Why timing is right for Kenya to issue another Eurobond

Currently, Kenya enjoys a good and stable rating of B+ on hard currency debt according to both Fitch and S&P. FILE PHOTO | NMG
Currently, Kenya enjoys a good and stable rating of B+ on hard currency debt according to both Fitch and S&P. FILE PHOTO | NMG 

Kenya’s total debt stood at Sh4.5 trillion as at September 2017, according to the National Treasury. This puts the total debt to GDP ratio at approximately 61 per cent, up significantly from 42.1 per cent in fiscal year 2012/13.

In that period, China has emerged as Kenya’s largest bilateral lender. Data shows that China was second to Japan as at June 2014 with total loans of $923 million versus Japan’s $964 million. This represented 27 per cent of total bilateral loans at the time.

As at September 2017, China’s loans to Kenya stood at $4.7 billion and now account for two-thirds of Kenya’s bilateral loans. This figure will definitely rise given the pipeline of infrastructure projects that will likely be financed and constructed by Chinese companies.

We estimate Kenya’s total debt to GDP at 70 per cent in 2020 in light of this. It is important to note that debt in itself is not bad. If well utilized, it can unlock economic growth. A case in point is China, whose debt to GDP ratio increased from 160 per cent in 2008 to 260 per cent in 2016, according to Bloomberg.

During this period, China used the debt to reinvigorate its manufacturing sector, strengthen its financial markets and accelerate urbanisation, a strategy that has positioned it competitively on the world stage and rattled US’s economic hegemony.

However, the economic impact of new infrastructure generally takes time to fully reflect on GDP and for the projects to breakeven. It is why the loans have moratoriums on principal.

According to China Aid Data, Kenya borrowed $3.23 billion from the Exim Bank of China, comprising of a $1.6bn 20 year concessional loan with a grace period of seven years and a $1.63 billionn 10-year commercial loan with a grace period of five years respectively.

Concerns on Kenya’s debt servicing ability were brought to the fore when the National Treasury sought an extension on the two- year $800 million syndicated loan which was maturing in October 2017. While some might have frowned at this, re-financing maturing debt is normal practice the world over.

There is no harm in a country taking advantage of its good rating to tap the international debt market. $750 million was borrowed from Trade and Development Bank to settle the syndicated loan and the terms are certainly better; an 8 year facility that is only 100bps pricier at LIBOR + 6.7 per cent. We expect the five -year $600m Eurobond set to mature in June 2019 to also be re-financed.

Currently, Kenya enjoys a good and stable rating of B+ on hard currency debt according to both Fitch and S&P. The yields on both existing issues are also very attractive with the five-year and 10-year yields down to 3.71 per cent and 5.7 per cent as of January 2018.

The papers were issued at par with coupons of 5.875 per cent and 6.875 per cent respectively.

In fact, Kenya is mulling another Eurobond issue in 2018. Roadshows in Europe and North America have been scheduled for mid-February.

The timing is opportune given the aforementioned favourable yields. Additionally, the need to borrow externally in the current fiscal year might be necessitated by a need to manage interest rates domestically. There is no doubt that the CBK faces an uphill task in meeting its domestic borrowing target.

It is behind on the run-rate having borrowed Sh94 billion currently against a target of Sh275 billion. And this figure always rises given the supplementary budget(s) passed every fiscal year.

Timothy Wambu is Head of Research at NIC Securities.