Ideas & Debate

Kenya walks a tightrope with plans to issue fresh Eurobond

Treasury secretary Henry Rotich. FILE PHOTO | NMG
Treasury secretary Henry Rotich. FILE PHOTO | NMG 

Senior Treasury and Central Bank of Kenya officials on Tuesday embarked on a European and US roadshow to market yet another Eurobond estimated at between $1.5 and $3 billion (Sh151-Sh302.5 billion).

The roadshow, which began in Las Vegas and is expected to end in London, aims to attract investors for the bond whose proceeds will mainly go to retiring old debts.

A large chunk of the Eurobond Two proceeds will go into settling $750 million of the first Eurobond as well as the $800 million syndicated loan that the government took shortly after the Eurobond One.

There are key concerns with the issuance of a new Eurobond, especially in the current state of the economy.

Top on the list of concerns is Kenya’s current debt status. With a debt to gross domestic product (GDP) ratio standing at about 60 per cent, Kenya’s public debt service has never been so high. The situation is especially dire considering the fact that just about five years ago, this figure stood at around 40 percent.

It is important to note that while debt in itself is not objectionable, use of the debt funds is important. Given the concerns over prudence in financial management at both national and county levels, any new debt issued ought to be thoroughly scrutinised.

Then there is the equally critical matter of debt sustainability. Kenya’s debt stood at Sh4.48 trillion as of last September. Several entities, including the World Bank, have expressed concern over Kenya’s debt status.

A rapid build-up of public debt in the past few years, the World Bank said, has put the Kenyan economy at the risk of turbulence adding that borrowing to finance infrastructure projects should be balanced against the dire risks of over-borrowing.

The African Development Bank made the point that Kenya could struggle to meet its public debt obligations as more long-term loans mature and the IMF has said that the rising public debt needs to be checked to avoid any shocks to the economy.

Third, these are not the only voices of concern. Kenya’s current debt portfolio has made credit rating agencies anxious. Ordinarily, Kenya’s debt sits in the ‘high speculative’ space in credit rating, one tranche above the ’substantial risks’ tranche.

Indeed, Moody’s expects Kenya’s public debt burden to continue rising due to high budget deficits and interest payments.

Moody’s concern is mainly with the rate at which Kenya’s debt is accumulating. It has, in fact, started considering Kenya for a downgrade.

A downgrade in national credit rating would make it difficult for Kenya to access cheap funds from international markets — yet this is the time Kenya has chosen to issue a new Eurobond.

It has been argued that despite current rating, the fact that Fitch shifted Kenya’s rating from ‘negative’ to ‘stable’ means Kenya’s overall rating should be viewed positively, especially in the African context.

But the view here is that, if Kenya expects to issue Eurobonds affordably, every effort should be made to improve credit ratings. Yet little or no effort is being made in that direction.

Indeed, over the past 5 years, three key trends in Kenya’s fiscal policy have been made evident. First, is that expenditure is always higher than what is anticipated in the Budget Policy Statement (BPS).

Second, revenue generation targets are generally not met causing borrowing to go higher than expected in the BPS.

Bear in mind that the Eurobond and concerns by international financial institutions as well as credit rating agencies are not the only points of concern as these understate the presence of a very important creditor — China.

As of September 2017, Kenya’s debt to China was the highest of any nation and stood at $4.7 billion or two-thirds of Kenya’s bilateral debt.

It is also important to note that Kenya’s bond issuance this year is operating in a very different context than that in which the first bond was issued.

During the first bond issuance, interest rates in Europe and North American were extremely depressed with weak economic growth, and Africa was riding on a commodities boom that made the continent a bright spot in the global economy.

Yield hunters turned to Africa as a key income growth market to viably compensate for subpar growth in other parts of their portfolios.

Since then, the commodities bust occurred which crippled key African economies, there is a notable recovery in Europe and North America, and Africa is, once again, viewed with scepticism in global markets.

When one adds Kenya’s debt warnings and credit rating status to the picture, it is easy to see the concern being raised here over the prudence and affordability of a new Eurobond issue.

Further, when one looks at the current Eurobond objectively, while it is true that in January 2018 the bond yields stood at 3.7 and 5.5, Kenya has paid far more in the past.

Around 2015, the opposition party in Kenya raised concerns over the use of proceeds of the first Eurobond and alleged embezzlement.

The allegations and speculation during this time drove Eurobond yields up to 9.4 per cent.

Thus, while the Eurobond One currently enjoys relatively low yields, domestic dynamics could change the context quite quickly raising issues about affordability and sustainability of Eurobond debt once more.

The final concern with the current Eurobond issue is that it will saddle the country with substantial future debt. It seems as though, through the new Eurobond issue, the current administration is pushing debt maturity to 2024, when it will no longer be their headache to address.

Well aware that their tenure ends in 2022, it is fair to ask whether the Jubilee administration is right in pushing debt repayment beyond their tenure.