World Bank turns to local market for cover from forex shocks

The International Finance Corporation (IFC) is joining a list of international development agencies resorting to country-specific fund-raising in place of borrowing.

IFC, the World Bank’s private sector lending arm, intends to raise Sh3 billion through a short-term note with a tenor of five years in its first local borrowing.

The move by IFC to issue a locally denominated instrument is interpreted by financial analysts as a part of a trend gaining ground where international agencies are tapping domestic markets to finance operations.

“The shift to local borrowing is driven by a combination of factors such as prevailing low interest rates, the elimination of exchange rate risks and deepening of the local capital market,” said Eric Musau, a research analyst at African Alliance.

However, the Sh3 billion bond is a climb down from the initial plan of Sh5 billion.

Other development financial institutions that have tapped the local capital market are the East African Development Bank (EADB), which has a fixed bond worth Sh800 million, the PTA Bank with two floating medium term notes of Sh800 million and Sh1 billion, and Shelter Afrique with two notes of floating rates and fixed medium term unsecured notes of Sh95 million and Sh904 million respectively.

According to Mr Musau, the preference for local borrowing is being driven by the low prevailing interest rates.

“The prevailing low rates are comparative to global rates and with the elimination of foreign exchange exposure by borrowing locally, the overall cost is lower,” said Mr Musau.

The bond offer — the third of its kind to be issued by the World Bank arm — is expected to raise cash for loaning to local private projects.

Robust growth

“The decision to borrow locally for onward lending is expected to result in affordable credit to the private sector as it passes over the benefit of the prevailing low interest rate regime,” said Einstein Kihanda, a fund manager with Sanlam Fund Management.

In addition, the decision to float the bond in the Kenyan capital market is seen as recognition of the growth of the local bond market and its potential to absorb the offer.

“The offer may have been revised to gauge the market appetite and ensure complete uptake,” said Mr Kihanda.

The bond offer comes at a time the fixed income market has experienced robust growth with both the government and corporate businesses tapping the market for working capital.

For instance, the government has issued an infrastructure bond of Sh31.6 billion. This is the third such bond in the recent past.

The private sector has also been active in issuing corporate bonds.

Some of the corporate bonds expected in the market include Sh10 billion by Housing Finance and Sh5 billion by National Housing Corporation (NHC).

Mr Kihanda says the recent capital easing in the money market through the various rights issues is likely to determine the outcome of the bond.

A number of companies have issued rights issue.

KCB Bank concluded its rights issue by raising Sh12.4 billion out of the targeted Sh15 billion.

Other firms such as TPS Serena and Standard Chartered Bank have rights issue of Sh1.2 billion and Sh1.5 billion respectively.

The flotation by the IFC is bound to create excitement among investors and point to viable investment opportunities in the region.

“There are enough projects in the region to generate healthy returns and it would be easier for the IFC to fund these ventures in local currency,” says Rogers Kinoti, fund manager at ICEA Asset Management.

Hot pick

Mr Kihanda says that due to the reputation of IFC, fund managers and institutional investors are expected to strongly pitch for the offer.

“The bond provides for further diversification with the reputation of the IFC and its backing from the World Bank affirming its creditworthiness in the eyes of investors, making it a hot pick for portfolios,” said Mr Kihanda.