StanChart executive backs timing of Kenya’s Sh172bn Eurobond offer

A top executive of Standard Chartered Bank has backed the timing of Kenya’s Eurobond sale, saying the Treasury is likely to achieve its target of between $1.5 billion and $2 billion (Sh172 billion) despite global liquidity shortage caused by the cutback of the US economic stimulus plan.

StanChart head of research for Africa Razia Khan said in an interview Tuesday that Kenya’s economic growth pattern is set to attract investors to the Eurobond.

“Kenya has a history of more diversified growth. That is ultimately what will add to perception of Kenya’s credit strength and will lead to demand for the Eurobond, even if it is coming at a time when the QE (quantitative easing) is being tapered,” said Ms Khan.

StanChart is a major international lender that has previously given Kenyan State corporations huge syndicated loans, and Ms Khan’s statement is likely to be viewed as a significant endorsement of the Eurobond issue.

The IMF managing director Christine Lagarde also gave her backing for the issuance during a visit to the country last month.

The US Federal Reserve’s cutback of its $85 billion-a-month economic stimulus has diverted capital from developing markets as investors seek safe havens in developed countries which are returning to growth.

The Kenyan economy is projected to grow at between five and six per cent this year, and is one of the biggest non-resource based economies in Africa.

Ms Khan said Kenya has set itself apart from other African countries that have issued Eurobonds, given that most are either oil producers or single commodity producers, which leaves them susceptible to credit worthiness deterioration in case of commodity price shocks.

The planned Eurobond will partly go towards financing a Sh330 billion deficit in the national budget and infrastructure projects.

The issuance of Kenya’s sovereign bond is expected to be next month, with the arrangers likely to start selling it to investors in road shows beginning mid this month.

The Treasury has already appointed lead transaction advisers JP Morgan Chase and Arnold & Porter LLP, based in the US, as lead counsel for the Eurobond sale.

Ms Khan also pointed at the relatively low participation of foreign investors in Kenya’s debt market as a positive. She noted that this means the negative effects of the US Fed taper action will not be as keenly felt in Kenya as it is in other emerging and frontier markets where foreigners hold a higher portfolio of debt, an example close home being in South Africa.

The StanChart executive also pointed at expected higher foreign direct investment flows into the country as a result of the discovery of oil deposits and other minerals, keeping attractiveness of the region to investors high.

African countries that have tapped the international debt market in recent past include Nigeria and Ghana, which raised $1 billion each at a cost of 6.6 per cent and 7.8 per cent respectively last year. Rwanda also issued a $400 million bond priced at 6.8 per cent last year.

However, World Bank in a report titled ‘‘Global Economic Prospects 2014; Coping with Policy Normalisation in High-income Countries’’ said that Kenya faces the prospects of paying a higher price for the planned Eurobond due to the US Fed taper which cuts supply of cheap money.

Kenya’s bond market is also seen by Ms Khan as a likely beneficiary of a successful Eurobond issue, with less government appetite for local debt encouraging a more robust secondary bond trading market. She, therefore, sees a more favourable interest rate environment going forward.

Analysts in the local market have also pointed at the Eurobond as likely to push bank lending rates down as a result of reduced government appetite for local debt.

“We expect private sector credit growth to rise in 2014 following the issue of the Eurobond,” said Kestrel Capital in their 2014 Kenya macro-economic outlook.