Treasury to rebase GDP after new Eurobond tap

Kenya has kicked off its fourth Eurobond offer with a promise to review the size of the economy later in the year through a rebasing similar to the one conducted in 2014.

The expected resultant higher GDP figures will help improve Kenya’s debt-to-GDP ratios and can, therefore, be applied by the country to justify the capacity to carry a larger debt load.

In a preliminary offer document for the issuance of a Eurobond whose roadshows the Treasury kicked off on Tuesday, the government said the rebasing will give an accurate reflection of the structure and size of the Kenyan economy.

Kenya rebased its economy in September 2014, revising the base year to 2009 from 2001 previously, which grew the GDP per capita from $994 to $1,256 and catapulted the country to middle-income status.

Overall, the exercise pushed the size of the economy up by 25.4 percent, putting the GDP figure for 2013 at Sh4.75 trillion from the earlier estimate of Sh3.8 trillion.

According to the latest National Economic Survey from the bureau of statistics, Kenya’s economy was valued at Sh9.7 trillion as at the close of December 2019.

“The rebasing in 2014 allowed the Government to account for changes in the production structure, relative to product prices and products. These measures have led to changes in the size of GDP, growth rates, contributions by sector, and related indicators that use GDP. The next rebasing is expected to take place later in 2021,” the Eurobond document states.

The rebasing in 2014 helped Kenya overtake countries such as Ethiopia, Tunisia, and Ghana and claim position nine in the list of largest economies in Africa from the previous 12th slot. The country also jumped about 10 spots globally from position 87, overtaking nations such as Guatemala, Bulgaria, Costa Rica, and Lebanon.

If the rebasing is done this year, it will be the seventh time Kenya’s economy will be undergoing the exercise, with previous ones in 1957, 1967, 1976, 1985, 2005, and 2014.

“The UN Statistical Commission recommends that countries rebase every five years. Rebasing enables economic estimates to better account for the current structure of the economy and sectoral growth drivers and to better reflect the performance of the most important parts of the economy,” adds the Treasury in the Eurobond document.

The Treasury has picked global financial services firms Citi and JPMorgan as lead underwriters for the Eurobond IV loans, while I&M Bank and NCBA Group will be the local financial managers advising the government on potential issuance.

Rebasing also carries significant implications concerning the type of financing they can access on the global markets.

The 2014 rebasing lifted the country to lower middle-income economic status and effectively locked it out from accessing most concessional financing available to low-income economic countries.

Syndicated loans

It, however, gave it access to more commercial funding that saw Kenya accumulate Eurobonds and syndicated loans which accounted for about 26 percent of external public debt at the end of 2020.

Eurobonds account for 70 percent of Kenya’s commercial debt ($6.1 billion), while syndicated loans represent 27 percent (about $2.5 billion).

The borrowing has pushed total Kenyan debt to Sh7.4 trillion which is 69 percent of the GDP from 48.6 percent in 2015, making it unsustainable.

Kenya plans to borrow an additional Sh929 billion in the next fiscal year and may benefit from the optics of a larger economy by bringing down the debt ratios.

Even though the move is seen as a way of increasing the economy’s capacity to carry more debt, the Treasury says the exercise will help provide more clarity about balance of payment data used to evaluate the value of the currency, imports, and exports which have returned errors over the past few years.

“There have also been significant efforts to improve the compilation of Kenya’s balance of payments data in recent years, including through technical assistance provided by the IMF. However, errors and omissions in the balance of payments data persist and may complicate the assessment of such data”, the document says.

Kenya initially borrowed on set ceilings until 2014 when the Jubilee administration changed to borrowing as a proportion of the GDP.

In 2014, the government was forced to approach Parliament to increase the external borrowing ceiling by Sh1.3 trillion to Sh2.5 trillion and pushed up the total debt to Sh2.4 trillion.

They would have had to do every year, but the new government enacted the Public Finance Management Act of 2015, giving parliamentary oversight role over the budget while the Treasury drove the revenue-raising agenda.