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Ideas & Debate

Depositary notes as capital raising tool for the government

Kenya attractive investment destination as evidenced by foreign investments at the NSE. file photo | nmg
Kenya attractive investment destination as evidenced by foreign investments at the NSE. file photo | nmg 

The basic tenet of public finance as advanced in economic development theory is the fundamental role that government plays through its revenue and expenditure policy decisions to improve the welfare of its citizens.

Kenya set its development agenda in 2008 through its economic blueprint, Vision 2030, whose implementation has been through five-year Medium Term Plans (MTPs), with the country preparing to transition into the third Medium Term Plan (2018-2023).

Inadequate funding for infrastructural projects remains a key challenge as demands continue to expand in line with the country’s goal of becoming a middle-income country, further propelled by the demands of a devolved system of governance.

Despite this, Kenya remains an attractive investment destination as evidenced by foreign investments which have been dominating equity trading at the Nairobi Securities Exchange as well as oversubscription in the two Eurobonds floated by the Government in the recent past.

Complementarily, the country has enjoyed increased diaspora remittances over the years with $1.95 billion (Sh195bn) collected in 2017, confirming capital availability for project financing.

These factors provide an opportunity for the use of sophisticated capital markets regulated products such as Global Depositary Receipts and Notes (GDR/Ns) to redirect affordable capital to Kenya’s economy.

GDR/Ns can be described as negotiable financial instruments issued in one country and representing an interest in an underlying security or debt issued and listed in another country.

GDNs should not only be perceived as a private sector instrument but could equally be adopted by government institutions, county and national government in raising capital to meet their respective development budgets, including the latter’s focus on the Big Four agenda.

Thus, like other asset classes such as bonds where we have both Government and corporate bonds, depositary notes can equally be issued by government entities.

The Irish Stock Exchange (ISE) presented a successful case study of the first ever Global Depositary Note (GDN) admitted on a European Exchange market, regulated by the Mexican financial regulator in February 2012.

The GDN was in the form of a $70 million denominated GDN issued by Citibank. The issuance related to an offering by Pemex (a decentralised Public Entity of the Federal Government of the United Mexican States) of $ 70 million, 7.65 per cent Mexican Peso debt due in the year 2021, being admitted to the ISE’s Global Exchange Market (GEM).

The listing expanded the investor base to include pension funds and was a hit with investors as it was oversubscribed one and a half times.

The success was partially attributable to Pemex’s good standing with the US Securities and Exchange Commission through its approved securities and the Luxembourg Stock Exchange through a Medium Term Note programme respectively.

I will illustrate the use of depositary notes by Government through the implementation roadmap of Lapsset. Key components of the project include the development of the Lamu port, highways, oil pipelines, railway, international airports, resort cities and a high grand falls dam respectively estimated to cost $19 Billion.

The Central Bank of Kenya, as an agent of the National Treasury could issue a local bond aimed at financing some of its components.

Once listed on the NSE, a depositary note representing the debt instrument and evidencing ownership of the local currency-denominated debt security could then be listed as a level 2 or level 3 American Depositary Note on other exchanges, for example the New York Stock Exchange and others.

As a consequence, foreign investors and the diaspora community will be able to purchase the notes using their respective currencies. Additionally, they will buy the instruments using their local Central Depository System accounts hence no need to establish custody arrangements for foreign holdings.

The outcome? Creation of opportunities for both patriotic Kenyans living abroad and foreign investors to contribute towards the development of Kenya.

Besides providing access to foreign capital by the Government, Depositary Notes also offer the government an opportunity to trade its instruments in global exchanges without incurring the foreign exchange risk associated with an international foreign currency issue like a Eurobond.

A GDN programme further positions Kenya strategically in new markets.

These are strategic instruments that should be tapped for use by government and State-owned enterprises as they are less costly when compared to bilateral and commercial loans.

Anne Nalo is Product development officer, Capital Markets Authority.

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