Yields on Kenyan Eurobonds have shrunk by up to 51 percent since they peaked in mid-July, indicating improved global conditions which could see the country rekindle its quest for commercial external financing.
The latest data from the Central Bank of Kenya (CBK) shows yields on the 10-year Eurobond maturing in 2024 have seen the largest dip in interest rates at 50.8 percent with the yield on the paper declining to 10.646 percent for the week ending on February 2 from a peak of 21.63 percent on July 14.
Respectively, yields on the seven, 10, 12, 13 and 30-year Eurobonds, maturing in 2027, 2028, 2032, 2034 and 2048 have declined by 47.7, 40.4, 34.3, 37.9 and 35.1 percent over the same period.
The fall in yields puts Kenya on a better footing in accessing external commercial financing after a spike in yields put off planned debt issuances in the 2021/22 fiscal year.
Nevertheless, despite the significant discounting, yields on the Eurobonds still stand above rates registered at the beginning of 2022 and during the issuance of the respective papers.
The 2024 Eurobond for instance had a yield of 5.574 percent at the end of 2021, trading lower than its 6.875 percent coupon registered at issuance in 2014.
All other Kenyan Eurobonds likewise traded below their coupon rates at the start of 2022 but for the 13-year Eurobond maturing in 2034.
The declining yields have reinvigorated Kenya’s prospects of returning to the international capital market after untenable yields held it hostage for the better part of 2022.
In December, the National Treasury in a letter to the International Monetary Fund (IMF) indicated it was already on the move to tap from the market.
“The planned Sh137.4 billion ($1.1 billion) external commercial financing for FY2021/22 did not take place amid unfavourable market conditions, reflecting the global risk-off attitude toward frontier issuers. In light of the protracted dislocations in international financial markets, we plan to raise the Sh112.4 billion ($900 million) external commercial borrowing planned for FY2022/23 from international banks. We have successfully contracted one-third of this amount and are in the process of reviewing offers for the remainder,” the exchequer told the IMF.
Most recently, the Central Bank of Kenya (CBK) has acknowledged the changing market sentiments point to an imminent move by Kenya as an issuer in the international capital markets in the short run.
“The news over the last two weeks is that the markets are beginning to turn,” CBK Governor Patrick Njoroge said last month.
Analysts however argue that Kenya is in a catch-22 situation.
“Currently, yields are still elevated compared to levels last year. At current yields, the risk is that you may lock in low double-digit levels if an emerging market taps the international market which may dial upwards the external debt service costs,” said IC Asset Managers Economist Churchill Ogutu.
“If Kenya is looking at the market for liability management operations, undoubtedly they will tap the international market at the earliest opportune time when the yields on the Eurobond maturing next year have trended lower in a durable manner.”
Economist Reginald Kadzutu meanwhile argues against any form of external commercial borrowing arguing for the country to instead prioritise tapping from concessional sources such as the World Bank and IMF.
Kadzutu nevertheless reckons the capacity to access further cheap financing from the multilateral is stretched with the country nearly exhausting its drawing rights from the IMF with the current 3-year extended credit and extended fund facilities, while Kenya expects a Sh93.7 billion ($750 million) disbursement from the World Bank by June.
“If they go to the market right now, they will be schooled by high-interest rates which will drive up the cost of borrowing. Priority should be on debt restructuring to free up revenue currently consumed by high debt service costs. Priority should be on accessing concessional financing from the World Bank and IMF to refinance the 2024 Eurobond,” he said.
Despite taking a bias for concessional financing in external borrowing, the new administration is still expected to significantly tap commercial sources to plug its budget deficit.
Data from the draft budget policy statement for instance indicates Kenya plans to issue a Sh105.6 billion sovereign bond under revised FY2022/23 spending/Supplementary Budget 1 and a further Sh270 billion in the subsequent 2023/24 fiscal year.
The pause on interest rate increases on Kenyan Eurobonds is primarily attributable to an expected pause to rate hikes in advanced economies as global inflation begins to taper in early 2023.
Central Banks including the European Central Bank and the Bank of England have nevertheless hinted at the need for further hikes to get ahead of inflation after lifting interest rates by 0.5 percent last week.
The US Federal Reserve has on its part hinted at pivoting after effecting a low 0.25 percent rate hike last Wednesday.