Kenya attractive investment destination as evidenced by foreign investments at the NSE. file photo | nmg
The basic tenet of public finance as advanced in economic
development theory is the fundamental role that government plays through
its revenue and expenditure policy decisions to improve the welfare of
its citizens.
Kenya set its development agenda in 2008
through its economic blueprint, Vision 2030, whose implementation has
been through five-year Medium Term Plans (MTPs), with the country
preparing to transition into the third Medium Term Plan (2018-2023).
Inadequate
funding for infrastructural projects remains a key challenge as demands
continue to expand in line with the country’s goal of becoming a
middle-income country, further propelled by the demands of a devolved
system of governance.
Despite this, Kenya remains an
attractive investment destination as evidenced by foreign investments
which have been dominating equity trading at the Nairobi Securities
Exchange as well as oversubscription in the two Eurobonds floated by the
Government in the recent past.
Complementarily, the country has enjoyed increased diaspora
remittances over the years with $1.95 billion (Sh195bn) collected in
2017, confirming capital availability for project financing.
These
factors provide an opportunity for the use of sophisticated capital
markets regulated products such as Global Depositary Receipts and Notes
(GDR/Ns) to redirect affordable capital to Kenya’s economy.
GDR/Ns
can be described as negotiable financial instruments issued in one
country and representing an interest in an underlying security or debt
issued and listed in another country.
GDNs should not
only be perceived as a private sector instrument but could equally be
adopted by government institutions, county and national government in
raising capital to meet their respective development budgets, including
the latter’s focus on the Big Four agenda.
Thus,
like other asset classes such as bonds where we have both Government
and corporate bonds, depositary notes can equally be issued by
government entities.
The Irish Stock Exchange (ISE)
presented a successful case study of the first ever Global Depositary
Note (GDN) admitted on a European Exchange market, regulated by the
Mexican financial regulator in February 2012.
The GDN
was in the form of a $70 million denominated GDN issued by Citibank. The
issuance related to an offering by Pemex (a decentralised Public Entity
of the Federal Government of the United Mexican States) of $ 70
million, 7.65 per cent Mexican Peso debt due in the year 2021, being
admitted to the ISE’s Global Exchange Market (GEM).
The
listing expanded the investor base to include pension funds and was a
hit with investors as it was oversubscribed one and a half times.
The
success was partially attributable to Pemex’s good standing with the US
Securities and Exchange Commission through its approved securities and
the Luxembourg Stock Exchange through a Medium Term Note programme
respectively.
I will illustrate the use of depositary
notes by Government through the implementation roadmap of Lapsset. Key
components of the project include the development of the Lamu port,
highways, oil pipelines, railway, international airports, resort cities
and a high grand falls dam respectively estimated to cost $19 Billion.
The
Central Bank of Kenya, as an agent of the National Treasury could issue
a local bond aimed at financing some of its components.
Once
listed on the NSE, a depositary note representing the debt instrument
and evidencing ownership of the local currency-denominated debt security
could then be listed as a level 2 or level 3 American Depositary Note
on other exchanges, for example the New York Stock Exchange and others.
As
a consequence, foreign investors and the diaspora community will be
able to purchase the notes using their respective currencies.
Additionally, they will buy the instruments using their local Central
Depository System accounts hence no need to establish custody
arrangements for foreign holdings.
The outcome?
Creation of opportunities for both patriotic Kenyans living abroad and
foreign investors to contribute towards the development of Kenya.
Besides
providing access to foreign capital by the Government, Depositary Notes
also offer the government an opportunity to trade its instruments in
global exchanges without incurring the foreign exchange risk associated
with an international foreign currency issue like a Eurobond.
A GDN programme further positions Kenya strategically in new markets.
These
are strategic instruments that should be tapped for use by government
and State-owned enterprises as they are less costly when compared to
bilateral and commercial loans.
Anne Nalo is Product development officer, Capital Markets Authority.
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