Costly Eurobond worries Kenya ahead of new issue

National Treasury Principal Secretary Julius Muia. PHOTO | SALATON NJAU | NMG

Kenya is reviewing its external borrowing options after its Eurobond yields hit double digits, signalling the high finance cost the country faces if it were to sell a new international bond.

Treasury PS Julius Muia said the government was concerned about the high yields and would explore alternatives for borrowing to plug the budget deficit.

“We are still keen to go to the international market for funding resources but are cautious about the yields which are currently elevated. We have to be careful about the yields to keep our financing sustainable,” he said.

Kenya’s six Eurobonds have risen sharply in the past few weeks, to trade above 10 percent in the secondary market and is an indication of the pricing the country will get if it returns to the global debt market.

The rise of the yield — which measures the return an investor gets from buying the fixed income securities — comes as major central banks, including the Federal Reserve of the US, are expected to raise interest rates significantly to dampen inflation.

Investors typically demand higher returns lending to emerging and frontier countries such as Kenya, which are seen as relatively high-risk compared to obligations of the US and European governments.

This has seen Nigeria cancel its planned issue of $950 million owing to unfavourable market conditions during the time frame approved for the fundraising.

The yield on the 10-year bond due in 2024 jumped to 10.9 percent on June 2 from 7.18 percent on April 20, according to the latest data from the Central Bank of Kenya.

That on the 10-year bond due in 2028 increased to 10.3 percent from 8.92 percent over the same period.

The yield on the 12-year bond due in 2032 jumped to 10.4 percent from 9.43 percent.

The jump in Kenya’s Eurobond yields also came amid reports of dollar shortages in the country, delaying transactions and adding to increased credit risk perception.

The Kenyan bankers' lobby, Kenya Bankers Association (KBA), sought to allay fears that dollar shortages were systemic and that this was only the case among certain banks.

The yields now seen in the secondary market, which are much higher than the interest rates set when the bonds were issued, are an indication of the current pricing of the country’s debt.

Kenya has been planning on issuing a Eurobond this year to plug its budget deficit. A $1 billion (Sh115 billion) debt was to be sold by June, according to media reports.

Investors are seeking better returns in the US where the Federal Reserve raised interest rates by between 0.25 and 0.5 percent and laid out an aggressive plan to increase them further to deal with inflation that has jumped to 6.6 percent.

Kenya has an outstanding portfolio of four Eurobonds worth a total of $7.1 billion (Sh829.9 billion), which are traded on the Irish and London stock exchanges.

The country has agreed with the IMF to stick to concessional finance to reduce debt vulnerabilities that have seen the country turn away from syndicated loans and only focus on multilateral loans and Eurobonds.

Kenya is trying to balance its debt portfolio after a surge of commercial debts piled up and became expensive to repay taking up more than 63 per cent of tax revenue.

Concessional and semi-concessional borrowing, including from the IMF and other multilaterals are part of the Treasury plan’ to limit reliance on external commercial borrowing in the coming years to reduce debt-related vulnerabilities.

Kenya borrowed $565.6 million in 2021 under the IMF’s ECF/EFF arrangements, $725.7 million, in August 2021 through the IMF’s Special Drawing Rights (SDR) general allocation, and is awaiting the US $244 million from the third ECF/EFF review once this is approved by the IMF Board.

From the World Bank Kenya got $750 million in policy financing in June 2021 and another $750 million, in March 2022 under a similar arrangement.

By borrowing from the multilateral bodies, the IMF and the World Bank, Kenya has already managed to cut its dependence on the more expensive commercial loans.

The cheap World Bank and the International Monetary Fund (IMF) loans have reduced the average cost of Kenyan loans from 9.1 per cent to 6.9 per cent according to Parliament Budget Office.

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