions,” said Fitch, adding that the country’s growing stock of foreign-currency denominated debt will make it more vulnerable to exchange rate shocks.

Interest rates — also termed as coupons or yields — for sovereign bonds vary according to the credit rating of the issuing country and the maturity of the bond.
Poorer ratings and longer maturities attract higher interest rates.

“I think our debt department is looking at that before we decide,” Geoffrey Mwau, director-general at the Budget, Fiscal and Economic Affairs Department in Kenya’s National Treasury told The EastAfrican, adding, “It depends on how the market develops. We may decide not to go to the market. Obviously, if the politics turns bad, it will be an issue, but so far so good. As far as I can see, there isn’t anything to worry about.”
Dr Mwau said the issuance of a sovereign bond is a process whose timing is important to ensure success.

According to the National Treasury, the country’s economy remains vulnerable to both domestic and external shocks, including drought, international commodity prices and uncertainty in the global economic and financial outlook.

“Kenya has been looking to borrow externally through the Eurobond market in the new fiscal year 2016/2017,” said Razia Khan, chief economist and head of African research at Standard Chartered Bank PLC.

“Any continuation of global market volatility will have implications for the price at which all sub-Saharan Africa sovereigns are able to borrow,” said Ms Khan.

In the last financial year (2015/2016) Kenya’s debt-to-GDP ratio stood at 43.7 per cent against a threshold of 54 per cent, implying the country still has room to take up more debt.

Kenya expects its debt-to-GDP ratio to fall to 42.6 per cent in the 2016/2017 financial year from the current 41.3 per cent.

According to a report by the Overseas Development Institute (ODI), a leading UK think tank, African sovereign bonds are trading at yields nearly 400 basis points higher than the developed markets. This is due to a built-in risk premium closer to levels last seen in the aftermath of the 2008-2009 financial crisis, when investors fled to the relative security of better-known issuers.

Foreign investor appetite for African sovereign bonds has been driven by the search for higher yield away from the exceptionally low interest rates in advanced countries.

Average yield

According to ODI, the average yield on sovereign bonds issued by African countries between 2009 and 2014 was 7.07 per cent with a maturity period of 10 years. The average yield on sovereign bonds issued by Angola stood at seven per cent; Ethiopia 6.5 per cent; Cote d’Ivoire 11.5 per cent; Gabon 6.5 per cent; Ghana 7.5 per cent; Mozambique eight per cent; Namibia 5.9 per cent; Nigeria 6.2 per cent; Rwanda seven per cent; Seychelles five per cent and Tanzania 6.2 per cent.

This year, South Africa issued a $1.25 billion 10-year global bond at a coupon rate of 4.9 per cent. Nigeria plans to borrow up to $5 billion this year to help close the gap between falling revenue ignited by the drop in oil prices and continuing high expenditure needs.

Last October, Ghana issued a $1 billion sovereign bond at a coupon rate of 10.75 per cent, which was partially guaranteed by the World Bank Group’s International Development Association.

In June 2014, Kenya issued a sovereign bond worth $2 billion to finance its public infrastructure projects and at the same time enable local companies to borrow from foreign markets.

The country’s opposition made claims that the was misused by key figures in government. However, the International Monetary Fund said the government accounted for the Eurobond money in the same manner that other countries do.

The bond was issued in two tranches of $500 million priced at 5.9 per cent and $1.5 billion priced at 6.9 per cent. Prior to 2009, issuance of sovereign bonds for sub-Saharan African countries had been negligible but this trend was reversed in 2008 when issues started to surge.

In 2010 to 2012 issues were moderate with between $1.5 billion and $2.5 billion being issued annually but by 2013 and 2014, issues exceeded $5.1 billion and $6.25 billion respectively.

The issues led to the stock of outstanding sovereign bonds in the region growing from less than $1 billion in 2008 to over $18 billion by 2014.