Moody’s Investors Service managing director Jacques Eis (left) and Nairobi Securities Exchange chief executive Peter Mwangi during the East African Credit RiskConference at the Stanley Hotel in Nairobi on June 26, 2013. Photo/Salaton Njau
What you need to know:
Announcement by the US Federal Reserve that it would end cash injections it has been using to stimulate the American economy had triggered a rise in bond yields since investors are preparing for a liquidity crunch.
The state of the government’s finances and the country’s risk profile are other factors that will be factored in the pricing of the sovereign bond.
Kenya’s debut sovereign bond may be priced higher than what was originally planned due to rising cost of issuing debt globally.
International credit rating agency Moody’s Wednesday said the announcement by the US Federal Reserve that it would end cash injections it has been using to stimulate the American economy had triggered a rise in bond yields since investors are preparing for a liquidity crunch.
“Conditions are less favourable because of the market turbulence after the Fed’s announcement, which has led to a rise in bond yields,” said Moody’s senior vice president Kristin Lindow at a presentation in Nairobi.
The Federal Reserve has announced a likely cutback of its aggressive purchase of treasury bonds citing signs that the world’s largest economy is recovering.
The massive stimulus has been keeping interest rates at historic lows, but the announcement has triggered a rise in bond prices and depressed stock markets. A weekly fixed income report by Old Mutual Securities (OMS) echoed Moody’s position.
“Anticipation that the Fed would slow, and eventually end, its bond purchases had the effect of depressing stock markets, pushing the US dollar higher and raising bond yields,” said a weekly fixed income report by OMS.
“As anticipated, if US bonds become more competitive we may see a reduced foreign uptake of the government papers, which may result in high interest rates in the market,” added the OMS report.
Moody’s analysts, however, did not give an indication of the likely increase in issuance costs.
Preparations for issuance of Kenya’s debut sovereign bond took a decisive turn on Tuesday with Treasury’s invite for international bids from deal makers to advise the government on its maiden bond for the international market.
Moody’s hinted that it is unlikely the Kenya bond would fetch the same price as Rwanda’s $400 million bond, the region’s first, which has a 6.875 per cent. Rwanda issued the debt mainly to finance its infrastructure.
“It might not get as good terms as what Rwanda got,” said Moody’s assistant vice president sovereign group Ed Al-Hussainy.
Kenya is seeking to raise $1 billion (Sh85 billion) to partly plug a Sh329 million budget deficit and refinance a $600 million syndicated loan borrowed in 2012.
The state of the government’s finances and the country’s risk profile are other factors that will be factored in the pricing of the sovereign bond.
Mr Al-Hussainy said that demand from county governments may strain the budget, which is a perceived risk going forward.
Other rating agencies have said that Kenya’s debt levels are high for a country with a stable outlook.
Fitch Ratings, which has assigned Kenya a B+ or stable outlook, says government debt is high compared to peers who have the same rating.
Fitch had earlier said that public debt, at 43 per cent of the GDP, is above the ‘B’ group median of 38 per cent.
Moody’s, however, said demand for sub-Saharan debt issues promises strong subscription of the bond though not at the desired price. Ms Lindow of Moody’s said European and American funds that are diversifying their holdings are choosing to add sub-Saharan sovereign bonds to their portfolios, which will augur well for the Treasury.
Going forward, the mineral, oil and ICT sectors, in addition to the recovery of tourism industry, are factors that are expected to boost Kenya’s credit outlook.
