Moody’s asks Kenya to consider issuing diaspora bonds

Global rating agency Moody’s says it is time the Treasury considered sourcing funds to build roads, dams and other infrastructure from Kenyans in the diaspora through a debt instrument.

The agency’s report on African countries’ borrowing from the international market titled International Sovereign Issuance in Africa 2013-14: A Rating Agency Perspective says that Kenya should look at issuing a dedicated diaspora bond.

Kenya has in the past marketed infrastructure bonds to citizens living abroad but has not issued a bond targeting the community.

Analysts at the rating agency now say that diaspora flows should go beyond helping relatives pay fees and buy food and be channelled towards the country’s infrastructure.

“Remittances support domestic consumption and the emergence of a middle class, and could support government financing through diaspora bonds,” says the report.

“They are thus a potential source of longer-term financial resources for infrastructure, complementing remittance flows that typically support consumption or social expenditures.”

The report says African countries can attract as much as Sh569 billion annually for infrastructure development through the diaspora bonds.

Ethiopia has experimented and succeeded at issuing a diaspora bond for construction of the Grand Renaissance Dam, which was done in 2011. There are an estimated three million Ethiopians living abroad.

The African Development Bank notes that while the exact amount raised by the fixed income instrument is not known, the project is estimated to cost $4.8 billion.

Kenyans in the diaspora remitted $1.1 billion (Sh95 billion) in 2012, a 31 per cent increase from $891 million a year before. The Kenyan’s population is estimated at more than one million.

Moody’s, however, says that there is a risk in remittance flows slowing down as the economies of Europe and America struggle to recover. Combined, the two regions account for 76 per cent of remittances that flow to Kenya.

The latest data from the Central Bank of Kenya shows that the remittances dropped by 9.4 per cent in June to $99.8 million from $110.15 million in May. The regulator said that the drop was due to decreased inflows from North America.

Industry pundits, however, said that there was still room for the Treasury to borrow from Kenyans living and working abroad due to limited investment options they have.

“Kenyans in the diaspora still have substantial disposable income without avenues to spend, unlike their compatriots here who buy land and invest through their chamaas (investment clubs),” said Frontier Markets Fund Managers regional director (East, Central and Southern Africa) Irungu Nyakera.

Frontier Markets Fund Managers manages GuarantCo, a firm that guarantees infrastructure projects in Africa and Asia. Mr Nyakera said that the diaspora bonds can work but only if the Treasury conducts thorough research and marketing.

The Treasury in the meantime expects to issue Kenya’s first Eurobond probably in early 2014 but analysts had hoped the issue would have been done by the end of the year.

“We believe that this is a good strategy in that the government will be able to raise funds cheaply compared to the high interest rates prevailing in the domestic market,” said Old Mutual Securities in its outlook report for the second half of the year.

“This will also cushion against ‘crowding out effect’ the country would experience if they financed the amount locally.”

The Treasury said that it plans to raise between $1.5 billion and $2 billion whose proceeds would be used to fund infrastructure projects and pay off a $600 million loan borrowed from a consortium of banks in 2012.