How Kenya will fund Sh256bn Eurobond settlement next year


National Treasury Principal Secretary Dr Chris Kiptoo when he appeared before the Public debt and privatization committee at Parliament Buildings on March 6, 2023. PHOTO | LUCY WANJIRU | NMG

Treasury will tap concessional external loans to fund the Sh256 billion bullet repayment of its debut Eurobond due in the next financial year starting July, Parliament heard.

Treasury Principal Secretary Chris Kiptoo told MPs that the International Sovereign Bond of $2,000 million (Sh256 billion) issued in 2014 will be falling due during the 2023/24 financial year.

Dr Kiptoo told the National Assembly’s committee on Public Debt and Privatisation that Kenya is expected to repay Eurobond debts of Sh254.16 billion in 2024, Sh114.37 billion in 2027 and Sh127.08 billion in 2028.

The Principal Secretary told the committee chaired by Balambala MP Abdi Shurie that Kenya had paid $127.0794 million as of March 1, 2023.

“The National Treasury will implement Liability management Operations targeting the 2024 Eurobond maturity to smoothen the maturity structure of public debt over the medium term,” said Dr Kiptoo.

Dr Kiptoo said the government will optimise the use of concessional external funding sources, lengthen the maturity profile of public debt through the issuance of medium to long-dated bonds and deepen the domestic debt market to be able to finance more budget deficits and cut reliance on external sources.

Treasury is facing tough options ahead of the repayment of the Eurobond, which has been compounded by the high global interest rates and the country’s shrinking dollar reserves.

Kenya is expected to make the bullet payment to retire the 10-year sovereign bond whose issuance in 2014 signalled the Jubilee administration’s turn to commercial debt to fund the budget.

When the bond was floated, the international debt market was awash with capital looking for a home, which African economies were only too happy to provide at rates that would look like a bargain today.

Kenya took up $2.75 billion (Sh345.5 billion at today’s rates) in two tranches consisting of a 10-year paper and a five-year issuance ($750 million), at interest rates of 6.78 percent and 5.87 percent respectively.

The five-year paper was repaid partly using the proceeds of another $2.1 billion Eurobond issued in May 2019.

Rolling over the 10-year tranche is now proving much more complicated, due to high rate demands by lenders that scuppered plans to float a sovereign bond last year—yields in the secondary market rose to highs of 22 percent in July.

Kenya’s dollar reserves, from which external debt is repaid, are now at a near 10-year low of $6.9 billion, having fallen below the required four months of import cover three weeks ago.

In the 2023 Budget Policy Statement, the Treasury says market pressures due to the Russia-Ukraine war and monetary tightening in the US and Europe have limited its access to the international market, and bar the concessional funding the country is getting from the IMF and World Bank.

Dr Kiptoo told MPs that the Treasury is taking several measures in addition to the continued implementation of fiscal consolidation to guide borrowings during the financial year 2023/24 to 2025/26.

“These include devising ways of managing maturities including the establishment of a Sinking Fund to manage debt maturities,” said Dr Kiptoo.

He said the Treasury will use long-tenor Treasury bonds for refinancing maturing domestic debt and raising new deficit funding sources along with a reduction in the proportion of short-term domestic debt (Treasury bills).

“This will minimise refinancing risks and lengthen the Average Time Maturity for domestic and total debt,” he said.

Dr Kiptoo said the Treasury will maximise the use of concessional borrowings as opposed to commercial debt.

He said the December 2022 Kenya’s Debt Sustainability Analysis (DSA) shows that public debt stock remains sustainable but with a high risk of debt distress.

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